Exercises of cash & liquidity management

Float = Bank balance – Book balance

Firrm writes check Firm receives check

-Bank bal X -Bank bal X

- Book bal X – 1000 - Book bal X + 800

+1000(disbursement float -800$(collection float)

Net float = disbursement float + Collection float

Ex 1. a. On a typical day, a firm writes checks totaling $3,000. These checks clear (xử lí xong) in
seven days. Simultaneously, the firm receives $1,700. The cash is available in two days on average.
Calculate the disbursement, collection, and net floats. How do you interpret the answer?

Dis=3000 x 7 = 21000 (mỗi ngày chuyển 3000, 7 ngày mới xử lí xong) (tiền đang chuyển đi, ra khỏi
túi mình rồi nhưng mà chưa về túi nhà cung cấp)

Collection (lúc nào cũng âm)=-1700 x 2 = -3400(tiền chuyển về, ra khỏi túi khách hàng, chưa về túi
mình)

Net floats= 21000-3400=17600

b. In a typical month, the Hampton Corporation receives 80 checks totaling $139,000. These are
delayed four days on average. What is the average daily float? Assume 30 days in a month.

Average daily float = (139000 : 30 ) x 4 = 18533,3

Ex 2. Each business day, on average, a company writes checks totaling $12,000 to pay its suppliers.
The usual clearing time for the checks is four days. Meanwhile, the company is receiving payments
from its customers each day, in the form of checks, totaling $23,000. The cash from the payments is
available to the firm after two days.

a.Calculate the company’s disbursement float, collection float, and net float.

Dis float = 12000 x 4 = 48000

Col float = -23000 x 2 = -46000

Net float = dis + col = 2000

b. How would your answer to part (a) change if the collected funds were available in one day instead
of two?

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Col float = -23000

Net float = 25000

Ex 3. Purple Feet Wine, Inc., receives an average of $17,000 in checks per day. The delay in clearing
is typically three days. The current interest rate is 0.017 percent per day. Những bài chỉ có 1 flow k
cần quan tâm dấu

a. What is the company’s float?

Col float = 3 x 17000 = 51000

b. What is the most Purple Feet should be willing to pay today to eliminate its float entirely?

The company should pay no more than 51000$ to eliminate the float

c. What is the highest daily fee the company should be willing to pay to eliminate its float entirely?

51000 x 0,017 = 867$

Ex 4. Your neighbor goes to the post office once a month and picks up two checks, one for $14,000
and one for $5,000. The larger check takes four days to clear after it is deposited; the smaller one
takes three days. Assume 30 days in a month.

a. What is the total float for the month?

Total float = (14000 x 4) + (5000 x 3) = 71000

b. What is the average daily float?

71000 : 30 =

c.What are the average daily receipts and weighted average delay?

Average daily receipts = (14000 + 5000) / 30 =

Weighted average delay = (4000/19000) x 4 + (5000/19000 x 3)

Ex 5. Your firm has an average receipt size of $125. A bank has approached you concerning a lockbox
service that will decrease your total collection time by two days. You typically receive 6,400 checks
per day. The daily interest rate is .016 percent. If the bank charges a fee of $175 per day, should the
lockbox project be accepted? What would the net annual savings be if the service were adopted?

a) should the lockbox project be accepted

Total receive = 125 x 6400 = 800 000

PV (benefits) = 800 000 x 2 = 1 600 000

PV of cost = 175/0,016 =10 937,5

NPV: Benefits > PV of cost -> accept

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 b) What would the net annual savings be if the service were adopted?

Interest = 1 600 000 x ((1+0,016%)^365 – 1.6m) =

FV of daily fee = 175* [1-((1/(1+0.016%)^365)/0.016%] * (1+0.016%)^365 =

(175 x (1-cục mũ 365)/0.016% x cục kia)

Annual net saving = Interest – FV of daily fees =

Ex 6. A mail-order firm processes 5,300 checks per month. Of these, 60 percent are for $43 and 40
percent are for $75. The $43 checks are delayed two days on average; the $75 checks are delayed
three days on

average. Assume 30 days in a month.

a. What is the average daily collection float? How do you interpret your answer?

60% of 5300 checks = 3180 -> 3180 x 43$ = 136740

Tương tự -> 40% = 159000

->Daily collection float = 136740 x 2 + 159000 x 2 = abc

-> average daily collection float = abc : 30

b. What is the weighted average delay? Use the result to calculate the average daily float.

Weighted average delay = từng cái chia cho tổng 2 cái rồi nhân với số ngày delay của từng cái

=(136740/136740 + 159000) x 2 + (159000/295740) x 3 = 2.53

Avr daily… = ((136740 + 159000) x 2.53)/30 =

b. How much should the firm be willing to pay to eliminate the float?

Eliminate the float: the firm should willing to pay 25016 (daily collection float)

c. If the interest rate is 7 percent per year, calculate the daily cost of the float.

Daily interest

(1 + rdaily) ^ 365 = (1 + 0.07)

e. How much should the firm be willing to pay to reduce the weighted average float to 1.5 days?

Ex 7. Paper Submarine Manufacturing is investigating a lockbox system to reduce its collection time.
It has determined the following:

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The total collection time will be reduced by three days if the lockbox system is adopted.

a. What is the PV of adopting the system?

PV = 975 x 385 x 3 = 1,126,125

PV of cost = (0.35 x 385) : 0.068% = 198161.7647

b. What is the NPV of adopting the system?

NPV = 1,126,125 – 198161.7647 = 927963.2353

c. What is the net cash flow per day from adopting? Per check?

Net cash flow per day = PV x 0.068% - PV of cost

Per check = Net cash flow per day : 385

Ex 8. It takes Cookie Cutter Modular Homes, Inc., about six days to receive and deposit checks from
customers. Cookie Cutter’s management is considering a lockbox system to reduce the firm’s
collection times. It is expected that the lockbox system will reduce receipt and deposit times to three
days total. Average daily collections are $130,000, and the required rate of return is 5 percent per year.
Assume 365 days per year.

a. What is the reduction in outstanding cash balances as a result of implementing the lockbox
system?

PV = 130,000 x 3 = 390,000

b. What is the daily dollar return that could be earned on these savings?

Daily interest rate = 1 + 5% = (R +1)^365 => R = 0.013%

Daily dollar return = 0.013% x 390,000 = 52.014

c. What is the maximum monthly charge Cookie Cutter should pay for this lockbox system if
the payment is due at the end of the month? What if the payment is due at the beginning of
the month?

Monthly required rate of return: 1+0.05 = (1+R)^12 => R = 0.407%

End of the month:

PV of cost = CF/r monthly =

Beginning of the month:

PV of cost = CF/r monthly * (1+r monthly) =

Ex 9. No More Pencils, Inc., disburses (giải ngân) checks every two weeks that average $86,000 and
take seven days to clear. How much interest can the company earn annually if it delays transfer of

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funds from an interest-bearing account that pays .011 percent per day for these seven days? Ignore the
effects of compounding interest.

Number of check per year = 52 (số tuần trong năm) : 2 = 26

Annual interest = 86,000 x 0.011% x 7 x 26 (Amount*rate*number of days*number of checks)

Ex 10. No More Books Corporation has an agreement with Floyd Bank whereby the bank handles $5
million in collections per day and requires a $350,000 compensating balance. No More Books is
contemplating canceling the agreement and dividing its eastern region so that two other banks will
handle its business. Banks A and B will each handle $2.5 million of collections per day, and each
requires a compensating balance of $200,000. No More Books’ financial management expects that
collections will be accelerated by one day if the eastern region is divided. Should the company
proceed with the new system? What will be the annual net savings? Assume that the T-bill rate is 2.5
percent annually.

Ex 11. Bird’s Eye Treehouses, Inc., a Kentucky company, has determined that a majority of its
customers are located in the Pennsylvania area. It therefore is considering using a lockbox system
offered by a bank located in Pittsburgh. The bank has estimated that use of the system will reduce
collection time by 1.5 days. Based on the following information, should the lockbox system be
adopted?

How would your answer change if there were a fi xed charge of $5,000 per year in addition to the
variable charge? Assume 365 days per year.

PV = 800 x 750 x 1.5 = 900,000

Daily interest = 1 + 5.5% = (R +1)^365 => R = 1.055 ^ (1:365) – 1 = 0.014%

PV cost = (800 x 0.15) : 0.014% = 857142.8571

NPV: benefits > cost => accept

 PV cost = 857142.8571 + (5000 : 5.5%) = 948051.948

NPV: benefits < cost => decline

Ex 14. Given the following information, calculate the target cash balance using the BAT model:

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How do you interpret your answer?

T= 10200

R = 4.5%

F = 25

C= căn (2 x T/R x F) =

Ex 15. White Whale

Corporation has an average daily cash balance of $1,700. Total cash needed for the year is $64,000.
The interest rate is 5 percent, and replenishing the cash costs $8 (F) each time. What are the
opportunity cost of holding cash, the trading cost, and the total cost? What do you think of White
Whale’s strategy?

OC = C/2 x R

C = căn (2 x 64,000/5% x 8)

Trading cost = T/C x F = 64,000/C x 8

Total cost = OC + Trading cost

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Current policy is not optimal

Ex 16. Debit and Credit Bookkeepers needs a total of $21,000 in cash during the year for transactions
and other purposes. Whenever cash runs low, it sells $1,500 in securities and transfers the cash in. The
interest rate is 4 percent per year, and selling securities costs $25 per sale.

a. What is the opportunity cost under the current policy? The trading cost? With no additional
calculations, would you say that Debit and Credit keeps too much or too little cash? Explain.

OC = C/2 x R = 1,500/2 x 4%

Trading cost = T/C x F = 21,000/1500 x 25 =

b. What is the target cash balance derived using the BAT model?

Ex 17. The All Day Company is currently holding $690,000 in cash. It projects that over the next year
its cash outflows will exceed cash inflows by $140,000 per month. How much of the current cash
holdings should be retained, and how much should be used to increase the company’s holdings of
marketable securities? Each time these securities are bought or sold through a broker, the company
pays a fee of $250. The annual interest rate on money market securities is 3.2 percent. After the initial
investment of excess cash, how many times during the next 12 months will securities be sold?

BAT: C* = căn (2TxF / R) = căn (2x140,000x250 / 3.2% = 162,018

Amount of excess cash to be invested: 690,000 – 162,018 = 527,982

How many times during the next 12 months the securities wil be sold after the investment of the
excess cash

=140,000 x 12 / 162018

Ex 19. Slap Shot Corporation has a fixed cost associated with buying and selling marketable securities
of $40. The interest rate is currently 0.013 percent per day, and the firm has estimated that the
standard deviation of its daily net cash flows is $80. Management has set a lower limit of $1,500 on
cash holdings. Calculate the target cash balance and upper limit (U) using the Miller–Orr model.
Describe how the system will work.

L = 1,500

U = L +d = 1,500 + [3 x căn bậc 3 (3/4 x (40 x 80^2)/0.013%)] = 4916.44

Target cash balance = C* = L + d/3 = 2638.81

Ex 21. The variance of the daily cash flows for the Pele Bicycle Shop is $890,000 (o^2). The
opportunity cost to the firm of holding cash is 4.1 percent per year. What should the target cash level
and the upper limit be if the tolerable lower limit has been established as $160,000? The fixed cost of
buying and selling securities is $300 per transaction.

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R daily = 4.1% / 365 = 0.011

Target cash level = C* = L + d/3

Upper limit = U = L + d = 160,000 + [3 x căn bậc 3 (3/4 x (300 x 890000)/0.011%)] = 196630.9

Ex 22. Rise Against Corporation has determined that its target cash balance if it uses the BAT model
is $5,100. The total cash needed for the year is $31,000, and the order cost is $10. What interest rate
must Rise Against be using?

C* = 5100 = căn(2T/R x F) = căn(2x31,000/R x 10) => R = 2.38%

Ex 23. Company AL has the data of net cash flows for the last 264 days as follows:

NCF ($000) Number of days

100-120 30
120-140 70
140-160 100
160-180 64
a. What is the variance of the company’s net cash flows?

Average NCF ( ) (110 x 30 + 130 x 70 + 150 x100 + 170 x 64)/264 = 145 (000$)

Var =[ (110 – 145)^2 x 30 + (130-145)^2 x 70 + (150-145)^2 x 100 + (170-145)^2 x 64 ] : (264 –

1) = 361.217

b. What is the difference between the lower limit and upper limit of the firm’s cash balance
(based on Miller-Orr model)? The annual interets rate is 12%, cost per transaction of selling
& buying marketable securities is $5, 1 year = 360 days. (vì từ đầu đang rút gọn nghìn đô)
d= [3 x căn bậc 3 (3/4 x (0.005 x 361.217)/(12% : 360))] =
c. The minimum requirement of cash balance for the firm’s operation is $200,000. What should
be the maximum cash balance for the firm? What should be the optimal cash balance?
U = L + d = 200,000 +
C* = L + d/3