Finance 4412 Short Term Financial Management Topic Outline for Second Exam 1 What are the two main ways a firm can tell one of its gathering banks a bank that collects checks for the firm and takes daily cash deposits from the firm to send collected funds to a cash concentration bank How could the firm send funds from its gathering bank that are ledger balances today but are expected to be collected balances tomorrow The two main ways a firm can tell one of its gathering banks to send collected funds to a cash concentration bank are through ACH debit 25 per transfer next day availability Day 2 because ACH are next day funds and Wire transfer 15 20 per transfer same day Day 1 The firm could also send funds from its gathering bank that are ledger balances through ACH debit 25 per transfer next day availability and Wire transfer 15 20 per transfer same day funds 2 Firms often import materials that are used in producing their output Be able to explain how a German firm can make a payment to a U S firm or vice versa using the SWIFT message transfer system to pay for imported raw materials International transfers use SWIFT and bank correspondent Due from and Due to balances demand deposit accounts held by other banks SWIFT A message transfer network money does not move among countries banks can exchange data for funds transfer between financial institutions Each financial institution is provided Bank Identifier Code or SWIFT Code Using the SWIFT code the payment could be directed to a specific institution For example a German firm pays US firm 10 M Exchange rate 1 25 1 implying the U S dollar value is worth 25 cent more than Germany s dollar European Union message debit Germany firm s most demand deposit account DDA 8 M credit due to US bank 8M US message credit due from Germany bank 10 M credit US firm s demand deposit account DDA 10 M computation 10 X 1 25 exchange rate X 8M 3 Given information on the expected daily cash needs of three separate subsidiaries of a large firm that currently each make deposits at a different bank be able to calculate how much the firm may be able to save by having all three subsidiaries use a single bank for deposits and disbursements decentralized versus centralized cash depositories Single vs multiple cash disbursing accounts Decentralized Cash Estimated cash needs 1 of needs 99 protection Depositories Accounts A B C A 3B Bank Act 1 10 000 000 1 000 000 13 000 000 Bank Act 2 6 000 000 2 000 000 12 000 000 Bank Act 3 12 000 000 3 000 000 21 000 000 28 000 000 6 000 000 46 000 000 mean mean 3 Centralized Single Account 28 000 000 3 741 657 39 224 972 1 2 3 var1 var2 var3 1M 2 2M 2 3M 2 3 741 657 46 000 000 39 224 972 Balance value saved working capital saved 6 775 028 4 How has Canada effectively eliminated float in their check collection process How has this affected the incentives for firms when they disburse checks Canadian banks eliminated the check float for both retail and business customers Canadian banks give payees same day funds availability for deposited checks and charge firms for the check float they create The central bank also backdates interbank check settlements by one day to effectively eliminate interbank float Float incentive 5 Know what a firm s cash forecast is and why it is important In a simple linear forecast of inventory needs based on projected sales be able to compute the intercept and slope parameters by hand from past data on inventory and sales Using your results be able to determine future inventory needs based on a given level of future sales A cash flow forecast is the most important tool for business cash flow planning is essential for business success The forecast will predict if your business will have enough cash to support the operations of the business or for other activities you plan for the business such as expansion S T investing borrowing decisions and operating expenses The slope intercept form of a simple linear equation has the following form where the equation is solved for y in terms of x y a bx b is the slope a is a constant term It is the y intercept the place where the line crosses the y axis Example 1 y 13 7x This equation is in slope intercept form The y intercept is 0 13 and the slope is 7 Example 2 Determining future inventory need based on future sales Future year projected sales Y 50 13 7x X 9 Inventory needed 6 Know what yield or revenue management is and why estimating a demand curve for a firm s product or service using regression analysis can increase revenue compared to charging the same price to all of a firm s customers What condition has to be met for price discrimination to be effective Explain Yield Management Understanding consumer behavior to maximize yield profits from a fixed perishable or unused good An inventory focused application of revenue management Example Inventory of airline seats on a plane inventory of rooms at a hotel inventory of rental cars in a city inventory of dresses in a store Revenue Management Ability to predict consumer behavior to optimize product availability and price to maximize revenue Influencing demand to match supply Example Selling the right product to the right customer at the right time at the right price Estimates demand by product characteristic type of customer time of purchase and price paid to predict price that maximizes revenue II Estimating a demand curve requires statistical regression analysis to predict the price to charge the different purchasers at different times to maximize revenue from the quantity predicted to be sold III There are two conditions that must be met if a price discrimination scheme is to work First the firm must be able to identify market segments by their price elasticity of demand and second the firms must be able to enforce the scheme 7 Know what financial instruments comprise the money market and how strongly their returns are correlated over time Know what a yield curve is and how it generally looks most of the time Also understand and be able to explain how the Federal Reserve uses open market operations to control the overnight federal funds rate to a desired target level Contrast the U S approach for controlling short term interest rates with how the European Central Bank operates to do the same thing Various instruments comprise the money market such as bank instruments corporate instruments federal government instruments state and local instruments and mixed instruments Interest rate on firm borrowing is