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 All I have a How to send funds i ACH Debit 0 25 per transfer next day availability Day 2 ii Wire Transfer 15 20 per transfer same day Day 1 1 Might be able to justify higher amount for wire transfer if amount is large enough b A firm can sell funds that are currently on their ledger balances but are expected to be collected balances tomorrow by sending these funds by ACH debit Since ACH debit is a next day collection by the time the funds are accessed they will be good funds c Should you use ACH or Wire Transfer WT wire transfer k opportunity cost TBAL transferred balance ecr bank rate TBAL WT ACH cost Days Saved x k ecr 1 rr 365 TBAL will give you the transferred balance you must be transferring for Wire transfer to be cost effective Anything below this value will be better off being sent through ACH 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 a International transfers use SWIFT and bank correspondent Due from and Due to balances demand deposit accounts held by other banks i Due to payables ii Due from receivables b These are merely accounting transactions just taking money from the demand deposit account of one bank and allocating it to the demand deposit of the other bank In turn the payables Due to are increased for the paying bank and the receivables Due from are increased of the receiving bank c These foreign exchange FX transactions typically cost 20 40 d German bank pays US firm 10M 8M Euros Assets 10M Due from US Bank Liabilities 10M to Demand Deposit German Bank Assets Liabilities 8M Euros Due to 8M Euros from Demand Deposit 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 1 4 How has Canada effectively eliminated float in their check collection process How has this affected the incentives for firms when they disburse checks a Canada charges firms for the float they create 1 day mail float i i e if a check is sent on Monday it is typically collected Tuesday the central bank says that it was collected on Monday to eliminate processing and collection float ii Due to this and Canada s geography there is no processing collection float b Because firms are charged for the float they create the incentive for firms to disburse payments far away from receiving bank has been reduced float taken away no reason to try to create it 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 A cash forecast should i Forecast cash receipts disbursements on a monthly 2 week basis for 1 year into the future ii Be consistent with the firms operating budget planned asset sales operating exp iii Be accurate enough to min bank account overdrafts and indicate the need for ST bank credit and ST investments iv Have a forecast error less than 3 95 of the time b Important because i Drives ST investing borrowing decisions ii Accurate cash forecasts improve profits 1 Firm is able to shift from using sweep accounts and paying bank fees to handling its own investments and earn 25BP higher return c Regression by hand i Xi observed X ii Yi observed Y iii Process 1 Set up structure top table and put in observed X and Y values leftmost 2 columns 2 Fill in table based off equations in header of table 3 Calculate covy x and varx then covy x varx 4 Use and the mean of observed X and Y to solve for 5 Plug in slope and intercept into regression equation Y X 6 Calculate R2 SSE sum of squared errors and SST total sum of squares a SSE squared differences between observed and predicted Y b SST total sum of squares between observed and mean Y 2 iv To forecast inventory needs plug sales X into equation Y will be inventory needed 1 2 3 4 6 3 5 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 a Revenue management i Ability to predict consumer behavior to optimize product availability and price to maximize revenue Influencing demand to match supply b Yield management i Understanding consumer behavior to maximize yield profits from a fixed perishable or unused good An inventory focused application of revenue management c Demand curve d Price Discrimination demand i charging different prices to different customers depending on their apparent price elasticity of ii You must be able to segment the market to price discriminate 3 1 Market segmentation ability to identify inelastic elastic demanders and impose restriction to prevent purchasers of a product at a low price from reselling it in the higher price market 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 a Money market instruments i Bank instruments ii Corporate instruments iii Federal government instruments 4 iv State and local instruments v Mixed instruments b Money market via investopedia i A segment of the financial market in which