Sabrina Bouter Finance 4412 Short Term Financial Management Topic Outline for Second Exam 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 Note 10 slide 10 1 Electronic Depository Transfer EDT also called ACH debit 2 Wire Transfer ACH debit Can t do wire transfer b c you can t send use funds you do not have 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 Note 11 and Book 1 A German firm would instruct its German bank to wire money to the US firm 2 The German bank then sends a message across SWIFT to a correspondent US bank which would debit the German bank s correspondent account for the amount of the transfer plus any fees 3 The US correspondent bank would then pay the US firm possibly working through another correspondent bank with which both of the banks have accounts 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 Note 12 Given Decentralized Cash Depositories Accounts Bank Act 1 Bank Act 2 Bank Act 3 Centralized Single Act Working Capital Saved E cash needs 1 of needs A 10 000 000 6 000 000 12 000 000 28 000 000 mean B 1 000 000 1 000 000 1 000 000 3 000 000 99 protection C A 3B 13 000 000 9 000 000 15 000 000 37 000 000 mean 3 28 000 000 1 732 051 33 196 152 3 803 848 How has Canada effectively eliminated float in their check collection process How has this affected the incentives for firms when they disburse checks Note 12 Slide 6 In Canada Easy to collect checks for presentment and firms are charged for the float they create 1 day mail float Geography 1 day to process collect checks But eliminated by 1 day backdating of central bank settlement so no processing collection float Same day funds availability for deposited checks by interbank agreement no availability float Canada pays interest on DDA so less need for cash concentration arrangements 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 1 A firm s cash forecast drives the short term investing and borrowing strategies 2 It is important input into short term financial policy decisions including disbursement policies credit terms and bank selection 3 Functions as a control device 4 Effective risk management is impossible without forecasts of the cash flow effects of interest rate changes commodity price changes and foreign exchange rate changes y 20 19 21 20 20 y y 0 1 1 0 x x 4 2 2 4 sum y y x x 0 2 2 0 COV 4 x x 2 16 4 4 16 VAR 40 y y 2 0 1 1 0 SST 2 y pred mx b 19 6 19 8 20 2 20 4 y y pred 0 4 0 8 0 8 0 4 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 Note 13 x 56 58 62 64 60 0 1 14 0 2 x y m COV VAR b y mx R2 1 SSE SST 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 Yield Management Understanding consumer behavior to maximize yield profits from a fixed perishable or unused good An inventory focused application of revenue management Examples 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 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 because customer can be responsive to price Selling airline seats to businessmen at a high price inelastic seat demand and selling a similar seat to leisure travelers at a low price elastic demand Offering rental cars and hotel rooms at a discount on the weekend but at full price during the week Businessmen have little opportunity to plan ahead and typically buy airline seat at last minute using tax deductible corporate funds inelastic demand Leisure travelers can buy ahead and typically pay for travel themselves and so are more price sensitive elastic demand 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 8 Know what the unbiased expectations hypothesis is and be able to apply it to a yield curve to determine the implied forecast of future interest rates for different maturities that are embedded in the slope of a yield curve Know the liquidity premium and market segmentation hypotheses and how they too may influence or explain the slope of a yield curve Notes 16 Page 514 in book as chart of answers Unbiased expectations hypothesis This Theory posits that the prevailing yield curve is mathematically derived from the present short term rate and expectations for rates that will exist at various points in time in the future Where tRn t 1r1 t 1 n Spot rate for 1 year security as of time period t Forward rate the rate the market thinks will exist at