Finance 4412 Short Term Financial Management Topic Outline for Second Exam 1 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 Slide 4 1 The German firm would tell its German bank to wire money to a US firm 2 The German bank sends a message through SWIFT to the US bank which would credit the German firms account of the amount of the transfer plus any fees 3 The US bank would then pay the US firm Example If a German firm pays a US firm 10 M at an exchange rate of 1 25 1 10 M 8 M 1 German firm increases liabilities for 8 M due to payment to US firm and decreases liabilities 8 M due from German firm s DD account 2 US firm increases assets for 10 M due from German firm and increases liabilities 10 M due to US firm s DD account Result A The firm that pays a foreign firm will have two liability journal entries in their own currency one that is due to the foreign firm and another that is due from their own DD account B The firm that receives the payment will have an asset journal entry in their own currency which is due from the payment and a liability journal entry which increases its DD account 2 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 Slides 11 12 For this question since it is math related I ll copy and paste Professor Humphries own example first to explain what is happening Then I will post the answers for the blank example so you can use it as a check 1 Column A will be given so all that is needed to calculate both the Centralized and Decentralized mean is to sum them up 2 Column B will also be given so in order to calculate Centralized Std Dev you sum them up However in order to calculate the Decentralized Std Dev you must square each value and sum them up If you do this you should get 1 4E 13 Then you need to square root the summed value 1 4E 13 and you should get his answer of 3 741 657 39 3 Column C is found by using the formula A1 3B1 10 000 000 3 1 000 000 13 000 000 After you do this for each row you must sum them all up like you did for Column A to get the Centralized Mean Std Dev To get the Decentralized amount you apply the A 3B formula to the Decentralized amounts 28 000 000 3 3 741 657 39 39 224 972 4 To calculate the Balance value saved you subtract the Decentralized Mean Std Dev 39 224 972 from the Centralized Mean Std Dev 46 000 000 to get a total of 6 775 028 Check 3 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 only 6 bank hold 90 of the country s total assets compared to the US in which 380 banks hold 90 of the US s assets Canada s geography also makes it easy to collect checks which reduces backdating the time it takes to Firms in Canada are charged for the mail float they create so checks are mailed close to the recipient process and collect the checks reducing mail float by 1 day The incentives are that Canada has same day availability for deposited checks creating no availability float Canada pays interest in DD accounts so there is less need for cash concentration arrangements 4 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 Note 13 Slide 5 Note 14 Slide 13 1 A firm s cash forecast drives the short term investing and borrowing strategies 2 Accurate cash forecasts can improve profits 3 A firm s cash forecast are used to estimate inventory expenses employee costs and asset purchases 4 Like we learned from Exam 1 everything is tied to an accurate forecast For the regression analysis I ll post Professor Humphries blank example and walk through it The main thing is to follow the formulas on the top row 1 First calculate X and Y s means and then subtract each X and Y value from its respective mean to fill up Columns 2 and 3 2 Then multiply these two values together to get Column 4 Column 2 Column 3 Column 4 3 For Columns 5 6 square the values you got in Column s 3 2 respectively 4 For COVy x VARx and SST sum up the values you calculated in Columns 4 5 6 respectively 5 To solve for alpha N E 1 you must first find the correlation coefficient which is COVx y VARx N E 2 and then plug it into the equation for alpha 6 Column 7 uses a plug and chug method along with the table in the lower left hand corner In order to calculate future inventory needs based on sales you would use the following formula Inventory Alpha Correlation Coefficient Sales In this case your R 2 0 meaning that there is no relationship between sales and inventory If you were to graph this line inventory would be on the Y axis and sales would be on the X axis and the line of best fit would be horizontal 5 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 Slide 6 15 1 Revenue Management to maximize revenue influencing demand to match supply Ability to predict consumer behavior to optimize product availability and price Example Estimates demand by product characteristic type of customer time of purchase and price 2 Yield Management paid good An inventory focused application of revenue management Understanding consumer behavior to maximize yield from a fixed perishable Example inventory of airline seats on a plane inventory of rooms at a hotel inventory of rental cars Estimating a demand curve for a firm s product or service using regression analyses can increase revenue because of the incremental …