FIL 240 Lecture 23 Outline of Last Lecture I Working Capital definition a Net working capital b Rule c Graph d Aggressive short term debt e Conservative f Moderate Outline of Current Lecture I Tax Management a Lower cash limit b Sweep c Target cash balance formula d Upper cash limit formula e Problem II Factors a V definition b TC definition c ROI definition d L definition Current Lecture Tax Management I Tax Management a Lower Cash Limit L management decides this b Sweep the money that was in customers accounts in banks at the end of the day disappears and goes to the pool of money used to trade internationally this earns the banks money 3 TCV c Target ideal cash balance Z formula Z L 4 r TC transaction cost 2 V daily variance in cash annual variance in cash 365 These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best used as a supplement to your own notes not as a substitute R ROI d Upper cash limit H formula 3Z 2L e We keep no less than 1000 L in cash It costs 20 transaction to move cash Daily variance in cash balances is 20 000 Average ROI for investments is 5 annual 3 20 20000 1000 Z 3 2299 target cash balance 0 05 4 365 H 4 897 When you hit 4897 you move 4897 2299 into some investment When you hit 1000 you move 2299 1000 into cash accounts You always want to keep the target cash balance in the accounts Factors a How much variation there is day to day in cash V b Transaction cost how much it costs to move your money in TC c Return on investments ROI as ROI goes up hold less cash on hand because cash on hand is in your projects If ROI is high meaning you have lots of risky investments going on you ll probably not have much cash on hand d Lower cash limit L there are some companies that don t have any cash on hand L 0 but that s risky because there could be an emergency II
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