FIL 240 Lecture23Outline of Last Lecture I. Working Capital definitiona. Net working capitalb. Rulec. Graphd. Aggressive short-term debte. Conservativef. ModerateOutline of Current Lecture I. Tax Managementa. Lower cash limitb. Sweepc. Target cash balance formulad. Upper cash limit formulae. ProblemII. Factorsa. V definitionb. TC definitionc. ROI definitiond. L definitionCurrent LectureTax ManagementI. Tax Managementa. Lower Cash Limit (L) = management decides thisb. 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 moneyc. Target (ideal) cash balance (Z) formula – Z = ∛3 ×TCV4 ×r + LTC = transaction costV = daily variance in cash = ∂2365 ; ᵟ = annual variance in cashThese 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 = ROId. Upper cash limit (H) formula = 3Z – 2Le. 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). Z = 3√3 ×20 × 200004 ×0.05365+1000 = $2299 (target cash balance)H = $4,897When 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. II. Factorsa. 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
View Full Document
Unlocking...