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Ch1.5 Cash Management
Ch1.5 Cash Management
Ch1.5 Cash Management
Cost
C
*
Cash Balance
Transaction Cost
Holding Cost
Total Cost
Optimum Cash Balance under uncertainty :
Miller-Orr Model
It assumes that cash flows are normally
distributed with a zero value of mean and
standard deviation.
It gives Upper limit, Lower limit and the return
point.
Cash Balance
Time
Low Limit
Return Point
Upper Limit
Purchase of Securities
Sale of Securities
The firm sets the lower control limit as per its
requirement of maintaining minimum cash
balance.
Distance between Upper and Lower limit (Z) =
Upper Limit = Lower Limit + 3Z
Return point = Lower limit + Z
3 / 1
) i / xc 4 / 3 ( Z
Investing surplus Cash in
Marketable Securities
Three basic features of security
Safety
Maturity
Marketability
Types of Short-Term investment opportunities
Treasury bills
Commercial Papers
Certificate of Deposits
Inter-corporate Deposits
Money Market Mutual Funds