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1、McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.28-0Corporate Finance Ross Westerfield JaffeSixth EditionSixth Edition28Chapter Twenty Eight Cash ManagementMcGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.28-1Chapter Outlin
2、e28.1 Reasons for Holding Cash28.2 Determining the Target Cash Balance28.3 Managing the Collection and Disbursement of Cash28.4 Investing Idle Cash28.5 Summary & ConclusionsMcGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.28-228.1 Reasons for Holding CashTransac
3、tions motiveCompensating balancesMcGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.28-328.2 Determining the Target Cash BalanceThe Baumol ModelThe Miller-Orr ModelOther Factors Influencing the Target Cash BalanceMcGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill
4、Companies, Inc. All rights reserved.28-4Costs of Holding CashOpportunity CostsTrading costsTotal cost of holding cashC*Costs in dollars of holding cashSize of cash balanceThe investment income foregone when holding cash.Trading costs increase when the firm must sell securities to meet cash needs.McG
5、raw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.28-5The Baumol ModelF = The fixed cost of selling securities to raise cashT = The total amount of new cash neededK = The opportunity cost of holding cash: this is the interest rate.TimeCIf we start with $C, spend at
6、a constant rate each period and replace our cash with $C when we run out of cash, our average cash balance will be .1 2 3The opportunity cost of holding is McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.28-6The Baumol ModelF = The fixed cost of selling securit
7、ies to raise cashT = The total amount of new cash neededK = The opportunity cost of holding cash: this is the interest rate.TimeCAs we transfer $C each period we incur a trading cost of F each period. If we need T in total over the planning period we will pay $F, T C times.1 2 3The trading cost is M
8、cGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.28-7The Baumol ModelC*Size of cash balanceOpportunity CostsTrading costsThe optimal cash balance is found where the opportunity costs equals the trading costsMcGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Compa
9、nies, Inc. All rights reserved.28-8The Baumol ModelOpportunity Costs = Trading CostsThe optimal cash balance is found where the opportunity costs equals the trading costsMultiply both sides by CMcGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.28-9The Miller-Orr
10、ModelThe firm allows its cash balance to wander randomly between upper and lower control limits.$TimeHZLWhen the cash balance reaches the upper control limit H cash is invested elsewhere to get us to the target cash balance Z.When the cash balance reaches the lower control limit, L, investments are
11、sold to raise cash to get us up to the target cash balance.McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.28-10The Miller-Orr Model MathGiven L, which is set by the firm, the Miller-Orr model solves for Z and Hwhere s2 is the variance of net daily cash flows.T
12、he average cash balance in the Miller-Orr model is McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.28-11Implications of the Miller-Orr ModelTo use the Miller-Orr model, the manager must do four things:1.Set the lower control limit for the cash balance.2.Estimat
13、e the standard deviation of daily cash flows.3.Determine the interest rate. 4.Estimate the trading costs of buying and selling securities.The model clarifies the issues of cash management: The best return point, Z, is positively related to trading costs, F, and negatively related to the interest rat
14、e K.Z and the average cash balance are positively related to the variability of cash flows.McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.28-12Other Factors Influencing the Target Cash BalanceBorrowingBorrowing is likely to be more expensive than selling marke
15、table securities.The need to borrow will depend on managements desire to hold low cash balances.Compensating BalanceFirms have cash in the bank as a compensation for banking services.Large corporations have thousands of accounts with several dozen bankssometimes it makes more sense to leave cash alo
16、ne than to manage each account on a daily basis.McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.28-13FloatThe difference between bank cash and book cash is called float.Float management involves controlling the collection and disbursement of cash.McGraw-Hill/Ir
17、winCopyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.28-1428.3 Managing the Collection and Disbursement of CashAccelerating CollectionsDelaying DisbursementsDisbursement FloatZero-Balance AccountsDraftsEthical and Legal QuestionsMcGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill
18、Companies, Inc. All rights reserved.28-15Accelerating CollectionsCustomer mails paymentCompany receives paymentCompany deposits paymentCash receivedMail delayMail floatProcessing delayProcessing floatClearing delayClearing floattimeCollection floatMcGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill C
19、ompanies, Inc. All rights reserved.28-16Overview of Lockbox Processing Corporate Customers Corporate Customers Corporate Customers Corporate Customers Local Bank Collects funds from PO Boxes Envelopes opened; separation of checks and receipts Deposit of checks into bank accounts Details of receivabl
20、es go to firm Firm processes receivables Bank clears checks Post Office Box 1 Post Office Box 2McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.28-17Delaying Disbursements1.Write check on a distant bank.2.Hold payment for several days after postmarked in office.
21、3.Call supplier firm to verify statement accuracy for large amounts.4.Mail from distant post office.5.Mail from post office that requires a great deal of handling. Firm prepares check to supplier Post Officeprocessing Delivery of check to supplier Deposit goes to suppliers bank Bank collects fundsMc
22、Graw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.28-18DraftsFirms sometimes use drafts instead of checks.Drafts differ from checks because they are not drawn on a bank but on an issuer (the firm) and are payable by the issuer.The bank acts only as an agent, presen
23、ting the draft to the issuer for payment.When the draft is transmitted to a firms bank for collection, the bank must present the draft to the issuing firm for acceptance before making payment. After the draft has been accepted, the firm must deposit the necessary cash to cover the payments.This allo
24、ws the firm to keep less cash on hand.McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.28-19Ethical and Legal QuestionsThe financial managers must always work with collected company cash balances and not with the companys book balance, which reflects checks that
25、 have been deposited but not collected. If you are borrowing the banks money without their knowledge, you are raising serious ethical and legal questions.McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.28-2028.4 Investing Idle CashA firm with surplus cash can p
26、ark it in the money market.Some large firms and many small ones use money market mutual funds.Firms have surplus cash for three reasons:Seasonal or Cyclical ActivitiesPlanned ExpendituresDifferent Types of Money Market SecuritiesMcGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies, Inc. All
27、rights reserved.28-21Seasonal Cash DemandsLong-term financingShort-term financingTimeTotal Financing needsJFMAMMarketable securitiesBank loansMcGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.28-2228.5 Summary & ConclusionsA firm holds cash to conduct transaction
28、s and to compensate banks for the various services they render.The optimal amount of cash for a firm to hold depends on the opportunity cost of holding cash and the uncertainty of future cash inflows and outflows.Two transactions models that provide rough guidelines for determining the optimal cash
29、postion are:The Miller-Orr modelThe Baumol modelMcGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.28-2328.5 Summary & ConclusionsThe firm can make use of a variety of procedures to manage the collection and disbursement of cash in such as way as to speed up the c
30、ollection of cash and slow down payments.Some methods to speed collections areLockboxesConcentration bankingWire transfersThe financial managers must always work with collected company cash balances and not with the companys book balance. McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies,
31、 Inc. All rights reserved.28-2428.5 Summary & ConclusionsIf you are borrowing the banks money without their knowledge, you are raising serious ethical and legal questions.The answers to which you probably know by now.McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies, Inc. All rights reser
32、ved.28-25Corporate Finance Ross Westerfield JaffeSixth EditionSixth Edition29Chapter Twenty Nine Credit ManagementMcGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.28-26Chapter Outline29.1 Terms of the Sale29.2 The Decision to Grant Credit: Risk and Information 2
33、9.3 Optimal Credit Policy29.4 Credit Analysis29.5 Collection Policy29.6 How to Finance Trade Credit29.7 Summary & ConclusionsMcGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.28-27IntroductionA firms credit policy is composed of:Terms of the saleCredit analysisCo
34、llection policyThis chapter discusses each of the components of credit policy that makes up the decision to grant credit.McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.28-28The Cash Flows of Granting CreditCredit sale is madeCustomer mails checkFirm deposits c
35、heckBank credits firms accountAccounts receivableCash collectionTimeMcGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.28-2929.1 Terms of the SaleThe terms of sale of composed ofCredit PeriodCash DiscountsCredit InstrumentsMcGraw-Hill/IrwinCopyright 2002 by The Mc
36、Graw-Hill Companies, Inc. All rights reserved.28-30Credit PeriodCredit periods vary across industries.Generally a firm must consider three factors in setting a credit period:The probability that the customer will not pay.The size of the account.The extent to which goods are perishable.Lengthening th
37、e credit period generally increases salesMcGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.28-31Cash DiscountsOften part of the terms of sale.Tradeoff between the size of the discount and the increased speed and rate of collection of receivables.An example would
38、be “3/10 net 30”The customer can take a 3% discount if he pays within 10 days.In any event, he must pay within 30 days.McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.28-32The Interest Rate Implicit in 3/10 net 30A firm offering credit terms of 3/10 net 30 is e
39、ssentially offering their customers a 20-day loan.To see this, consider a firm that makes a $1,000 sale on day 0Some customers will pay on day 10 and take the discount.Other customers will pay on day 30 and forgo the discount.01030$97001030$1,000McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Com
40、panies, Inc. All rights reserved.28-3301030+$970-$1,000A customer that forgoes the 3% discount to pay on day 30 is borrowing $970 for 20 days and paying $30 interest: The Interest Rate Implicit in 3/10 net 30McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.28-34
41、Credit InstrumentsMost credit is offered on open accountthe invoice is the only credit instrument.Promissory notes are IOUs that are signed after the delivery of goodsCommercial drafts call for a customer to pay a specific amount by a specific date. The draft is sent to the customers bank, when the
42、customer signs the draft, the goods are sent.Bankers acceptances allow a bank to substitute its creditworthiness for the customer, for a fee.Conditional sales contracts let the seller retain legal ownership of the goods until the customer has completed payment.McGraw-Hill/IrwinCopyright 2002 by The
43、McGraw-Hill Companies, Inc. All rights reserved.28-3529.2 The Decision to Grant Credit: Risk and Information Consider a firm that is choosing between two alternative credit policies:“In God we trusteverybody else pays cash.”Offering their customers credit. The only cash flow of the first strategy is
44、 The expected cash flows of the credit strategy are:01We incur costs up frontand get paid in 1 period by h% of our customers.McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.28-3629.2 The Decision to Grant Credit: Risk and Information The NPV of the cash only st
45、rategy isThe NPV of the credit strategy isThe decision to grant credit depends on four factors:1.The delayed revenues from granting credit,2.The immediate costs of granting credit,3.The probability of repayment, h4.The discount rate, rBMcGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies, In
46、c. All rights reserved.28-37Example of the Decision to Grant CreditA firm currently sells 1,000 items per month on a cash basis for $500 each.If they offered terms net 30, the marketing department believes that they could sell 1,300 items per month.The collections department estimates that 5% of cre
47、dit customers will default.The cost of capital is 10% per annum.McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.28-38Example of the Decision to Grant CreditThe NPV of cash only:The NPV of Net 30:McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies, Inc.
48、 All rights reserved.28-39Example of the Decision to Grant CreditHow high must the credit price be to make it worthwhile for the firm to extend credit?The NPV of Net 30 must be at least as big as the NPV of cash only:McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies, Inc. All rights reser
49、ved.28-40The Value of New Information about Credit RiskThe most that we should be willing to pay for new information about credit risk is the present value of the expected cost of defaults: In our earlier example, with a credit price of $500, we would be willing to pay $26,000 for a perfect credit s
50、creen.McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.28-41Future Sales and the Credit DecisionDo not give creditGive creditCustomer pays h = 100%Customer pays (Probability = h)Customer defaults(Probability = 1 h)Give creditDo not give creditOur first decision:
51、We refuse further sales to deadbeats.We face a more certain credit decision with our paying customers:Information is revealed at the end of the first period:McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.28-4229.3 Optimal Credit PolicyCarrying CostsTotal costs
52、C*Costs in dollarsLevel of credit extended At the optimal amount of credit, the incremental cash flows from increased sales are exactly equal to the carrying costs from the increase in accounts receivable. Opportunity costsMcGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies, Inc. All rights
53、 reserved.28-4329.3 Optimal Credit PolicyTrade Credit is more likely to be granted if:1.The selling firm has a cost advantage over other lenders.2.The selling firm can engage in price discrimination.3.The selling firm can obtain favorable tax treatment.4.The selling firm has no established reputatio
54、n for quality products or services.5.The selling firm perceives a long-term strategic relationship.The optimal credit policy depends on the characteristics of particular firms.McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.28-4429.4 Credit AnalysisCredit Infor
55、mationFinancial StatementsCredit Reports on Customers Payment History with Other FirmsBanksCustomers Payment History with the FirmCredit Scoring: The traditional 5 Cs of creditCharacterCapacityCapital CollateralConditionsSome firms employ sophisticated statistical modelsMcGraw-Hill/IrwinCopyright 20
56、02 by The McGraw-Hill Companies, Inc. All rights reserved.28-4529.5 Collection PolicyCollection refers to obtaining payment on past-due accounts.Collection Policy is composed ofThe firms willingness to extend credit as reflected in the firms investment in receivables.Collection EffortMcGraw-Hill/Irw
57、inCopyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.28-46Average Collection PeriodMeasures the average amount of time required to collect an account receivable. For example, a firm with average daily sales of $20,000 and an investment in accounts receivable of $150,000 has an ave
58、rage collection period ofMcGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.28-47Accounts Receivable Aging ScheduleShows receivables by age of account.The longer an account has been unpaid, the less likely it is to be paid.McGraw-Hill/IrwinCopyright 2002 by The Mc
59、Graw-Hill Companies, Inc. All rights reserved.28-48Collection EffortMost firms follow a protocol for customers that are past due:1.Send a delinquency letter.2.Make a telephone call to the customer.3.Employ a collection agency.4.Take legal action against the customer.There is a potential for a conflict of interest between the collections department and the sales department.You need to strike a balance between antagonizing a customer and being taken advantage of by a deadbeat.
