financial analysis, planning and forecasting theory and application by alice c. lee san francisco...
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Financial Analysis, Planning and Forecasting
Theory and Application
ByAlice C. Lee
San Francisco State UniversityJohn C. Lee
J.P. Morgan ChaseCheng F. Lee
Rutgers University
Chapter 20
Cash, Marketable Securities, and Inventory Management
Outline 20.1 Introduction
20.2 The Baumol and Miller-Orr model
20.3 Cash management systems
20.4 Credit lines and bank relations
20.5 Marketable securities management
20.6 Inventory Management
20.7 Summary
Appendix 20A. Derivation of equation 20-1
20.1 Introduction
20.2 The Baumol and Miller-Orr model
Baumol’s EOQ model
Miller-Orr model
20.2 The Baumol and Miller-Orr model
（ 20-1）Figure 20-1
2C
FTEOQ «
k
20.2 The Baumol and Miller-Orr model
Figure 20-2
20.2 The Baumol and Miller-Orr model
2 $120 $1,560,000C $55,857
.12
C $55,857$27,928.50
2 2
20.2 The Baumol and Miller-Orr model
Figure 20-3
20.2 The Baumol and Miller-Orr model
（ 20-2）
（ 20-3）
（ 20-4）
（ 20-5）
12 33
34
FS
k
3
SR L
H S L 4
3
R LACB
20.2 The Baumol and Miller-Orr model
upper limit = lower limit + spread
= ＄ 20,000 ＋＄ 22,293
= ＄ 42,293
1
33 20 9,000,000spread 3 $22,293
4 .000329
22,293return point = 20,000 + $ 27,431
3
4 $27,431 $20,000average cash balance = $ 29,908
3
20.3 Cash management systems
Float
Cash collection and transference systems
Cash transference mechanism and scheduling
20.3 Cash management systems
Figure 20-4
20.3 Cash management systemsFigure 20-5
Source: Stone and Hill, 1980.
20.3 Cash management systemsFigure 20-6
Source: Stone and Hill, 1980.
20.4 Credit lines and bank relations
Credit lines
Bank relations
20.4 Credit lines and bank relations
$112,00014%
$800,000
.14 $200,0003.5%
$800,000
$112,000 $28,00017.5%
$800,000
interest expense + implicit interest expense
elective interest cost = line of credit limit - compensating balances
20.5 Marketable securities management
Investment criteria for surplus cash balances
Types of marketable securities
Hedging considerations
20.5 Marketable securities management
n
t=1
fixed interest payment principalbond price =
1+ί 1+ίt n
$10,000 - price 365 daysannual yield
price days to maturity
$10,000 9,500 365 .1055
9,500 182
20.5 Marketable securities management
(20-6)
2ln 2P E rt t
t
1
put hedge ratio = 1 - call hedge ratio
= 1 - N d
20.6 Inventory Management
Inventory Loans
Economic order quantity
20.6 Inventory Management
（ 20-7） 2SO
QC
2 50,000 2001,000 units
20Q
20.7 Summary
Chapter 20 has examined various aspects of cash and marketable security management. Two techniques were discussed that can assist in the estimation of an optimal level or range for the cash balance; these were Baumol’s model and the Miller-Orr model.
To make the cash collection system more efficient, the firm can choose from various methods for collecting or transferring cash and deciding when to transfer it. Such cost minimization is ideal for linear programming applications.
20.7 Summary The credit line offers the firm a means of handling cash
variations caused by seasonal effects or unanticipated events. Establishing good bank relations is an important feature for any cash management system. However, bank services do take on a cost, typically in the form of compensating balances. While credit lines can be a good investment for a bank, they can have detrimental effects on the bank’s liquidity that could intensify any maturity gap problems.
Efficient cash management ensures that surplus balances are invested in marketable securities that meet minimum standards for certainty of principal, maturity, liquidity, and yield. In Chapter 20, we considered the hedge decision from the cash manager’s perspective and gave various examples of hedging applications. Optimal inventory management was also briefly discussed.
Appendix 20A. Derivation of equation 20-1
（ 20A-1）
（ 20A-2）
total costs = holding cost + transaction cost
C T = F
2 Ck
2
total cost0
C 2
T F
C
k
2
2;
2
FT FTC
C
kk