TM 2 part 2

FACTORS TO BE CONSIDERED WHILE

DETERMINING THE OPTIMUM CASH

BALANCE

Answer explanation

Cash shortage costs,

Uncertainty

Compensating balance.

Excess cash balance costs

Efficiency of Management

Types of concentration system

Answer explanation

Field banking system

Collect cash and other otc deposits

Lock box system

Collect mailed deposits

OBJECTIVES FUNCTIONS OF CASH

CONCENTRATION

Answer explanation

Minimize opportunity cost of excess balance.

x Minimize transaction cost

x Minimize administrative cost of maint-

aining.

x Minimize cash control cost

- assumed to receive

cash periodically but has to pay out cash

continuously at a steady rate

Answer explanation

baumol model

the fin’s inflows are

lumpy but its outflows are not.

Answer explanation

baumol model

enables companies to find out their desirable level of cash balance under certainty.

Answer explanation

baumol model

relies on the tradeoff between the liquidity

provided by holding money

Answer explanation

baumol model

based on the basic assumption

that the size and timing of cash flows are known with certainty.

Answer explanation

baumol model

- for firms with uncertain cash inflows and cash outflows

Answer explanation

Stochastic Model

models in

operation.

Answer explanation

Stochastic Model