Chapter 24 video

Question 1

Transaction motive

Answer 1

for normal business transactions

Question 2

Precautionary motive

Answer 2

to provide a buffer for protection against unanticipated required cash outlays such as repairs for, or replacement of equipmetn

Question 3

Finance motive

Answer 3

in anticipation of major outlays such as lump-sum loan repayments or dividend payments

Question 4

speculative motive

Answer 4

to take advantage of opportunities such as the chance to purchase raw materials at lower than normal prices

Question 5

optimal cash balance

Answer 5

the amount of cash that balances the risks of illiquidity against the sacrifice in expected return associated with maintaining (holding) cash balances
- differs from firm to firm

Question 6

objective of cash management

Answer 6

1. reduce the opportunity cost of holding idel cash
2. ensure that all obligations are paid on time
3. collect money owed as soon as it becomes due

Question 7

firms with predictable cash flows and/or excess borrowing capacity (eg unused lines of credit) can

Answer 7

afford to have lower optimal cash balances

Question 8

cash flow synchronization

Answer 8

tehcnique manage their cash and cash flows

- the goal is to minimize the reuired amount of capital by speeding up cash inflows and delaying cash outflows

Question 9

cash flow synchoronization focuses on what

Answer 9

matching timing of cash inflows and outflows

- often means that firms look for ways to speed up cash inflows and delay cash outflows

Question 10

how do you speed up cash inflows

Answer 10

1. bill clients earlier
2. encourage cash sales by providing incentives
3. encourage the use of electronic payment systems such as direct deposit, auto debit, and debit cards instead of cheques

Question 11

how do you delay cash outflows

Answer 11

1. pressure suppliers to offer more generous trade credit terms
2. pay employees once a month rather than twice or every two weeks

Question 12

float

Answer 12

is the time that elapses between payment is initiated and funds are received

• it takes time to mail, deposit and clear a cheque through a bank
• float can be reduced by using debit cards, preauthrozied payments and electronic funds transfer and electronic data interchange systems

Question 13

what is disbursement float

Answer 13

the payer’s float

- represents this time lag for the payor

Question 14

what is a positive float

Answer 14

the payer’s float because the payer’s bank balance shows more cash than the amount of the company actually owns

Question 15

what is a collection float

Answer 15

the receives’s float

• this is also called a negative float
• bank balance showing less cash than the amount the company actually owns

Question 16

what are the 3 types of floats

Answer 16

mail float

2. processing float
3. clearing float

Question 17

what is kiting

Answer 17

intentional NSF payments