Exam 28: Advanced Issues in Cash Management and Inventory Control

The cash balances of most firms consist of transactions,compensating,precautionary,and speculative balances.We can produce a total desired cash balance by calculating the amount needed for each purpose and then summing them together.

Humphrey's Housing has been practicing cash management for some time by using the Baumol model for determining cash balances.Some time ago,the model called for an average balance (C*/2)of $500; at that time,the rate on marketable securities was 4 percent.A rapid increase in interest rates has driven the interest rate up to 9 percent.What is the appropriate average cash balance now?

Gemini Inc.'s optimal cash transfer amount,using the Baumol model,is $60,000.The firm's fixed cost per cash transfer of marketable securities to cash is $180.In addition,the total estimated cash costs (transfers and carrying cost)for the firm,based on 16 transactions per year,are $5,760.On what opportunity cost of holding cash was this analysis based?

Gemini Inc.'s optimal cash transfer amount,using the Baumol model,is $60,000.The firm's fixed cost per cash transfer of marketable securities to cash is $180,and the total cash needed for transactions annually is $960,000.On what opportunity cost of holding cash was this analysis based?

Halliday Inc.receives a $2 million payment once a year.Of this amount,$700,000 is needed for cash payments made during the next year.Each time Halliday deposits money in its account,a charge of $2.00 is assessed to cover clerical costs.If Halliday can hold marketable securities that yield 5 percent,and then convert these securities to cash at a cost of only the $2 deposit charge,what is the total cost for one year of holding the minimum cost cash balance according to the Baumol model?

If a company increases its safety stock,then its average inventory will go up.

New England Charm,Inc.specializes in selling scented candles.The company has established a policy of reordering inventory every 30 days.A recently employed MBA has considered New England's inventory problem from the EOQ model viewpoint.If the following constitute the relevant data,how does the current policy compare with the optimal policy? Ortering cost $\quad$ $\quad$ $\quad = \$ 10$ per orter Carring cost $\quad$ $\quad$ $\quad$$\quad$$= 20 \%$ of purchase price purchase price $\quad$ $\quad$$\quad$ $= \$ 10$ per unit Tatal sales for year $\quad$ $\quad$ $= 1,000$ urits Sefety stack $\quad$ $\quad$$\quad$ $\quad = 0$

During times of inflation,which of these inventory accounting methods is best for cash flow?

Which of the following is true of the EOQ model? Note that the optimal order quantity,Q,will be called EOQ.

Which of the following is true of the Baumol model? Note that the optimal cash transfer amount is C*.

Suppose Stanley's Office Supply purchases 50,000 boxes of pens every year.Ordering costs are $100 per order and carrying costs are $0.40 per box.Moreover,management has determined that the EOQ is 5,000 boxes.The vendor now offers a quantity discount of $0.20 per box if the company buys pens in order sizes of 10,000 boxes.Determine the before-tax benefit or loss of accepting the quantity discount.(Assume the carrying cost remains at $0.40 per box whether or not the discount is taken.)

For some firms,holding highly liquid marketable securities is a substitute for holding cash because a marketable securities portfolio can accomplish the same objective as cash.

Which of the following would cause average inventory holdings to decrease,other things held constant?

The easier a firm's access to borrowed funds the higher its precautionary balances will be,in order to protect against sudden increases in interest rates.

Each year,Holly's Best Salad Dressing,Inc.(HBSD)purchases 50,000 gallons of extra virgin olive oil.Ordering costs are $100 per order,and the carrying cost,as a percentage of inventory value,is 80 percent.The purchase price to HBSD is $0.50 per gallon.Management currently orders the EOQ each time an order is placed.No safety stock is carried.The supplier is now offering a quantity discount of $0.03 per gallon if HBSD orders 10,000 gallons at a time.Should HBSD take the discount?

If a company increases its safety stock,then its EOQ will go up.

A just-in-time system is designed to stretch accounts payable as long as possible.