Question

1. a) Identify and Explain the 3 motives for holding Cash, and Give 2 uses of the Cash Budget. b) What is the main goal of Cash Management? Describe and explain one cash management technique used to speed-up cash collection c) What are Marketable Securities? Give three examples of Marketable Securities d) What are the goals in Marketable Securities management? e) Describe the Conservative approaches to working capital management. What are its advantages? 2. a) A manufacturing firm sells on terms 2/10 net 30. Its annual sales amount to $3.650.000. 30% of its customers pay on the tenth day and take the discount; the other 70% take 40 days to make payments. i. What is the firm's Days Sales Outstanding? ii. Determine the firm's average amount of Accounts Receivable. b) c) What are the 4 Credit Policy variables, and explain how a change in a policy variable is evaluated. Please explain why it may be good to offer discounts to customers. 3. a) What are the relevant costs incinted with

Answer 1

a) The three broad motives for holding cash are:

1. Transaction motive: This motive refers to cash required for the daily transactions like salaries, wages, interest payments, etc.

2. Precautionary motive: This refers to holding of cash for contingencies and unforeseen conditions

3. Speculative motive: This refers to holding of cash for future opportunities like hoarding the material if price in raw material decreases for a firm.

Uses of Cash Budget:

1. It helps to identify any future cash deficits

2. It helps to determine the future ability of the business to meet the account payables

b) The main goal of cash management is to maintain sufficient cash to obligate for the future cash needs and avoid the risk of insolvency

One cash management technique used to speed up cash flow:

Company give a specific discount for payments in the first some days after the invoice has been generated. in this way the profitability can reduce a bit but the cash flows can improve substantially.

c) Marketable securities are the type of liquid securities which can easily be converted to cash within one year time frame.

Three types of Marketable securities:

1. Bonds: Bonds are issued by corporates or Governments to borrow funds from investors to grow the business and offers a fixed payment in the form of coupon and prices of the same fluctuate as per the changes in the interest rates.

2. Preferred Shares: These securities have the quality of both debt and equity. Coupon payments are done periodically but seniority wise bonds stand ahead of preferred shares.

3. Exchange Traded Funds(ETFs): ETFs allow investing in a basket of stocks, commodities or bonds which follows a particular index and returns are mirrored as per the index itself.

d) Goals In Marketable Securities Management:

The major goal in Marketable Securities management is to capture the opportunity of earning returns on the liquid cash available while also insuring the comfort of liquidating the same instruments very quickly.

The Company can identify the need of the cash flow timelines and accordingly decide to invest in bond, treasuries, Cash Management Bills, Preferred shares, ETFs, etc