Questions and Problems

Changes in Target Cash Balances Indicate the likely impact of each of the following on a company's target cash balance. Use the letter I to denote an increase and D to denote a decrease. Briefly explain your reasoning in each case.

a. Commissions charged by brokers decrease.

b. Interest rates paid on money market securities rise.

c. The compensating balance requirement of a bank is raised.

d. The firm's credit rating improves.

e. The cost of borrowing increases.

f. Direct fees for banking services are established.

Using the BAT Model Given the following information, calculate the target cash balance using the BAT model:

Annual interest rate


Fixed order cost


Total cash needed

(Questions 1-10)

How do you interpret your answer?

Opportunity versus Trading Costs White Whale Corporation has an average daily cash balance of $300. Total cash needed for the year is $30,000. The interest rate is 5 percent, and replenishing the cash costs $6 each time. What are the opportunity cost of holding cash, the trading cost, and the total cost? What do you think of White Whale's strategy?

Ross et al.: Fundamentals of Corporate Finance, Sixth Edition, Alternate Edition

VII. Short-Term Financial Planning and Management

20. Cash and Liquidity Management

© The McGraw-Hill Companies, 2002

Borrowing Basics

Borrowing Basics

Some small business persons cannot understand why a lending institution refused to lend them money. Others have no trouble getting funds, but they are surprised to find strings attached to their loans.

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