7.5 What is the goal of cash management? 7.7 Give 2 reasons that businesses hold

Question

7.5 What is the goal of cash management?

7.7 Give 2 reasons that businesses hold marketable securities (short term investments)

b. Which types of securities are most suitable to hold as marketable securities?

c. Suppose Southwest Regional Medical Center has just raised $ 6 million in new capital that it plans to use to build 3 freestanding clinics, one each year over the next 3 years. (For the sake of simplicity, assume that equal payments have to be made at the end of each of the next 3 years). What securities should be bought for the firm’s marketable securities portfolio, assuming that the firm has no excess cash? (Hint: consider both the type and maturity of the securities).

d. Now consider the situation faced by Huntsville Physical therapy group. It has accumulated $ 20,000 in cash above its target cash balance, and it has no immediate needs for this excess cash. However, the firm may at any time need some or all of the $20,000 to meet unforeseen cash needs. What securities should be bought for the firm’s marketable securities portfolio?

Explanation / Answer

7.5

The goal of cash management is to ensure that adequate capital is available to meet the short term requirements,e.g. purchase of stock, payment to creditors , payment of dividends etc.. if any company fails to pay any interest, dividend, redemtion amount of securities etc. whenever it becomes due because of lack of cash, the company is insolvent.. it is the indicator of bankrupcy. so , company should manage cash in such a way so that it can prevent bankcrupcy. If we do not have good cash position, it may create problem in hiring and retaining good employee also.

7.7 marketable securities provide cash quickly and earn higher returns than cash. however, following should also be considered:

Risks; There may be adverse market situation.

Maturity: whether it is to be maturee within 1 to 5 years or more time.

Yield: earning sholud be more than yield earn on deposit of cash with bank

Liqidity: whether cash is readily available or whether it takes too much time to cash realized.

b.

very liquid securities that can be converted in to cash within one year.

The rate at which theses securities bought are change with the very little differences. so a company sholud invest in such type of securities.

c

the firm shold invest their fund in such a way so that liquidity of their meets with the cash requirement of the entity on timely basis.

in the perseny case, invest in short term securities that are liquid type as can be converted into cash at the end of one, two and three year. entity should consider other factor such as market risk, yield, etc.

d in the present situation , company should invest their excess cash of $ 20,000 in such type of securuties that can be liquidated at any time. for example-invest in stock of stock market. however other factor as mentioned in above cases should also to be considered.

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