Page 125 - DCOM505_WORKING_CAPITAL_MANAGEMENT

Working Capital Management

Notes 7.7 Review Questions

1. In your opinion, what are the motives that a company may have for holding liquid assets?
Explain the costs and benefits associated with holding liquid assets.

2. “It is normal for the financial manager to place great importance on the cash budget in
determining the desirable cash holdings for a company.” How did Beranek utilise this
approach to develop a model suitable for determining the company’s optimal cash balance?
3. What action can a financial manager take to reduce a company’s cash requirements?
4. “Liquidity risk is of greater importance than return risk in making decision about
investments in short-term securities.” Discuss.
5. What role do marketable securities play in fulfilling the firms’ overall objective of
maximising its owner’s wealth? How does the presence of marketable securities in the
firm’s asset structure affect the risk associated with the firm?
6. If a firm reduces the average age of its inventories, what effect might this action have on
the cash cycle and on the firm’s total sales?
7. How would you test the liquidity of the firm? What would be the main criterion for that?
8. Elucidate upon the Beranek Model only by the help of examples.

9. In your opinion, what seems to be the reason behind the Baumol model being the most
popular model of cash management?
10. Examine the factors that determine the optimum cash balances in a firm.

Answers: Self Assessment

1. cash 2. management

3. expect, must have on hand 4. Cash flow
5. customers, lenders, investors 6. inflow, outflow
7. “Cash Flow Statement” 8. Operating cash flow
9. Financing cash flow 10. receipts, payments

11. investment 12. cash budget
13. minimum 14. liquidity
15. Miller-Orr

7.8 Further Readings

Books D.R. Mehta, Working Capital Management, Prentice-Hall Inc., 1974.
K.V. Smith, Management of Working Capital, McGraw-Hill, New York.

Khan and Jain, Financial Management, Tata McGraw-Hill.
Pandey, Financial Management, Vikas Annex. 54.J.3 -MBA - Finance - SDE Page
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