Determination of spread, Financial Management

Assignment Help:

Determination of spread

Daily interest rate = 5.11/ 365 = 0.014% per day

Variance of cash flows = 1000 × 1000 = $1000000 per day

Transaction cost = $18 per transaction

Spread = 3 * ((0.75 * transaction cost * variance)/interest rate) 1/3 = 3 * ((0.75 * 18 * 1000000)/ 0.00014)1/3 = 3 * 4585.7 = $13757

Lower limit (set by Renpec Co) = $7500

Upper limit = 7500 + 13757 =$21257

Return point = 7500 + (13757/ 3) = $12086

The Miller-Orr model takes account of improbability in relation to receipts and payment. The cash balance of Renpec Co is permitted to differ between the lower and upper limits calculated by the model. If the lower limit is arrive at an amount of cash equal to the difference between the return point and the lower limit is raised by selling short-term investments. If the upper limit is arrive at an amount of cash equal to the difference between the upper limit and the return point is used to buy short-term investments. The model thus helps Renpec Co to decrease the risk of running out of cash while avoiding the loss of profit caused by having unnecessarily high cash balances.


Related Discussions:- Determination of spread

Collecting information and forecasting in budget, Collecting Information an...

Collecting Information and Forecasting: All budgets must be based on accurate and reasonable information. A budget derived from information which is irrelevant to the actual or

Financial analysis and interpretation , You have been to carry out the foll...

You have been to carry out the following work: To provide a financial analysis and interpretation of one London stock Exchange registered company. The senior Partner has

Legal obligations of corporation is the cost of equity zero, If dividends p...

If dividends paid to common stockholders are not legal obligations of a corporation, is the cost of equity zero? Explain your answer. Even though common stockholders don't have

Which ratios would a banker be most interested, Which ratios would a banker...

Which ratios would a banker be most interested in when considering whether to approve an application for a short-term business loan? Explain. Bankers and other lenders use liq

Interlinkage in the financial markets, Interlinkage in the Financial Market...

Interlinkage in the Financial Markets - Common Features The interlinkage present in the financial markets is essentially due to the fact that all these markets are in the proce

Gold standard, what is the traditional gold standard? and how does it diffe...

what is the traditional gold standard? and how does it differ from our current monetary system.

Leverage, evaluate the importance of leverage in a small scale company

evaluate the importance of leverage in a small scale company

Explain the benefit plan, Q. Explain the benefit plan? Cafeteria Plan -...

Q. Explain the benefit plan? Cafeteria Plan - A benefit plan maintained by an employer for benefit of the employees underwhich every participant has the opportunity to select t

Explain how earnings available to common stockholders, Explain how earnings...

Explain how earnings available to common stockholders and common stock dividends paid from the current income statement affect the balance sheet item retained earnings. The cha

Historical versus implied volatility, There are two ways to estimate ...

There are two ways to estimate yield volatility - historical volatility and implied volatility. Thus far we have discussed how to calculate volatility by estimati

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd