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

Constructing the theoretical spot rate curve for treasuries, The following ...

The following treasury issues can be included for the construction of the curve: On-the-run treasury issues. On-the-run treasury issues and sele

APC 308, the importance of a balanced capital structure and the problems wh...

the importance of a balanced capital structure and the problems which are associated with high levels of gearing

Explain the risk–return relationship, Explain the risk–return relationship ...

Explain the risk–return relationship The relationship among the risk and required rate of return is termed as the risk–return relationship.  It is a positive relationship since t

Evaluate the vulnerability, Assume you are a professional financial analyst...

Assume you are a professional financial analyst working for a wealthy investor.  Your client has $2.6 million to invest and wants to sink it into a single stock (diversification is

Misconceptions about financial manmagement, What are the misconceptions abo...

What are the misconceptions about Financial Management?

Operating economics, Q Operating economics A number of operating econo...

Q Operating economics A number of operating economies will be available with the merger of two or more companies. Duplicating facilities in accounting purchasing marketing etc

Csae lets.., how would you judge the potential

how would you judge the potential

What is the requirement of working capital, Q. What is the requirement of W...

Q. What is the requirement of Working Capital? Ans. Meaning of Working Capital: - Working capital management is a significant aspect of financial management. In business money

Types of finance functions/ decisions, TYPES OF FINANCE FUNCTIONS/ DECISION...

TYPES OF FINANCE FUNCTIONS/ DECISIONS The most main decisions in finance relate to procuring funds, investing them in profitable projects or assets, operate for the year and a

Explain the concepts of planning the work, Explain the concepts of Planning...

Explain the concepts of Planning the work Determine scope and objective of the audit (to verify assets, to check adequacy of internal controls etc...). Ensuring appropr

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