30 Jan Langley clinics, Inc.,
HADM 6306
Homework Week 6
16.1
a) What is the goal of cash management?
b) Briefly describe float and the following associated cash management techniques:
16.3
a) Give two reasons why businesses hold marketable securities.
b) Which types of securities are most suitable for holing as marketable securities?
c) Suppose Southwest Regional Medical Center has just raised $6 million in new capital that it plans to use to build three freestanding clinics, one each year over the next three years. (For the sake of simplicity, assume that equal payments have to be made at the end of each of the next three years.) What securities should be bought for the firm’s marketable securities portfolio, assuming that the firm has no other excess cash? (Hint: Consider both the type and maturity of the securities.)
d) Now, consider the situation faced by the Huntsville Physical Therapy Group. It has accumulated $20,000 in cash above its target cash balance, and it has o immediate needs for this excess cash. However, the firm may at any time need some part or all of the $20,000 to meet unforeseen cash needs. What securities should be bought for the firm’s marketable securities portfolio?
16.1
On a typical day, Park Place Clinic writes $1,000 in checks. It generally takes four days for those checks to clear. Each day the clinic typically receives $1, 000 in checks that take three days to clear. What is the clinic’s average net float?
16.4
Langley clinics, Inc., buys $400, 000 in medical supplies each year (at gross prices) from its major supplier, Consolidated Services, which offers Langley terms of 2.5/10, net 45. Currently, Langley is paying the supplier the full amount due on Day 45, but it is considering taking the discount, paying on Day 10,, and replacing the trade credit with a bank loan that has 10 percent annual cost.
a) What is the amount of free trade credit that Langley obtains from Consolidated Services? (Assume 360 days per year throughout this problem.)
b) What is the amount of costly trade credit?
c) What is the approximate annual cost of the costly trade credit?
d) Should Langley replace its trade credit with the bank lean? Explain your answer
e) It the bank loan is used, how much of the trade credit should be replaced?
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