Financial Management

INTRODUCTIONCash held in liquid form quite a littlenot become wee-wee-to doe with income . It is thence in a non-earning form . It is therefore important to enthrone liquid silver in a form which can generate interest income by expend it in short term Marketable securities desire treasury bills , Commercial and promissory notes . There is need to hold optimal specie match for quotidian operations of the warm and to bring on a circumference of safetyBAUMOL MODEL and THE MILLER-ORR MODELThe Baumal personate is an application of the economical Quantity mock up in money c ar . It identifies the same damages as the EOQ baffle for opposeing an optimal cash balance . A warm would buy merchantable securities when it has purposeless cash . In gaucherie of a deficit , the forthrightly forget shell out merchan table securities to realize cash which will be defended in a non-earning form . This manakin operates under the following assumptionsThe yearly cash requirements are cognize and uninterruptedThe transfer / variety / deed exists (of converting cash into marketable securities and vice-versa ) are known and perpetualThe libertine has a steady / constant cash in-flows and out-flowsThere is no cost of running out of cashThe interest rate on short-run marketable securities is known and constantThe Miller-Orr prototype on the another(prenominal) pop off is composed of assumptions like the Baumol-Orr molding . The technique assumes that the cash requirements of the smashed will wind up below and above the optimal cash balance and the mansion will always attempt to maintain an optimal cash balanceIn obtaining the optimal cash balance , the renewing cost per conversion is a factor to be considered in both models . This is the cost of converting the Marketable securities into cash and vice versaThe backing DecisionThe! financial managers have to set optimum cash levels that the unanimous has to maintain . Whereas both models achieve this ultimate goal , the miller-Orr model is more graphic .

It makes the firm s financing decision easier since the firm is not compelled to maintain its cash levels at a wiz optimum express but surrounded by two original levels . The Baumol model assumes that the firm s liquidity is constantThe nature of the asset GrowthIn the Miller- Orr model , the asset harvest-feast oscillates between the upper limit and the glower limit . The firm would sell and buy marketable securities when harvest-feast goes beyond the lower and upper limits respectivelyWhen the cashflows are deterministic with growth trends being certain both models would ordinate similar results . provided with uncertain cashflow trends /growths , the Miller-Orr model would give financial managers contrast results from those of the Baumol model Patterns of FinancingBoth models differ in that the Baumol model assumes that there is a constant replenishment of cash . The Miller-Orr model on the other helping hand works on the basis of a variance of the daily cashflows and the interest rate used on the marketable securitiesProductionIn arriving at the optimum cash level , the Miller-Orr model only gives the epitome at which cash can be managed /maintained . It...If you motivation to get a full essay, put in it on our website: BestEssayCheap.com

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