Financial Management

INTRODUCTIONCash held in liquid form quite a littlenot represent stake income . It is thence in a non-earning form . It is so important to enthrone liquid silver in a form which can generate interest income by commit it in short term Marketable securities handle treasury bills , Commercial and promissory notes . There is need to hold best currency match for quotidian operations of the warm and to take a leak a circumference of safetyBAUMOL MODEL and THE MILLER-ORR MODELThe Baumal personate is an application of the economical Quantity mock up in capital focal mastermind . It identifies the same damages as the EOQ baffle for opposeing an optimal cash balance . A warm would buy merchantable securities when it has surplus cash . In gaucherie of a deficit , the even up allow swap marketable securities t o realize cash which will be asseverateed in a non-earning form . This manikin operates under the following assumptionsThe yearly cash requirements ar cognise and uninterruptedThe transfer / variety / deed damages (of converting cash into marketable securities and vice-versa ) are known and unendingThe 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 baffle on the former(a) pop off is composed of assumptions like the Baumol-Orr homunculus . The technique assumes that the cash requirements of the smashed will drift below and above the optimal cash balance and the level will always attempt to maintain an optimal cash balanceIn obtaining the optimal cash balance , the innovation cost per conversion is a factor to be considered in both(prenominal) models . This is the cost of converting the Marketable securities into cash and vice versaThe backing DecisionThe financial man! agers halt to set optimum cash levels that the trustworthy has to maintain . Whereas both models achieve this ultimate goal , the miller-Orr model is more practical(prenominal) .

It makes the firm s financing decision easier since the firm is not compelled to maintain its cash levels at a wiz optimum point but betwixt 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 give similar results . provided with uncertain cashflow trends /growths , the Miller-Orr model would give financial managers contrastive 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, pose it on our website: BestEssayCheap.com

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