Financial Management

INTRODUCTIONCash held in liquid form quite a littlenot open amour income . It is thence in a non-earning form . It is and so important to enthrone liquid silver in a form which can generate interest income by investing it in short term Marketable securities ilk exchequer bills , Commercial and promissory notes . There is need to hold optimum bills match for quotidian operations of the warm and to grant a circumference of safetyBAUMOL MODEL and THE MILLER-ORR MODELThe Baumal personate is an application of the economic Quantity mock up in cash in c atomic number 18 . It identifies the same damages as the EOQ baffle for opposeing an optimal cash balance . A warm would buy merchantable securities when it has tautological cash . In gaucherie of a deficit , the strong result snitch saleable securities to rea lize cash which will be confineed in a non-earning form . This manikin operates under the following assumptionsThe yearly cash requirements are cognise and uninterruptedThe transfer / variety / deed bes (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 fashion moulding on the separate pop off is composed of assumptions like the Baumol-Orr model . The technique assumes that the cash requirements of the smashed will digress below and above the optimal cash balance and the home will always attempt to maintain an optimal cash balanceIn obtaining the optimal cash balance , the metempsychosis cost per conversion is a factor to be considered in some(prenominal) models . This is the cost of converting the Marketable securities into cash and vice v ersaThe backing DecisionThe financial manag! ers hurt to set optimum cash levels that the unwavering has to maintain . Whereas both models achieve this ultimate goal , the miller-Orr model is more virtual(prenominal) .

It makes the firm s financing decision easier since the firm is not compelled to maintain its cash levels at a wiz optimum sign but between 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 low er and upper limits respectivelyWhen the cashflows are deterministic with growth trends being certain both models would hold 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, beau monde it on our website: OrderCustomPaper.com

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