UNIVERSITY OF DAR ES SALAAM

BUSINESS SCHOOL
Department of Finance

COURSE FN 307: Treasury

Management
Seminar & Review: Cash Transfer Methods and Payment Systems
Group 7, 8 & 9
1. Is it possible for a firm to have too much cash? Why would shareholders care if a firm
accumulates substantial amounts of cash?
2. Discuss distinct types of international payment methods.
3. Discuss issues and challenges of electronic payment systems.
4. Identify various private and public sector bodies in Tanzania National Payment System and
discuss distinct roles they play.
5. Which would a firm prefer: a net collection float or a net disbursement float? Why?
6. What is a firm cash cycle? How the cash cycle and cash turnover of a firm are related?
What should a firm’s objectives with respect to its cash cycle and cash turnover be?
7. It is normal for financial manager to place significant importance on cash budget in
determining cash holding period for a company. How did William Baumol utilize this approach
in to develop the model suitable for determining the company’s optimal cash balance?
8. On an average day, your firm receives 50 checks. These checks, on average, are worth $250
each. The average collection delay is 3 days. Also each day, your firm writes about 25 checks.
These checks are worth an average of $400 and clear your bank in an average of 6 days.
a. What is the amount of the collection float?
b. What is the amount of the disbursement float?
c. What is the amount of the net float?
9. Purple Feet Wine, Inc., receives an average of TZS6,000,000 in checks per day. The delay
in clearing is typically five days. The current interest rate is 0.075 percent per day.
a. What is the company’s float?
b. What is the most Purple Feet should be willing to pay today to eliminate its float
entirely?

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 c. What is the highest daily fee the company should be willing to pay to eliminate its
float entirely?
10. It takes Cookie Cutter Modular Homes, Inc., about five days to receive and deposit checks
from customers. Cookie Cutter’s management is considering a lockbox system to reduce the
firm’s collection times. It is expected that the lockbox system will reduce receipt and deposit
times to three days total. Average daily collections are TZS140,000, and the required rate of
return is 10 percent per year.
a. What is the reduction in outstanding cash balances because of implementing the
lockbox system?
b. What could be earned on these savings?
c. What is the maximum monthly charge Cookie Cutter should pay for this lockbox
system?
11. Bird’s Eye Treehouses, Inc., a Kentucky company, has determined that most of its customers
are in the Pennsylvania area. It therefore is considering using a lockbox system offered by a
bank located in Pittsburgh. The bank has estimated that use of the system will reduce collection
time by two days. Based on the following information, should the lockbox system be adopted?
Average number of payments per day 700
Average value of payment TZS 1,100,000
Variable Lock Box fee (per transaction) TZS 350
Annual interest rate on Money market securities 6%
How would your answer change if there were a fixed charge of TZS1,000,000 per year in
addition to the variable charge?
12. Using optimal cash balance models indicate the likely impact of each of the following on
a company’s target cash balance. Briefly explain your reasoning in each case.
a. Commissions charged by brokers decrease.
b. Interest rates paid on money market securities rise.
c. The compensating balance requirement of a bank is raised.
d. The firm’s credit rating improves.
e. The cost of borrowing increases.
f. Direct fees for banking services are established.
13. In the Miller-Orr cash balance model, contrast the average cash balance and the return points.

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14. A firm uses a continuous billing system that results into an average daily receipt of TZS
4,000,000. It is contemplating the institution of concentration banking instead of the
current system of centralized billing and collection. It is estimated that such a system
would reduce collection period of accounts receivables by two days. Concentration
banking would cost TZS 75,000 annually and 8 per cent can be earned by firm on its
investments. It is also found that a lock-box system could reduce its overall collection time
by four days and could cost annually TZS 120,000.
a. How much cash would be released with the concentration banking system?
b. How much cash can be saved due to reduction in collection period by two days?
c. Should the firm institute concentration banking?
d. How much cash would be freed by lock box- system?
e. Between concentration banking and lock box system, which is better?
15. Your firm utilizes TZS 165,000 a week to pay bills. The standard deviation of these cash
flows is TZS 20,000. The fixed cost of transferring funds is TZS 48 a transfer. The
applicable interest rate is 6%. The firm has established a lower cash balance limit of TZS
100,000. Answer these five questions using the BAT (Baumol-Allais-Tobin) model:
a. What is the optimal initial cash balance?
b. What is the optimal average cash balance?
c. What is the opportunity cost of holding cash?
d. What is the trading cost of holding cash?
e. What is the total cost of holding cash?
16. Your firm utilizes TZS 130,000 a week to pay bills. The standard deviation of these cash flows
is TZS 15,000. The fixed cost of transferring funds is TZS 51 a transfer. Your firm has
established a lower cash balance limit of TZS 80,000. The weekly interest rate is .067%. Use
the Miller-Orr model to answer these three questions.
a. What is the optimal initial cash balance?
b. What is the optimum upper limit?
c. What is the average cash balance?

Note:
Seminar Questions are in Bold