1. © 2012 McGraw-Hill Ryerson LimitedChapter 21 -1 Initial Cash Balance =  When the cost of selling securities is high, hold larger average cash balances  When interest rates are high, hold smaller cash balances  When annual cash outflows increase, the optimal level of cash increases less than proportionately 2 x Annual Cash Outflows x Cost per Sale of Security Interest Rate == LO3, LO4, LO5

2. © 2012 McGraw-Hill Ryerson LimitedChapter 21 -2 Managing Inventories of Cash  Similar to finding the optimal order size (EOQ) EOQ = 2 x Annual cash outflows x cost per sale of securities Interest rate  LO3, LO4, LO5

3. © 2012 McGraw-Hill Ryerson LimitedChapter 21 -3  Uncertain cash flows: If cash flows are unpredictable, the cash balance should be allowed to meander until it hits an upper or lower limit. At this point, the firm buys or sells securities to restore the balance to the return point. LO3, LO4, LO5

4. Cash Management in Large Domestic and International Corporations  Cost of transactions vs. opportunity cost of holding cash idle ◦ May hold to compensate banks ◦ May have hundreds of accounts – decentralized management  Multinationals use: ◦ Regional system ◦ Each business manages own money © 2012 McGraw-Hill Ryerson LimitedChapter 6-4 LO4, LO5