17. Megamedia Enterprises wishes to apply the Stone model to its cash position management situ- ation. It has never used a cash management model before. Its control limits are $20,000 (lower) and $75,000 (upper). The company wishes to try the model out with a 2-day look ahead, as well as a 3-day look ahead. In other words, transfers between cash and securities will not take place unless the cash position gets very high or low, and it looks like it will stay that way for another 2 days in the first analysis and 3 days in the second analysis. This implies that the cash manager must make decisions based on the anticipated cash position, which is the sum of today's cash position and the next 2 or 3 days' forecasted cash flows. Second, to partially adjust for forecasting errors, the trigger points will be modified. The control limits will be adjusted by a 5% safety-stock cushion. This effectively shrinks the range of values within which the forecasted cash position can move before a transaction is triggered. The company has been using a return point of $50,000, and the present cash balance is $45,000. The next 7 days' net cash flows are projected to be: DAY 1 2 CASH FLOW FORECAST $ 35,000 (50,000) (25,000) 5,000 CASH FLOW DAY FORECAST 5 (10,000) 6 25,000 7 45,000 3 4 a. What transactions should the cash manager make during the next 2 days, if any, under the 2-day look ahead? b. What transactions should the cash manager make during the next 3 days, if any, under the 3-day look ahead? What general advice do you have for the cash manager, given what you know about the Stone model and the fact the company has never before used a cash management model? c. 17. Megamedia Enterprises wishes to apply the Stone model to its cash position management situ- ation. It has never used a cash management model before. Its control limits are $20,000 (lower) and $75,000 (upper). The company wishes to try the model out with a 2-day look ahead, as well as a 3-day look ahead. In other words, transfers between cash and securities will not take place unless the cash position gets very high or low, and it looks like it will stay that way for another 2 days in the first analysis and 3 days in the second analysis. This implies that the cash manager must make decisions based on the anticipated cash position, which is the sum of today's cash position and the next 2 or 3 days' forecasted cash flows. Second, to partially adjust for forecasting errors, the trigger points will be modified. The control limits will be adjusted by a 5% safety-stock cushion. This effectively shrinks the range of values within which the forecasted cash position can move before a transaction is triggered. The company has been using a return point of $50,000, and the present cash balance is $45,000. The next 7 days' net cash flows are projected to be: DAY 1 2 CASH FLOW FORECAST $ 35,000 (50,000) (25,000) 5,000 CASH FLOW DAY FORECAST 5 (10,000) 6 25,000 7 45,000 3 4 a. What transactions should the cash manager make during the next 2 days, if any, under the 2-day look ahead? b. What transactions should the cash manager make during the next 3 days, if any, under the 3-day look ahead? What general advice do you have for the cash manager, given what you know about the Stone model and the fact the company has never before used a cash management model? c
