90 Short-Term Financial Management The table below presents three distinct liqui

Question

90 Short-Term Financial Management The table below presents three distinct liquidity scenarios. Use the table for ques SCENARIO c VARIABLE Cash + Unused Line of Credit Average Daily Cash Flow Standard Deviation of Daily Cash Flow SCENARIO A SCENARIO B $500 3,000 $2,127d $1,000 $200 $729 $100 $1,500 $972 11. Based solely on the liquidity reserve, which scenario provides the greatest liquidity? 12. After accounting for the unpredictable nature of cash flows, which scenario provides the grea est liquidity? 13. The assistant treasurer of Monroe Tires, Inc., is trying to determine what the appropriate tsuen level should be The company's cash balances have been fluctuating wildly bec

Explanation / Answer

12.

The ratio of average cash flow to standard deviation should be calculated in each case. The highest ratio gives the greatest liquidity.

S. A = Average cash flow / Standard deviation = 3,000 / 2127 = 1.41

S. B = Average cash flow / Standard deviation = 200 / 729 = 0.27

S. C = Average cash flow / Standard deviation = 1,500 / 972 = 1.54

Answer: S. C has the greatest liquidity, since its ratio is the highest.

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