QUESTION THREE tieno Mvua, a manager at a local Bata Shoe Store, gets paid every

Question

QUESTION THREE tieno Mvua, a manager at a local Bata Shoe Store, gets paid every 2 weeks by direct deposit into her checking account. This account pays no interest and has no minimum balanoe a "target" cash balance of requirement. Her monthly income is Sh.420,000. Atieno has around Sh.120,000, and whether it exceeds that amount she transfers the excess into her gs account, which currently pays 2.0% annual interest. Her current savings balance is Sh.1,500,000, and Atieno estimates she transfers about Sh.50,000 per month from checking account into her savings account. Atieno doesn't waste any time in paying her bills, and her monthly bills average about Sh.200,000. Her monthly cash outlay for food, as, and other Sundry items totals about Sh.85,000. Reviewing her payment habits indicates that on average she pays her bills 9 days early. At this time, most marketable se yielding about 15.5% annual interest. curities are Required: Show how Atieno can better manage her cash balance by answering the following questions: (e) What can Atieno do regarding the handling of her current balances? (b) What do you suggest that she does with her monthly surpluses? (c) What do you suggest Atieno do about the manner in which she pays her bills? (work. (d) Can Atieno grow her earnings by better managing her cash balances? Show your

Explanation / Answer

a. SInce there is no minimum balance requirement, she should transfer her total balance in checking account into her savings account

b. Her monthly surplus should be invested according to her risk preferences, if she is comfortable in investing in marketable securities money should be invested rahter keeping them idle or keeping them in low interest paying accounts.

c. she is paying bills 9 days in advance, rather she can wait and pay them on due date, as every money interest will be earned on these funds, by paying in advance there is no benefit.

d. she can actually grow her income by following two tips:

1. invest all money in savings account in marketable securities,:

by doing so an excess of 15.5%-2%= 13.5% rate of return can be earned which equals= 1500000*13.5%= 202500 per year.

and from her monthly pay of 420000 she is saving around 50000 every month after keeping surplus cash of 120000. she can invest this 50000 the same way as above in marketable securities.

the surplus cash she wanted to maintain 120000 she better maintain it in savings account and earn interest of 2% per annum and use it whenever required.

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