The smarter way
to do assignments.

Please note that this is just a preview of a school assignment posted on our website by one of our clients. If you need assistance with this question too, please click on the Order button at the bottom of the page to get started.

The List Company, which can earn 7 percent on money market instruments, currently has a lockbox arrangement with a New Orleans bank for its Southern customers. The bank handles \$3 million a day in return for a compensating balance of \$2 million.a. The List Company has discovered that it could divide the Southern region into a southwestern region (with \$1 million a day in collections, which could be handled by a Dallas bank for a \$1 million compensating balance) and a southeastern region (with \$2 million a day in collections, which could be handled by an Atlanta bank by a \$2 million compensating balance). In each case, collections would be one-half day quicker than with the New Orleans arrangement. What would be the annual savings (or cost) of dividing the Southern region?b. In an effort to retain the business, the New Orleans bank has offered to handle the collections strictly on a fee basis (no compensating balance). What would be the maximum fee the New Orleans bank could charge and still retain Lists business?
Solution: Daily cash handling 3 million Interest rate 7% New arrangement: Savings in days of cash balance = 0.5 Cash handling per day 3 million Additional interest earned on 0.5*3 = 1.5 million per day Interest saved per year = 1.5*7% = 0.105 million. [A] Additional compensating balance to be maintained = 3-2 = 1 million Interest expense on additional compensating balance = 1*7% = 0.07 million [B] a. Annual Net savings = 0.105 0.07 = \$0.035 million. [A] [B] If New Orleans does not ask for compensating balance then the savings on interest would be 2million…

7% = 0.14 million Interest earned from faster clearance in new arrangement = 0.105 million Interest expense on compensating balance of 3 million = 3*7% = 0.21 million Net expense = 0.105 million Hence, New Orleans can charge an annual fees of 0.105 million to stay competitive and retain the business. At this level, the List Company would be indifferent as the net cost to them would be 0.105 million.

## GET HELP WITH THIS ASSIGNMENT TODAY

Clicking on this button will take you to our custom assignment page. Here you can fill out all the additional details for this particular paper (grading rubric, academic style, number of sources etc), after which your paper will get assigned to a course-specific writer. If you have any issues/concerns, please don’t hesitate to contact our live support team or email us right away.