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Planning Optimal From The Firm Value Creation Perspective. Levels Of Operating Cash Investments

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Author Info

  • Michalski, Grzegorz

    ()
    (Wroclaw University of Economics, Department of Corporate Finance and Value Management, ul. Komandorska 118/120, pok. 1-Z (KFPiZW), PL53-345 Wroclaw, Poland)

Abstract

The basic financial purpose of corporation is creation of its value. Liquidity management should also contribute to realization of this fundamental aim. Many of the current asset management models that are found in financial management literature assume book profit maximization as the basic financial purpose. These book profitbased models could be lacking in what relates to another aim (i.e., maximization of enterprise value). The corporate value creation strategy is executed with a focus on risk and uncertainty. Firms hold cash for a variety of reasons. Generally, cash balances held in a firm can be called considered, precautionary, speculative, transactional and intentional. The first are the result of management anxieties. Managers fear the negative part of the risk and hold cash to hedge against it. Second, cash balances are held to use chances that are created by the positive part of the risk equation. Next, cash balances are the result of the operating needs of the firm. In this article, we analyze the relation between these types of cash balances and risk. This article presents the discussion about relations between firm’s net working investment policy and as result operating cash balances and firm’s value. This article also contains propositions for marking levels of precautionary cash balances and speculative cash balances. Application of these propositions should help managers to make better decisions to maximize the value of a firm.

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Bibliographic Info

Article provided by Institute for Economic Forecasting in its journal Journal for Economic Forecasting.

Volume (Year): (2010)
Issue (Month): 1 (March)
Pages: 198-214

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Handle: RePEc:rjr:romjef:v::y:2010:i:1:p:198-214

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Keywords: corporate value; investments; current assets; working capital; value based management; cash managementJournal: Romanian Journal for Economic Forecasting;

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References

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  1. Grzegorz Michalski, 2013. "Portfolio Management Approach in Trade Credit Decision Making," Papers 1301.3823, arXiv.org.
  2. Michalski, Grzegorz, 2008. "Value-Based Inventory Management," EconStor Open Access Articles, ZBW - German National Library of Economics.
  3. Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1992. "Waiting to Invest: Investment and Uncertainty," The Journal of Business, University of Chicago Press, vol. 65(1), pages 1-29, January.
  4. Beck, Stacie & Stockman, David R., 2005. "Money as real options in a cash-in-advance economy," Economics Letters, Elsevier, vol. 87(3), pages 337-345, June.
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Cited by:
  1. Michalski, Grzegorz, 2012. "Risk sensitivity indicator as correction factor for cost of capital rate," MPRA Paper 43399, University Library of Munich, Germany, revised 02 Sep 2012.

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