Share
Explore BrainMass

Float Management using remote bank

Float Management. Some years ago, Merrill Lynch increased its float by mailing checks drawn on West Coast banks to customers in the East and checks drawn on East Coast banks to customers in the West. A subsequent class action suit against Merrill Lynch revealed that in 28 months from September 1976 Merrill Lynch disbursed $1.25 billion in 365,000 checks to New York State customers alone. The plaintiff's lawyer calculated that by using a remote bank Merrill Lynch had increased its average float by 1 1/2 days.

a. How much did Merrill Lynch disburse per day to New York State customers?

b. What was the total gain to Merrill Lynch over the 28 months, assuming an interest rate of 8 percent?

c. What was the present value of the increase in float if the benefits were expected to be permanent?

d. Suppose that the use of remote banks had involved Merrill Lynch in extra expenses. What was the maximum extra cost per check that Merrill Lynch would have been prepared to pay?

Attachments

Solution Preview

Float Management. Some years ago, Merrill Lynch increased its float by mailing checks drawn on West Coast banks to customers in the East and checks drawn on East Coast banks to customers in the West. A subsequent class action suit against Merrill Lynch revealed that in 28 months from September 1976 Merrill Lynch disbursed $1.25 billion in 365,000 checks to New York State customers alone. The plaintiff's ...

Solution Summary

Calculates gain from float.

$2.19