Estimating the Value of a Float Reduction Suppose that we want to estimate the value of a 1-day float reduction for Starbucks Corporation (SBUX). Starbucks’ 2014 sales revenues were reported at $16.448 billion. Let’s assume that prudent investment in money-market securities will earn 4 percent

Question

Estimating the Value of a Float Reduction

Suppose that we want to estimate the value of a 1-day float reduction for Starbucks Corporation (SBUX). Starbucks’ 2014 sales revenues were reported at $16.448 billion. Let’s assume that prudent investment in money-market securities will earn 4 percent annually. We ask, what is the estimated value of a 1-day float reduction to Starbucks?

Accepted Answer

STEP 1: Formulate a Solution Strategy

a. Annual revenues/days in year = 1-day float reduction
b. 1-day float reduction × assumed yield = annual (before-tax) value of the float reduction

STEP 2: Crunch the Numbers

For Starbucks in 2014:

a. $16.448 billion/365 days = $45,062,466/day

b. $45,062,466/day × 0.04 = $1,802,499

STEP 3: Analyze Your Results

Thus, 1 day’s freed-up balances for Starbucks will be $45,062,466. Then we find the annual (before-tax) value of the float reduction is $1,802,499. Profits like these make it worthwhile for the firm and its treasury manager to closely evaluate the cash management services offered by commercial banks—even when the bank fees can also be quite costly. We learn how to make decisions of this nature later in the chapter.

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