1. Why do firms hold cash? What are the consequences of holding too little cash? Is it possible for a firm to have too much cash? Why would shareholders care if a firm accumulates large amounts of cash? Explain

2. A firm needs a total of 54,000 in cash during the year for transactions and other purposes. Whenever cash runs low, it sells for 20, 000 in securities and transfers the cash in. The interest rate is 3 per cent per year, and selling off securities costs 100 per sale.

(a) What is the opportunity cost under the current policy? What is the trading cost? With no additional calculations, would you say that the firm keeps too much or too little cash? Explain

(b) What is the target cash balance derived using the BAT model?

3. ABC plc. is currently holding 700,000 in cash. It projects that over the next year its cash outflows will exceed cash inflows by 360,000 per month. How much of the current cash holding should be retained, and how much should be used to increase the companys holdings of marketable securities? Each time these securities are bought or sold through a broker, the company pays a fee of 500. The annual interest rate on money market securities is 6.5 per cent. After the initial investment of excess cash, how many times during the next 12 months will securities be sold? Please use the BAT model.