Financial Management

A. The management of Rowlock Inc. is considering cash variability in its planning based on the following assumptions. The standard deviation () of the daily cash balance during the last year was $37,500, and the transaction cost was $75. The company also has the opportunity to invest idle cash in marketable securities at an annual interest rate of 8%. Assume 365 in the year

Required: i. Determine the daily opportunity cost (interest rate) and the variance of daily cash flow' ii. Calculate the targeted cash balance (the optimal cash balance) for the firm iii. Determine the upper limit of cash balance and the average cash balance iv. What is the amount of cash to be purchased or sold once the upper limit or lower limit is reached

B. Consider the following financial Information for Payne Ltd for the year ending December 31. 2021 is as follows.

Items I January December 31 Inventory $6 200 $6 620 Accounts receivable 11 836 13 200 Accounts payable 9 200 10 200 Other information Net Sales $90 000 Cost of goods sold 55 400 Net Purchases 56 000 Table 1.

The firm has a current annual outlay of $4,200,000 on operating cycle investments. The company currently pays 10 percent for its negotiated financing. (Assume a 360-day operating year.)

Required: i. Calculate the operating and cash conversion cycle for the company ii. Calculate the daily expenditure and the firm's annual savings if the operating cycle is reduced by 15 days C. Harbour view Hardware provides the following data: Current annual credit sales = 12 000 000 Collection period 2 months Terms net /30 Required rate of return 15% The firm proposes to offer a 3/10, net /30. The firm anticipates 25% of its customers will take advantage of the discount. As a result of the discount policy, the collection period will be reduced to 1 months.

Required: Should the firm offer the new discount policy to its customers?