Question 1( Baumol model of cash management)

Pringles Plc which currently has negligible cash holdings, expects to have to make a series of cash payments totalling $1 500 000 over the forthcoming year. These will become due at a steady rate and can be met by making periodic sales from existing holdings of short-term securities. According to the companys financial advisors, the most likely average percentage rate of return on these securities is 12 %(i) over the forth coming year, although this estimate is highly uncertain. Whenever the company sells securities, it incurs a transaction fee (T) of $25.

Required:Determine

1. The optimal cash balance for the company
2. the optimal number of times the company should sell securities
3. Calculate the cost of holding cash resulting from this policy
4. What are the assumptions of this approach to cash management?

Question 2( Miller-Orr model of cash management)

Alpha Ltd standard deviation () of the daily cash balance during the last year was $500, and the transaction cost was $5. The company also has the opportunity to invest idle cash in marketable securities at an annual interest rate of 10%.

Required

1. Determine the daily opportunity cost ( interest rate) and the variance of daily cash flow
2. Calculate the targeted cash balance for the firm
3. The upper limit of cash balance and the average cash balance.
4. State the amount of short-term securities to be purchase or sold once the upper limit or lower limit is reach.
5. How would you evaluate this approach to cash management?

Question 3

Consider the following financial information for Applet Ltd for the year ending December 31 2022.

Items	1 January	31 December
Inventory	$6200	6620
Accounts Receivable	11 836	13 200
Accounts Payable	9 200	10 200
Other infromation
Net Sales	90 000
Cost of goods sold	55 400
Net Purchases	56 000

The firm has a current annual outlay of $4 320 000 on operating cycle investments.

The firm currently pays 10% for its negotiated financing ( assume a 360 day operating year)

Required:

Calculate:

i.) the firms cash conversion cycle.

ii.) the firms operating cycle.

iii.) the daily expenditure and the firms annual savings if the operating cycle is reduced by

15 days.

Question 4

Discount Policy. The Stillwell Company presents the following information:

Current annual credit sales: $36,000,000

Collection period: 2 months

Terms: net/40

Rate of return: 18%

The company is considering offering a 5/10, net/40 discount. It anticipates that 50 percent of

its customers will take advantage of the discount. The collection period is expected to decrease to 1 month.

Required : Evaluate whether or not the discount policy be implemented?