Question 2: (15 marks)

The board of directors of Chibondo Ltd in Mpumalanga has set the company's lower cash control limit at R50,000. You ascertain that the interest rate on investments is 0.025% per day. The company's standard deviation of daily cash has been measured as R25,000. Switching cost is R1,000 per transaction. Round your final answers to the nearest Rand. Using the Miller-Orr model:

a) Calculate the spread.

b) Find the upper limit. (1)

c) At what level will the corporate treasurer need to sell short-term investments to bring the cash balance back to the return point? (2)

d) Elaborate on the advantages that an MSME would derive from holding adequate cash reserves. (8)