QUESTION $4(20$ Marks$)$

$4\mathrm{.}1.$ Using the information provided below, answer the following questions. $(10$ marks$)$

INFORMATION

You are the management accountant at Oxygenesis Ltd$,$ a manufacturing company based in South Africa. The company is

seeking to optimise its cash management strategy to efficiently handle its excess cash reserves. After reviewing the

corporate finance literature, the Chief Financial Officer $($CFO$)$ has proposed combining the Baumol and Miller$-$Orr models

for cash management, recognising their complementary nature. The CFO has tasked you with developing a plan based on

these models to achieve the company$$s objectives of minimising costs while maintaining adequate liquidity.

The following financial data for the upcoming year is available:

$-$ Annual cash disbursements $($B$)$: R$2000000$

$-$ Transaction cost per cash conversion $($i$.$e$.,$ cost of buying and selling marketable securities$)($T$)$: R$100$ per transaction

$-$ Opportunity cost of holding cash $($i$)$: $5\%$ per annum

$-$ Variance of daily cash flows $($s$2$

$)$: R$2500000000$

In addition, the CFO has outlined the following financial objectives, risk tolerance, and operational requirements for

Oxygenesis Ltd for the forthcoming financial year:

Financial Objectives:

Oxygenesis Ltd aims to minimise idle cash holdings to maximize returns on its cash reserves. However, it also prioritizes

maintaining sufficient liquidity to fund day$-$to$-$day operations, pay suppliers, and capitalize on investment opportunities as

they arise.

Risk Tolerance:

The company maintains a moderate risk tolerance, balancing liquidity needs with the desire to generate returns on excess

cash. Oxygenesis Ltd is willing to accept some market risk associated with investing surplus cash in marketable securities

to achieve higher yields.

Operational Requirements:

Operating within a competitive industry characterised by fluctuating cash flows due to seasonal demand patterns and

varying sales cycles, Oxygenesis Ltd requires a flexible cash management strategy that can adapt to changing operational

needs and market conditions.

REQUIRED: Based on the information provided above, answer the following questions:

$4\mathrm{.}1\mathrm{.}1.$ Using the Baumol Model, calculate the optimal cash transfer size $($Q$)$ and the total annual cost of

managing cash for Oxygenesis Ltd $($show all calculations and round off answers to two decimal places$).$

$(5$ marks$)$

$4\mathrm{.}1\mathrm{.}2.$ Assuming that Oxygenesis Ltd maintains a minimum cash balance of R$300000$ and the daily interest

rate on marketable securities is $0\mathrm{.}015\%.$ Utilising the Miller$-$Orr Model, calculate the spread between the

upper and lower limits $($Z$),$ the upper limit $($U$),$ and the return point $($R$)$ for cash balance for Oxygenesis Ltd

$($show all calculations and round off answers to two decimal places$).$

$(5$ marks$)$

$4\mathrm{.}1\mathrm{.}3.$ Recommend the best approach to integrating the two models into the cash management strategy of

Oxygenesis Ltd based on the results obtained from the Baumol Model and the Miller$-$Orr Model. Justify your

recommendation by considering the company's financial objectives, risk tolerance, and operational

requirements.

$(4$ marks$)$

$4\mathrm{.}2.$ Study the information provided below and answer the following questions. $(6$ marks$)$

INFORMATION: As the management accountant at AlphaBeta Limited, you have received the following credit terms from

two prospective suppliers: supplier X is prepared to offer terms of $2/20$ net $70$ and supplier Y has terms of $3/10$ net $60.$

AlphaBeta Limited currently operates an overdraft facility at an interest rate of $18\%$ per annum.

$4\mathrm{.}2\mathrm{.}1.$ Calculate the costs of not accepting the cash discount offered by the two suppliers $($round off answers

to two decimal places$).$

$(4$ marks$)$

$4\mathrm{.}2\mathrm{.}2.$ Based on the results of the analysis in $4\mathrm{.}2\mathrm{.}1,$ what should be your response to the credit terms offered

by suppliers X and Y$?$