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Using the information provided below, answer the following questions. ( 1 0 marks ) INFORMATION You are the management accountant at Oxygenesis Ltd , a

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 companys objectives of minimising costs while maintaining adequate liquidity.
The following financial data for the upcoming year is available:
- Annual cash disbursements (B): R2000000
- Transaction cost per cash conversion (i.e., cost of buying and selling marketable securities)(T): R100 per transaction
- Opportunity cost of holding cash (i): 5% per annum
- Variance of daily cash flows (s2
): R2500000000
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:
4.1.1. 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)
4.1.2. Assuming that Oxygenesis Ltd maintains a minimum cash balance of R300000 and the daily interest
rate on marketable securities is 0.015%. 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)
4.1.3. 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)
4.2. 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.
4.2.1. Calculate the costs of not accepting the cash discount offered by the two suppliers (round off answers
to two decimal places).
(4 marks)
4.2.2. Based on the results of the analysis in 4.2.1, what should be your response to the credit terms offered
by suppliers X and Y?
(2 marks

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