Your company is evaluating a switch from a cash only policy to a net $30$ policy. The price per

unit is $$100,$ and the variable cost per unit is $$50.$ The company currently sells $1,000$ units per

month. Under the proposed policy, the company expects to sell $1,200$ units per month at the

price per unit $$105.$ The probability of default is $10\%$ and the required monthly return is $1\mathrm{.}2\%.$

Assume sales and costs occur at the beginning of the month.

a$)$ Should the company offer credit terms of net $30$ to a one$-$time customer? Explain

$($Support your result with calculations$)$

$(6$ marks$)$

b$)$ What is the maximum acceptable default probability in part $($a$)?$

$(4$ marks$)$

c$)$ The cash flow pattern in the firm is approximated by the Baumol $($BAT$)$ model. Now, the

firm has $$6,000,000$ holdings in cash and zero marketable securities$.$ Over next year, the

total amount of new cash needed for transaction purpose is expected to be $$4,000,000.$ The

firm has to pay transaction cost $$500$ each time when it buys or sells securities$.$ The annual

interest rate on money market securities is $5\%.$

i$.$ What is the target cash balance?

$(3$ marks$)$

ii$.$ How much of the current cash holding should be used to increase the firm's holdings of

marketable securities$?$

$(3$ marks$)$

iii. After the investment of excess cash at part $($ii$),$ how many times will marketable securities

be sold to replenish cash during the next $12$ months?

$(4$ marks$)$