Welders PLC, which currently has negligible cash holdings, expects to have to make a series of cash payments totalling $3 000 000 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 company’s financial advisors, the most likely average percentage rate of return on these securities is 9% over the forthcoming year, although this estimate is highly uncertain. Whenever the company sells securities, it incurs a transaction fee (T) of $50. i. Calculate the optimal cash balance for the company. ii. What is the optimal number of times Welders should sell securities? iii. Determine the cost of holding cash resulting from this policy. iv. How would you evaluate this approach to cash management?
Please answer all questions.
Welders PLC, which currently has negligible cash holdings, expects to have to make a series of cash payments totalling $3 000 000 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 company’s financial advisors, the most likely average percentage
i. Calculate the optimal cash balance for the company.
ii. What is the optimal number of times Welders should sell securities?
iii. Determine the cost of holding cash resulting from this policy.
iv. How would you evaluate this approach to cash management?
Step by step
Solved in 3 steps