(a) ABC maintains a minimum cash balance of Sh.500,000. The standard deviation of the company's daily...
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(a) ABC maintains a minimum cash balance of Sh.500,000. The standard deviation of the company's daily cash changes is Sh.200,000. The annual interest rate is 14%. The transaction cost of buying or selling securities is Sh. 150 per transaction. (Assume 365 days in a year) Required: Using Miller-Orr cash management model determine the following: (i) (11) The upper cash limit. The average cash balance. The return point. Give the decision rule. (3 Marks) Companies A and B are identical in every respect except that A is ungeared while B is geared. Assume that you are given the following information concerning the two companies: A 10,000 (iii) (iv) (b) EBIT 5% debt interest EBT Ke 10,000 10% B 10,000 1,500 (2 Marks) (2 Marks) (3 Marks) 8,000 10% Required: Using M&M without taxes, answer the following questions: (4 Marks) (1) Determine the current market value of the 2 firms. (ii) (6 Marks) Determine how an investor who owns 10% in any of the two firms will practice the arbitrage process. (a) ABC maintains a minimum cash balance of Sh.500,000. The standard deviation of the company's daily cash changes is Sh.200,000. The annual interest rate is 14%. The transaction cost of buying or selling securities is Sh. 150 per transaction. (Assume 365 days in a year) Required: Using Miller-Orr cash management model determine the following: (i) (11) The upper cash limit. The average cash balance. The return point. Give the decision rule. (3 Marks) Companies A and B are identical in every respect except that A is ungeared while B is geared. Assume that you are given the following information concerning the two companies: A 10,000 (iii) (iv) (b) EBIT 5% debt interest EBT Ke 10,000 10% B 10,000 1,500 (2 Marks) (2 Marks) (3 Marks) 8,000 10% Required: Using M&M without taxes, answer the following questions: (4 Marks) (1) Determine the current market value of the 2 firms. (ii) (6 Marks) Determine how an investor who owns 10% in any of the two firms will practice the arbitrage process.
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Answer rating: 100% (QA)
SOLUTION The MillerOrr cash management model is used to determine the optimal cash balance for a company to minimize transaction costs while maintaining a desired level of liquidity Given Minimum cash ... View the full answer
Related Book For
Management Accounting Information for Decision-Making and Strategy Execution
ISBN: 978-0137024971
6th Edition
Authors: Anthony A. Atkinson, Robert S. Kaplan, Ella Mae Matsumura, S. Mark Young
Posted Date:
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