GIVEN INFORMATION: -

1. ABC & Co. should set the lower cash limit (L) and upper cash limit (H) so that any time the cash limit reaches any of those points, it will trigger the company to move (H Z) and (Z L) BD respectively.
2. The financial management expert analysed the historical net cash flows of ABC & Co. and computed the variance of the daily cash flows to be 160,000 BD. The standard deviation is taken into account for the daily variance.
3. The cost per transaction for buying and selling marketable securities F, is assumed to be fixed, at 89 BD.
4. The opportunity cost for holding cash in a year is 8.6%. The interest rate and the variance are all based on the same length of time.
5. The tolerable lower cash limit (L) has been established as 2,000 BD
6. Use Miller-Orr model to solve this question.

QUESTIONS TO BE ANSWERED As a student of finance studying working capital management, you are required to analyse the information above and advise ABC & Co. based on the following effects:

1. What is the spread or cash return point level that will not move the cash above (H Z) or (Z L)? Explain your answer.
2. Assuming ABC & Co. does not understand the number of securities to purchase in a year if they forecast the cash disbursement to be equal to the daily variance. How many security sales will the company have in a year that will help them to plan ahead?
3. Describe what will happen to the lower cash limit, the upper cash limit, and the spread (the distance between the two) if the variation in net cash grows. Give an intuitive explanation for why this happens. What happens if the variance drops to zero?