QUESTION 4 The management of a large firm, W.E. Lovett Limited, has or some time about the efficiency of its cash management policy, and has engaged your firm for expert financial advice on the matter. a detailed analysis of Lovett's books shows that its daily net cash flows vary randomly, with a mean of so and a standard deviation of $25 000 The company can earn an average of 12% on risk -free short-term investments, whilst the ld from risk-free long-term investments is 16%. The bank charges Lovett an interest rate of 14% on its overdraft, although there is no charge for the unused portion of its overdraft limit. The fixed cost per transaction for long-term investment or disinvestment is $300, the correspond ing cost for short-term transfers is about $20 i) Using the Miller-Orr model for cash management, advise W.E. Lovett Ltd on the return point for the company's bank balance and the upper and lower limits for its bank balance. Assume 365 days per year and round money values to the nearest whole dollar If the yield on long-term investments was 13% and the interest rate on the bank overdraft was 15%, what advice would you give Lovett on the return point and the upper and lower limits? Assume all other data remains unchanged and round all money values to the nearest whole dollar QUESTION 5 Aspen Jeans Limited has collected data about its current operations. The average age of nventory is 55 days; the average collection period is 42 days; and the average payment period is 46 days. The firm has an opportunity cost of short-term financing equal to 9% Annual investments in the OC amount to $4.8 million. Aspen has been offered a contract to produce private label jeans for a large retailer. If the firm takes the contract, it will increase operating profits by $35 000 and reduce the average age of inventory to 50 days. However,it will increase the length of the collection period to 65 days. No changes will occur in the payment period or the amount of OC investments. In all calculations, assume a 365-day year Calculate Aspen Jean's current OC and CCC b. Recalculate the firm's cycles for the effects that the new contract will produce Calculate the change in the cost of financing OC investments d. Compare your results in c. above to the promised add itional operating profits. Should the firm accept the contract?August 2003 QUESTION 4 The management of a large firm, W.E. Lovett Limited, has been concerned for some time about the efficiency of its cash management policy, and has engaged your firm for expert financial advice on the matter. A detailed analysis of Lovett's books shows that its daily net cash flows vary randomly, with a mean of $0 and a standard deviation of $25 000. The company can earn an average of 12% on risk-free short-term investments, whilst the yield from risk-free long-term investments is 16%. The bank charges Lovett an interest rate of 14% on its overdraft, although there is no charge for the unused portion of its overdraft limit. The fixed cost per transaction for long-term investment or disinvestment is $300; the corresponding cost for short-term transfers is about $20. i) Using the Miller-Orr model for cash management, advise W.E. Lovett Ltd on the return point for the company's bank balance and the upper and lower limits for its bank balance. Assume 365 days per year and round money values to the nearest whole dollar. ii) If the yield on long-term investments was 13% and the interest rate on the bank overdraft was 15%, what advice would you give Lovett on the return point and the upper and lower limits? Assume all other data remains unchanged and round all money values to the nearest whole dollar. QUESTION 5 Aspen Jeans Limited has collected data about its current operations. The average age of inventory is 55 days; the average collection period is 42 days; and the average payment period is 46 days. The firm has an opportunity cost of short-term financing equal to 9%. Annual investments in the OC amount to $4.8 million. Aspen has been offered a contract to produce private label jeans for a large retailer. If the firm takes the contract, it will increase operating profits by $35 000 and reduce the average age of inventory to 50 days. However, it will increase the length of the collection period to 65 days. No changes will occur in the payment period or the amount of OC investments. In all calculations, assume a 365-day year. a. Calculate Aspen Jean’s current OC and CCC. b. Recalculate the firm’s cycles for the effects that the new contract will produce. c. Calculate the change in the cost of financing OC investments. d. Compare your results in c. above to the promised additional operating profits. Should the firm accept the contract?