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RIFT VALLEY UNIVERSITY

Department of Accounting and finance
Assignment for Financial Management II
Maximum mark: 15
Name: _ZEMIKAEL TILAHUN _______
ID. No: _RVKADR/0048/18____________
General Instruction:
 Neatness and eligible hand writing have reward.
 Make sure that this assignment booklet has two parts
 Write all answers on the separate answer sheet for part I and for part II on white
paper only.
PART I: MULTIPLE CHOICES (1 point each)
1) when it comes to managing the disbursement cycle, the objective is to:
A. Shorten the disbursement cycle. C. Equalize disbursements with receipts.
B. Lengthen the disbursement cycle D. Borrow for all disbursements.
2) One way of decreasing the collection time for cash receipts is to:
A. Accept cash payments only. C. Issue vendor payments immediately.
B. Invoice customers quickly. D. Treat all customers the same.
3) when it comes to managing the disbursement cycle, the objective is to:
A. Shorten the disbursement cycle. C. Equalize disbursements with receipts.
B. Lengthen the disbursement cycle D. Borrow for all disbursements.
4) The objective of Firms to hold some of their assets in the form of cash is
A. To facilitate the day to day operation
B. To tap unexpected opportunity in the market
C. To meet the unexpected business expenses
D. all of the above
5) Which of the following is not a motive to hold cash?
A. Transactionary Motive C. Capital Investment
B. Pre-cautionary Motive D. None of the above.
6) Which of the following investments is not acceptable as a way for companies to invest short-
term cash surpluses? 
A. Ordinary shares D. Money market deposits
B. certificates of deposit E. commercial paper
C. Treasury bills

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7) The Transaction Motive for holding cash is for
A. Safety Cushion C. Purchase of Assets
B. Daily Operations D. Payment of Dividends.
8) Baumol's Model of Cash Management attempts to:
A. Minimise the holding cost C. Minimization of total cost
B. Minimization of transaction cost D. Minimization of cash balance
9) Which of the following is not considered by Miller-Orr Model?
A. Variability in cash requirement C. Holding cost
B. Cost of transaction D. Total annual requirement of cash
10) Your company has two major customers, Ajax and Miller. Ajax owes you $ 10,000 and
Miller owes you $ 20,000 for the current month. Collection probabilities show that Ajax pays
70% of the time in the current month and 30% of the time the following month. Collection
probabilities show that Miller pays 40% of the time in the current month and 60% of the time
in the following month. Using expected values, what is the total amount of cash receipts for
the current month?
A. $ 10,000 C. $ 7,000
B. $ 15,000 D. $ 3,000
Part II: WORK OUT QUESTIONS
1) The Konso Company wishes to apply the Miller-Orr model to manage its cash
investment. Konso’s management has collected the following estimates:
Cost per transaction = $200
Variance of daily cash flows = $10,000
Opportunity cost of cash, per month = 1.5%
Konso management has figured, based on their experience dealing with the cash flows of the
company, that there should be a cushion— a safety stock (minimum)—of cash of $20,000.
Required: Calculate
a) the lower limit
b) the upper limit
c) Return point
2) Hail Incorporation has an annual cash demand of $ 1 million. Transaction cost is
given as $ 200 per purchase or sale of securities. Interest on borrowings is given as
12 percent.
Required: using Baumol model, determine optimal cash balance.
Answer sheet for multiple choice
R.no Answer R.n Answer
o
1 B 6 A
2 D 7 B
3 B 8 D
4 D 9 D
5 C 10 B

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PART TWO ANSWER

1.
Given

Cost per transaction = $ 200

Variance of daily cash = $10,000
Opportunity cost of cash per month = 1.5% = Daily interest rate = 1.5%/30 = 0.0005 or 0.05%
Safety stock of cash = $ 20,000

Solution
3× F × variance square 1/3
Spread = [ 4× K ] where:- K is opportunity cost of holding cash

F is Transaction cost

3× 200 ×10,0002 1/3

Spread = [ ]
4 × 0.0005

Spread = $1,442,249.5703074083823216383107801

a) Lower limit = $ 20,000

b) The upper limit= lower limit + spread

= $20,000 + $1,442,249.5703074083823216383107801

upper limit =$ 1,462,249.5703074083823216383107801

C) return point = lower limit +1/3 x spread

= $20,000 + 1/3 x 1,442,249.5703074083823216383107801
return point = $ 9,614,997,135.3827225488109220718673

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2.
Given
Annual(monthly) cash disbursement= $ 1,000,000
Fixed cost per transaction= $ 200

opportunity cost of one Re.p.a = 12%

solution
2 x U x P 1/2
C=[ S ] where:- C is optimal cash balance

U is annual (monthly)cash disbursement

P is fixed cost per transaction

S is opportunity cost of one re.p.a

2 x 1,000,000 x 200 1/2

C=[ 0.12 ]
C = 57,735.026