(a) January February March

Cash Receipt:
Credit Sales(W1) 960,000 1,000,000 1,092,000
Long Term loan 300,000
TOTAL RECEIPT 960,000 1,000,000 1,392,000

Cash Payment:
Purchases(W1) 500,000 520,000 560,000
Variable overhead and wages 130,000 140,000 150,000
Purchase of NCA 400,000
TOTAL EXPENSES 630,000 660,000 1,110,000
Cash Surplus/Deficit 330,000 340,000 282,000
Opening Balance 40,000 370,000 710,000
Closing Balance 370,000 710,000 992,000

Working 1:
Sales (1 month credit period)
December 960,000
January 1,000,000
February 1,092,000

Purchases(1 month before sale)

January 500,000
February 520,000
March 560,000

(b) Forecast Current Ratio:

Current Asset
Inventory 750,000
Receivable 1,176,000
Cash 992,000
2,918,000
Current Liabilities
Payables 600,000
Current Ratio 4.9

© Risk
Since Flit Co only have short term cash surplus during the month,the company should prevent itself from invest in t
Investing in the stock market is a high risk and not suitable for Flit Co

Long Term Finance

Stock market investment is only suitable for the long term purposes,as this is not suitable since Flit Co have short te

Profitability
The company may get higher profit when invest in the stock market,since it is a high risk investment with a high ret
 In conclusion,the company should prevent itself from invest in stock market because it is too risky for the company

(d) Introduction
Baumol Model is one type of model that been designed to find the quantity of cash need to be hold by the compan
Quantity.It is based on the idea that deciding an optimum cash balances is like deciding an optimum inventory leve
is steadily consumed over time.

Component of costs
There are several costs that need to be calculated.There is two separation of the cost,which is the variable and fixe
Model has the fixedcost which is the interest on short term financial securities while the variable cost is the cost of
in the form of cash.

Drawback of Baumol Model:

This model will eventually have the disadvantages since the model uses some assumption.The disadvantages are:

1) It is difficult to predict amounts required over future with much accuracy.

2) The cash is unlikely to be used in a constant rate,which the optimum cash balances will be fluctuate along the ye
3) The model didn’t take into the consideration the seasonal factor that happen in the industry,in example retail in
4)There may be hidden cost of other like cost of holding cash which is not being taken into consideration in the form

(e ) Lower limit 7,500

Variances 1,000,000
Interest rate daily 0.0001
Transaction Cost 18

Spread 13,757
Upper Limit 21,257
Return Point 12,086

According to the Miller-Orr model,when the cash reaches the upper limit which is $21257,the company will buy sec
$9171 to make the cash balance return to the return point which is the normal level.In addition,when the cash reac
lower limit which is $7,500,the company will take an action which is they will sell $4586 of marketable securities to
the return point which is $8142.
uld prevent itself from invest in the unliquid investment.

uitable since Flit Co have short term cash surplus.

h risk investment with a high return.

se it is too risky for the company.

h need to be hold by the company,which is the

iding an optimum inventory level.It assumes that cash

ost,which is the variable and fixed costs.Baumol

le the variable cost is the cost of keeping the money

mption.The disadvantages are:

ces will be fluctuate along the year.

the industry,in example retail industry
ken into consideration in the formula.

$21257,the company will buy securities of

el.In addition,when the cash reaches the
4586 of marketable securities to return to