Using Baumol's model, design an alternative cash management policy and calculate the cost savings that the alternative policy would achieve.

1. Under the term of government contract, ABC Ltd receives a cheque for 100000 every 20 weeks. these funds are then spent in steady stream until the next cheque is received. At present, ABC's policy is to hold $20000 in cash and to deposit the remaining $80000. Every few weeks, a further $20000 is withdrawn and spent. the interest rate is 0.4 per cent per week(or 8 per cent of the amount transacted.

Using Baumol's model, design an alternative cash management policy and calculate the cost savings that the alternative policy would achieve.

2. Explain how the company's credit policy with regards to accounts receivable may affect shareholder wealth.

3. Briefly describe an aggressive working capital management strategy and identify the associated risk- return trade-offs.

Solution Summary

Brief but clear sentences respond to posting. Computation shown for Q1.