1. Why do firms hold cash? What are the consequences of holding too little cash? Is it possible for a firm to have too m

[answerhappygod]

1. Why do firms hold cash? What are the consequences of holding
too little cash? Is it possible for a firm to have too much cash?
Why would shareholders care if a firm accumulates large amounts of
cash? Explain
2. A firm needs a total of £54,000 in cash during the year for
transactions and other purposes. Whenever cash runs low, it sells
for £20, 000 in securities and transfers the cash in. The interest
rate is 3 per cent per year, and selling off securities costs £100
per sale.
(a) What is the opportunity cost under the current policy? What
is the trading cost? With no additional calculations, would you say
that the firm keeps too much or too little cash? Explain
(b) What is the target cash balance derived using the BAT
model?
3. ABC plc. is currently holding £700,000 in cash. It
projects that over the next year its cash outflows will exceed cash
inflows by £360,000 per month. How much of the current cash holding
should be retained, and how much should be used to increase the
company’s holdings of marketable securities? Each time these
securities are bought or sold through a broker, the company pays a
fee of £500. The annual interest rate on money market securities is
6.5 per cent. After the initial investment of excess cash, how many
times during the next 12 months will securities be sold? Please use
the BAT model.