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Welders PLC, which currently has negligible cash holdings, expects to have to make a series of cash payments totalling $3 000 000 over the forthcoming year. These will become due at a steady rate and can be met by making periodic sales from existing holdings of short-term securities. According to the company's financial advisors, the most likely average percentage rate of return on these securities is 9% over the forthcoming year, although this estimate is highly uncertain. Whenever the company sells securities, it incurs a transaction fee (T) of $50.
Problem i. Calculate the optimal cash balance for the company.
Problem ii. What is the optimal number of times Welders should sell securities?
Problem iii. Determine the cost of holding cash resulting from this policy.
Problem iv. How would you evaluate this approach to cash management?
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