The requirement here was to identify and discuss the factors to be considered in determining the optimum level of cash to be held by a company. A number of answers gained marks for identifying and discussing the reasons for holding cash (transactions need, precautionary need and speculative need), the availability of finance, the need to balance profitability and liquidity, the opportunity cost of funds held in liquid form, and so on. The marking scheme gave space for ‘other relevant discussion’ here, and marks were awarded accordingly.

However, many answers failed to gain reasonable marks because they did not discuss factors. For example, some answers explained the workings of the Baumol and Miller-Orr cash management models. The question did not ask for a discussion of these models and such answers gained little or no credit. Where such answers discussed factors included in the models, such as the demand for cash, the volatility of cash flows, and so on, credit was given.