Veggie Burgers, Inc., would like to maintain its cash account at a minimum level
ID: 2615838 • Letter: V
Question
Veggie Burgers, Inc., would like to maintain its cash account at a minimum level of $259,000 but expects the standard deviation in net daily cash flows to be $13,400, the effective annual rate on marketable securities to be 4.3 percent per year, and the trading cost per sale or purchase of marketable securities to be $34.50 per transaction.
What will be its optimal cash return point? (Use 365 days a year. Do not round intermediate calculations and round your answer to 2 decimal places.)
Optimal Cash Return Point $ ___________
Veggie Burgers, Inc., would like to maintain its cash account at a minimum level of $259,000 but expects the standard deviation in net daily cash flows to be $13,400, the effective annual rate on marketable securities to be 4.3 percent per year, and the trading cost per sale or purchase of marketable securities to be $34.50 per transaction.
Explanation / Answer
Optimal cash return point formula
= (3*F*V/(4*r))^(1/3) + M
where M is minimum level of cash account
F is trading cost per sale or purchase of marketable securities
V is variance of daily cash flows
r is daily interest rate
so r = 4.3%/365 = .01178%
V = 13400^2 = 179560000
F = 34.5
M = 259,000
while putting all the values in the above given equation we will get the value of optimal cash return point equal to $293039.37
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.