Veggie Burgers, Inc., would like to maintain its cash account at a minimum level

Question

Veggie Burgers, Inc., would like to maintain its cash account at a minimum level of $263,000 but expects the standard deviation in net daily cash flows to be $13,800, the effective annual rate on marketable securities to be 3.9 percent per year, and the trading cost per sale or purchase of marketable securities to be $36.50 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   $   

Please show work.

Explanation / Answer

Answer

Note : I have not given answer for this question previously.

The standard deviation in net daily cash flows to be $13,800 So variance will be $ 190,440,000 [ i.e. (13,800)2 ].

The effective annual rate on marketable securities to be 3.9 percent per year. So the effective daily rate on marketable securities will be 0.010685 % (3.9% / 365 days).

Spread = , Variance and interest rates should be expressed in daily terms.

= 3*(3/4 * 36.50 *190,440,000 / 0.00010685)1/3

= $ 109622.70

Return point = Lower limit + (1/3 × spread)

                        = 263,000 + (109622.70*1/3)

                = 263,000 + 36540.90

                =$ 299540.90

Answer : Optimal cash return point is $ 299540.90   

Related Questions

Navigate

• Browse (All)
• Browse V
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.