The Timberline firm expects a total need of €12,500 over the next 3 months. They

Question

The Timberline firm expects a total need of €12,500 over the next 3 months. They have a beginning cash balance of €1,500, and cash is replenished when it hits zero. The fixed cost of selling securities to replenish cash balances is €3.50. The interest rate on marketable securities is 8% per annum. There is a constant rate of cash disbursement and no cash receipts during the month.

What is the total saving to the firm if it switches from its current practice to the optimum practice (as given by the Baumol model)?

Explanation / Answer

he Timberline firm expects a total need of €12,500 over the next 3 months. They have a beginning cash balance of €1,500, and cash is replenished when it hits zero. The fixed cost of selling securities to replenish cash balances is €3.50. The interest rate on marketable securities is 8% per annum. There is a constant rate of cash disbursement and no cash receipts during the month. What is the total opportunity cost for a month based on the firm's current practice? €5.00 €18.98 €27.92 €60.00 None of the above. =[(1,500+ 12,500)/2] /90 =77.78------------cash balance

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