HotFoot Shoes would like to maintain its cash account at a minimum level of $44,

Question

HotFoot Shoes would like to maintain its cash account at a minimum level of $44,000 but expects the standard deviation in net daily cash flows to be $3,900, the effective annual rate on marketable securities to be 2.6 percent per year, and the trading cost per sale or purchase of marketable securities to be $390 per transaction.

What will be its optimal upper cash limit? (Use 365 days a year. Do not round intermediate calculations and round your answer to 2 decimal places.)

HotFoot Shoes would like to maintain its cash account at a minimum level of $44,000 but expects the standard deviation in net daily cash flows to be $3,900, the effective annual rate on marketable securities to be 2.6 percent per year, and the trading cost per sale or purchase of marketable securities to be $390 per transaction.

Explanation / Answer

Annual interest rate = 2.6% = 0.026

Daily interest rate = 1.0261/365 - 1 = 0.00007033

Z = { (3*$390*$3,9002) / (4*0.00007033) }1/3 = $39,845.72

H = (3*$39,845.72) - (2*$44,000) = $31,537.15

Hence, Optimal upper cash limit = $31,537.15

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