Watkins Resources faces a smooth annual demand for cash of $1.70 million, incurs

Question

Watkins Resources faces a smooth annual demand for cash of $1.70 million, incurs transaction costs of $65 every time the firm sells marketable securities, and can earn 2.7 percent on its marketable securities.

What will be its optimal cash replenishment level? (Enter your answer in dollars not in millions. Round your answer to 2 decimal places.)

Watkins Resources faces a smooth annual demand for cash of $1.70 million, incurs transaction costs of $65 every time the firm sells marketable securities, and can earn 2.7 percent on its marketable securities.

Explanation / Answer

The formula to calculate Optimal Cash =

Square root of ( 2 * Annual Demand * Cost per Transaction / Rate of Interest )

Square root of ( 2 * 1700000 * 65 / 0.027 )

Square root of ( 2 * 1700000 * 65 / 0.027 )

Square root of ( 221000000 / 0.027 )

Square root of ( 8,185,185,185. 185 )

90.472.01327

Therefore, Optimal Cash = $ 90.472.01

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