Barenbaum Industries projects that cash outlays of $4.5 million will occur unifo
ID: 2754430 • Letter: B
Question
Barenbaum Industries projects that cash outlays of $4.5 million will occur uniformly throughout the year. Barenbaum plans to meet its cash requirements by periodically selling marketable securities from its portfolio. The firm’s marketable securities are invested to earn 12%, and the cost per transaction of converting securities to cash is $27. a. Use the Baumol model to determine the optimal transaction size for transfers from marketable securities to cash.
b. What will be Barenbaum’s average cash balance?
c. How many transfers per year will be required?
d. What will be Barenbaum’s total annual cost of maintaining cash balances? What would the total cost be if the company maintained an average cash balance of $50,000 or of $0 (it deposits funds daily to meet cash requirements)?
Explanation / Answer
Solution:
a.
b.
c.
Optimal Transaction size = Square Root of ( 2*cost per transaction*total requirement / interest on marketable securities ) Optimal Transaction size = Square Root of ( (2*27*4,500,000)/.12) cost per transaction 27 total requirement 12% interest on marketable securities 4,500,000 Optimal transaction size 45,000Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.