Watkins Resources faces a smooth annual demand for cash of $1.57 million, incurs

Question

Watkins Resources faces a smooth annual demand for cash of $1.57 million, incurs transaction costs of $82 every time the firm sells marketable securities, and can earn 4.4 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.)

Optimal Cash=???

Watkins Resources faces a smooth annual demand for cash of $1.57 million, incurs transaction costs of $82 every time the firm sells marketable securities, and can earn 4.4 percent on its marketable securities.

Explanation / Answer

optimal cash replenishment level=[(2*Annual demand*Transaction cost)/Rate of earnings on marketable securities]

=[(2*1,570,000*82)/0.044]^(1/2)

which is equal to

=$76497.18(Approx).

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