Furles Inc. has hired you as a consultant toanalyze their cash management policy andsuggest the most efficient parameters. Theyhave estimated their current daily variance ofnet cash flow to be $75,00O. Their bankrequires them to maintain a minimumcompensating balance in their account of$2,000. They have negotiated a fixedtransaction cost with their broker of $15 pertransaction and they are currently able to earnan annual return of 5% on their investment inmarketable securities. Compute their optimalcash balance target (C*), optimal upperbound (U*) and lower bound (L), as well asthe average cash balance (ACB) that they willhave on hand so that you can also tell themtheir annual opportunity cost of maintainingthe average cash balance.C* =U* =L =ACB =Annual Opportunity Cost ($) =%3D

Cash is the most liquid asset of a firm which is very important to calculate the optimum cash…

marketable securities. Compute their optimal cash balance target (C*), optimal upper bound (U*) and lower bound (L), as well as the average cash balance (ACB) that they will have on hand so that you can also tell them their annual opportunity cost of maintaining the average cash balance.

marketable securities. Compute their optimal cash balance target (C), optimal upper bound (U) and lower bound (L), as well as the average cash balance (ACB) that they will have on hand so that you can also tell them their annual opportunity cost of maintaining the average cash balance.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter17: The Management Of Cash And Marketable Securities

Section: Chapter Questions

Problem 2P

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Concept explainers

Production Budget

A budget can be defined as a financial plan designed by an undertaking for a definite period in the future that can contribute towards enhancing the financial success of the business undertaking. It is used to estimate the revenue and expenses. The budget generally takes into account both current and future income and expenses.

Question

Furles Inc. has hired you as a consultant to
analyze their cash management policy and
suggest the most efficient parameters. They
have estimated their current daily variance of
net cash flow to be $75,00O. Their bank
requires them to maintain a minimum
compensating balance in their account of
$2,000. They have negotiated a fixed
transaction cost with their broker of $15 per
transaction and they are currently able to earn
an annual return of 5% on their investment in
marketable securities. Compute their optimal
cash balance target (C*), optimal upper
bound (U*) and lower bound (L), as well as
the average cash balance (ACB) that they will
have on hand so that you can also tell them
their annual opportunity cost of maintaining
the average cash balance.
C* =
U* =
L =
ACB =
Annual Opportunity Cost ($) =
%3D

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