INTERMEDIATE FINANCIAL MANAGEMENT
14th Edition
ISBN: 9780357516669
Author: Brigham
Publisher: CENGAGE L
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Textbook Question
Chapter 23, Problem 2P
Optimal Cash Transfer
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)?
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Students have asked these similar questions
mekmek Corporation uses the Baumol Cash Model to determine its optimal cash balance. For the coming year, the expected cash disbursement total to P432,000. The interest rate on marketable securities is P8 per transaction. Using 5% carrying cost rate, what is the optimal cash balance of the company?
A. 1,175.76
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Baumol Model and Miller-Orr Model
1. The management of the Book Warehouse Company wishes to apply the Miller-Orr model to manage its cash investment. They have determined that the cost of either investing in or selling marketable securities is $100. By looking at Book Warehouse’s past cash needs, they have determined that the variance of daily cash flows is $20,000. Book Warehouse’s opportunity cost of cash, per day, is estimated to be 0.03%. Based on experience, management has determined that the cash balance should never fall below $10,000. Calculate the lower limit, the return point, and the upper limit based on the Miller-Orr model of cash management.
Watkins Resources faces a smooth annual demand for cash of $1.66 million, incurs transaction costs of $69 every time the firm sells
marketable securities, and can earn 3.1 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
Chapter 23 Solutions
INTERMEDIATE FINANCIAL MANAGEMENT
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