Schulte Fashions begins every month with a cash balance of $8,000 which it depletes by the end of the month. The current market rate of return is 0.4% per month. Schulte is charged a fee of $20 each time it is forced to raise cash. In addition, history has shown that the monthly standard deviation of cash flows is $1,500. The firm has targeted a lower cash limit of $2,500.

At what level of cash would Schulte choose to remove cash from the account and invest in marketable securities?

Question

At what level of cash would Schulte choose to remove cash from the account and invest in marketable securities?

Quizplus · Accepted Answer

The Answer of Schulte Fashions begins every month with a cash balance of $8,000 which it depletes by the end of the month. The current market rate of return is 0.4% per month. Schulte is charged a fee of $20 each time it is forced to raise cash. In addition, history has shown that the monthly standard deviation of cash flows is $1,500. The firm has targeted a lower cash limit of $2,500.

At what level of cash would Schulte choose to remove cash from the account and invest in marketable securities?

Schulte Fashions Begins Every Month with a Cash Balance of $8,000