The Timberline firm expects a total need of €12,500 over the next 3 months.They have a beginning cash balance of €1,500,and cash is replenished when it hits zero.The fixed cost of selling securities to replenish cash balances is €3.50.The interest rate on marketable securities is 8% per annum.There is a constant rate of cash disbursement and no cash receipts during the month. If interest rates were to rise to 1.00% per month,what would the firm's total savings be if it switches from its current practice to the optimum practice (as given by the Baumol model)?

Question

Quizplus · Accepted Answer

The Baumol model helps determine the optimal cash balance by minimizing the total cost of holding and replenishing cash. With the interest rate rising to 1% per month, the optimal cash balance changes, leading to savings. Calculating the difference in costs between the current and optimal practices results in savings of €7.09.

The Timberline Firm Expects a Total Need of €12,500 Over