A firm expects to have funds of $150,000 idle for 60 days. If the firm could purchase marketable securities yielding 10 percent and pay brokerage fees of $1,500, the firm ________.
A) should make the investment since interest earned exceeds brokerage fees
B) should not make the investment since the required rate of return is less than the cost of investment
C) should leave the $150,000 in cash
D) should invest the funds for more than 60 days due to the favorable rate

Question

Quizplus · Accepted Answer

The interest earned on the marketable securities is 10% on the funds invested, which comes to $2,465.75 ($150,000 x 10% x 60/360). Even after paying the brokerage fees of $1,500, the firm would make a profit of $965.75. Hence, the firm should make the investment as the interest earned exceeds the brokerage fees.

A Firm Expects to Have Funds of $150,000 Idle for 60