Reese's Resources faces a smooth annual demand for cash of $15 million, incurs transaction costs of $125 every time they sell marketable securities, and can earn 4.5 percent on their marketable securities. What will be their optimal cash replenishment level?
A) $28,867.51
B) $288,675.13
C) $61,237.24
D) $6,123.72

Question

Quizplus · Accepted Answer

Using the Baumol model, the optimal cash replenishment level (C*) can be calculated using the formula: C* = sqrt((2*b*T)/i), where b is the annual cash requirement, T is the transaction cost per sale, and i is the interest rate (in decimal form). Plugging in the values: b = $15,000,000, T = $125, and i = 0.045, we get C* = sqrt((2*15,000,000*125)/0.045) = sqrt(83,333,333.33) ≈ $288,675.13.

Reese's Resources Faces a Smooth Annual Demand for Cash of $15