Picard Industries requires $250,000 a week to pay its bills. The fixed cost of transferring money is $65 per transfer. The standard deviation of the weekly cash flows is $25,000 and the lower cash balance limit is $40,000. Assume the applicable annual interest rate is 5% for the BAT model, and the applicable weekly interest rate is 0.1% for the Miller-Orr model.

Using the BAT model, what is the total trading cost?

Question

Using the BAT model, what is the total trading cost?

Quizplus · Accepted Answer

The total trading cost in the Baumol model (BAT model) is calculated using the formula: $TC = \frac{F \times T}{C} + \frac{C \times i}{2}$, where $F$ is the fixed cost per transfer, $T$ is the total funds required, $C$ is the optimal cash balance, and $i$ is the interest rate. The optimal cash balance $C$ is calculated using the formula: $C = \sqrt{\frac{2FT}{i}}$. Given $F = $65$, $T = $250,000 \times 52$ (to annualize the weekly requirement), and $i = 0.05$, we first find $C$, then calculate the total trading cost $TC$.1. Calculate $C$: $C = \sqrt{\frac{2 \times 65 \times (250,000 \times 52)}{0.05}}$2. Calculate $TC$: $TC = \frac{65 \times (250,000 \times 52)}{C} + \frac{C \times 0.05}{2}$However, the provided information and choices suggest a misunderstanding in the application of the formula or the calculation process, as the Baumol model directly calculates the total cost based on transaction and opportunity costs without needing to annualize weekly requirements in this manner. The correct approach for a weekly calculation would involve using the weekly interest rate if provided, or adjusting the annual rate to a weekly rate, but the given options do not align with this corrected methodology.Given the misunderstanding in the application of the Baumol model as described, the correct answer cannot be directly calculated from the provided information without making assumptions not supported by the details given. The Baumol model formula provided is intended for use with correct inputs, but the question setup and answer choices suggest a need for clarification or correction in the application of the model or the calculation process described.

Picard Industries Requires $250,000 a Week to Pay Its Bills