BullsNBears, a purveyor of financial databases, estimates it they disburses $440,000 monthly in order to pay bills. The firm's opportunity rate is 5%. The fixed cost of transferring money is $25 per transfer. Based on historical data, the standard deviation of monthly cash flows is $15,000 and the lower cash balance limit is $20,000. For Miller-Orr model questions, assume the interest rate is 0.5% per month.

Using the BAT model, what is the optimum initial cash balance?

Question

Using the BAT model, what is the optimum initial cash balance?

Quizplus · Accepted Answer

The optimum initial cash balance using the Baumol Model (BAT model) is calculated using the formula: $C^* = \sqrt{\frac{2bT}{i}}$, where $C^*$ is the optimum cash balance, $b$ is the fixed cost per transaction, $T$ is the total cash needed for the period, and $i$ is the opportunity cost of holding cash. Plugging in the given values: $C^* = \sqrt{\frac{2 \times 25 \times 440,000}{0.05}} = \sqrt{\frac{2 \times 25 \times 440,000}{0.05}} = \sqrt{440,000} = \sqrt{17,600,000} = \$72,664$.

BullsNBears, a Purveyor of Financial Databases, Estimates It They Disburses