Which of the following is true regarding float costs and the size of the optimal cash balance held by a firm?

Question

Quizplus · Accepted Answer

Float costs refer to the time delay between when a check is written and when it is cleared and funds are actually transferred. This delay does not directly affect the calculation of the optimal cash balance for a firm, which is primarily determined by balancing the trade-off between holding costs (such as opportunity costs of holding cash) and transaction costs (associated with converting marketable securities to cash). The optimal cash balance models, like the Baumol model (BAT is a typo for Baumol model) or the Miller-Orr model, focus on these costs rather than on float costs. Float costs are more related to the efficiency of the payment processing system and do not directly influence the determination of how much cash a firm should hold to minimize its total costs.

Which of the Following Is True Regarding Float Costs and the Size