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 leave the $150,000 in cash.
B) should not make the investment since brokerage fees exceed interest earned.
C) should make the investment since interest earned exceeds brokerage fees.
D) should invest the funds for more than 60 days due to the favorable rate.

Question

Quizplus · Accepted Answer

If the firm chooses to invest in marketable securities, the interest earned would be:

$150,000 x 10% x (60/360) = $2,500

After subtracting the brokerage fees of $1,500, the net interest earned would be $1,000.

Since the net interest earned exceeds the brokerage fees, the firm should make the investment. Therefore, the best choice is C.

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