Exhibit Duckett Group
The Duckett Group is trying to determine its optimal average cash balance.The firm has determined that it will need $5,000,000 net new cash during the coming year.The fixed transaction cost of converting securities to cash is $50, and the firm earns 10 percent on its marketable securities investments.
-Refer to Exhibit Duckett Group.According to the Baumol model, what should be Duckett's average cash balance?
A) $35,356
B) $3,536
C) $22,157
D) $70,711
E) $42,918

Question

Quizplus · Accepted Answer

The Baumol model suggests that the optimal average cash balance is the square root of (2*fixed transaction cost*net new cash)/interest rate. Plugging in the given values, we get:Optimal average cash balance = √(2*$50*$5,000,000)/0.10 = $35,355.33Therefore, the correct answer is A) $35,356.

Exhibit Duckett Group The Duckett Group Is Trying to Determine Its Optimal Average