The Norris Company 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.
-According to the Baumol model, what is the optimal transaction size for transfers from marketable securities to cash?
A) $ 7,071
B) $ 38,357
C) $ 70,711
D) $102,956
E) $ 87,000

Question

Quizplus · Accepted Answer

The Baumol model formula for optimal transaction size is: √(2 * Total cash needed * Transaction cost / Interest rate). Plugging in the values: √(2 * 5,000,000 * 50 / 0.10) = $70,711.

The Norris Company Is Trying to Determine Its Optimal Average