Use the following information to answer the question below.
Short-term investments are yielding 6 percent per year. Transaction costs are $40.00 for each transaction. The variance of daily cash flows is $75,432. The managerial emergency level for cash is $20,000
-What is the target cash balance?

Question

Quizplus · Accepted Answer

The target cash balance can be calculated using the Baumol model, which is given by the formula: $ \sqrt{\frac{2FB}{i}} $, where F is the fixed transaction cost, B is the variance of the cash flows, and i is the interest rate. Plugging in the given values: $ \sqrt{\frac{2 * 40 * 75432}{0.06}} $ gives approximately $22,397. This includes the managerial emergency level for cash, ensuring liquidity for unexpected needs.

Use the Following Information to Answer the Question Below