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 upper limit for the target cash balance?

Question

Quizplus · Accepted Answer

The upper limit for 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 \times 40 \times 75432}{0.06}} $, we get approximately $27,191 as the upper limit for the target cash balance. This includes the managerial emergency level of $20,000 plus an additional buffer calculated through the model.

Use the Following Information to Answer the Question Below