The Timberline firm expects a total cash need of $12,500 over the next 3 months. They have a beginning cash balance of $1,500,and cash is replenished when it hits zero. The fixed cost of selling securities to replenish cash balances is $3.50. The interest rate on marketable securities is 8% per annum. There is a constant rate of cash disbursement and no cash receipts during the month. Based on the firm's current practice,what is the average daily cash balance (a month has 30 days)?

Question

Quizplus · Accepted Answer

The average daily cash balance can be calculated using the Baumol model. The formula is: Average Cash Balance = (1/2) * (2 * Total Cash Need * Fixed Cost / Interest Rate)^(1/2). Here, Total Cash Need = $12,500, Fixed Cost = $3.50, and Interest Rate = 8% per annum or 0.08/12 per month. The average cash balance is approximately $94.44.

The Timberline Firm Expects a Total Cash Need of $12,500