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,how many times during the next 3 months will the cash balance be replenished?

Question

Quizplus · Accepted Answer

The firm needs $12,500 over 3 months and starts with $1,500, so it needs to replenish $11,000. If the cash is replenished when it hits zero, the number of times it needs to be replenished is $11,000 / $1,500 = 7.33 times. However, since the firm can only replenish whole times, it will need to do so 8 times.

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