Hollywood Shoes would like to maintain their cash account at a minimum level of $50,000, but expects the standard deviation in net daily cash flows to be $4,000, the effective annual rate on marketable securities to be 6 percent per year, and the trading cost per sale or purchase of marketable securities to be $100 per transaction. What will be their optimal cash return point?
A) $59,094.77
B) $69,588.47
C) $181,131.66
D) $54,000.00

Question

Quizplus · Accepted Answer

The optimal cash return point can be calculated using the Miller-Orr model, which considers the standard deviation of cash flows, the interest rate, and transaction costs. The formula is: Return Point = Minimum Cash Balance + (3/4 * (3 * Transaction Cost * Variance of Cash Flows / Interest Rate)^(1/3)). Plugging in the given values, the optimal cash return point is approximately $69,588.47.

Hollywood Shoes Would Like to Maintain Their Cash Account at a Minimum