HotFoot Shoes would like to maintain their cash account at a minimum level of $35,000, but expect the standard deviation in net daily cash flows to be $2,000, the effective annual rate on marketable securities to be 5 percent per year, and the trading cost per sale or purchase of marketable securities to be $210 per transaction. What will be their optimal cash return point?

Question

Quizplus · Accepted Answer

The optimal cash return point can be calculated using the Miller-Orr model, which is given by the formula: Return Point = Minimum Cash Balance + (3/4 * Spread). The spread is calculated as: Spread = (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 $51,752.46.

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