Exhibit 23.1
The Duckett Group is trying to determine its optimal average cash balance. The firm has determined that it will need $5,000,000 net new cash during the coming year. The fixed transaction cost of converting securities to cash is $50, and the firm earns 10 percent on its marketable securities investments.
-Refer to Exhibit 23.1.According to the Baumol model,what is the optimal transaction size for transfers from marketable securities to cash?
A)$7,071
B)$38,357
C)$70,711
D)$102,956
E)$87,000

Question

Quizplus · Accepted Answer

The optimal transaction size can be calculated using the Baumol model formula: 
Optimal transaction size = sqrt((2Cs)/(i)), where Cs = fixed transaction cost, s = net new cash needed, and i = opportunity cost of holding cash. 
Plugging in the values given in the question, we get: 
Optimal transaction size = sqrt((2(50)(5,000,000))/(0.10)) = $70,710.68, which is closest to option C: $70,711. Therefore, option C is the correct answer.

Exhibit 23.1 The Duckett Group Is Trying to Determine Its Optimal Average