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 should be Duckett's average cash balance?
A)$35,356
B)$3,536
C)$22,157
D)$70,711
E)$42,918

Question

Quizplus · Accepted Answer

The Baumol model formula for optimal cash balance is: √(2 * Transaction Cost * Total Cash Needed / Interest Rate). Plugging in the values: √(2 * $50 * $5,000,000 / 0.10) = $35,355.34, which rounds to $35,356.

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