A firm expects to have funds of $150,000 idle for 60 days. If the firm could purchase marketable securities yielding 10 percent and pay brokerage fees of $1,500, the firm
A) should make the investment since interest earned exceeds brokerage fees.
B) should not make the investment since brokerage fees exceed interest earned.
C) should leave the $150,000 in cash.
D) should invest the funds for more than 60 days due to the favorable rate.

Question

Quizplus · Accepted Answer

The interest earned on the marketable securities will be $2,465 ($150,000 x 10% x 60/365). After deducting the brokerage fees of $1,500, the net interest earned will still be $965. Therefore, it is beneficial for the firm to invest the funds in marketable securities instead of leaving it idle in cash.

A Firm Expects to Have Funds of $150,000 Idle for 60