Assume that Everyman’s Bookstore uses up cash at a steady rate of $200,000 per year. The...
| Assume that Everyman’s Bookstore uses up cash at a steady rate of $200,000 per year. The interest rate is 4% and each sale of securities costs $40. |
| a. | How many times a year should the store sell securities? (Round your answer to 2 decimal places.) | ||
| b. | What is its average cash balance? (Round your answer to the nearest whole dollar.) | ||
Homework Answers
Answer-a:
According to Baumol
C = Optimum cash
A = Annual cash outgoing per annum = $200,000
T = Cost of sale of each securities = $40
I = 4% interest rate
Number of times Everyman;s Bookstore sell securities a year = Annual requirement / C = $200,000 / $20,000 = 10
Answer-b:
Average cash balance = $20,000 / 2 = $10,000
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