Question

HotFoot Shoes would like to maintain its cash account at a minimum level of $30,000, but expects the standard deviation in net daily cash flows to be $4,500, the effective annual rate on marketable securities to be 7.0 percent per year, and the trading cost per sale or purchase of marketable securities to be $250 per transaction.

What will be its optimal cash return point? (Use 365 days a year. Do not round intermediate calculations. Round your final answer to 2 decimal places.)

Optimal cash return point

$

Answer 1

interest daily = i 0.000185 1.07^(1/365)-1 (1+r)^(1/365)-1 Optimal cash balance = z = F = trading cost per transaction = 250 standard deviation = 4500 0.000185 optimum cash balance = ((3*250*4500-2)/(4*0.000185))^(1/3) $ 27,360.15 Optimal cash return point = $ 57,360.15 [27360.15+30,000] optimal cash balance + minimum balance to be maintained)