Question

Development Partners Housing has been practicing cash management for some time by using the Baumol model for determining cash balances. Some time ago, the model called for an average balance (C*/2) of $500; at that time, the rate on marketable securities was 4.0 percent. A rapid increase in interest rates has driven the interest rate up to 9.0 percent. What is the appropriate average cash balance now? Note that the fixed cost per transaction and the total cash needed for transactions during the year did not change. Enter your answer rounded to two decimal places. Do not enter $ or comma in the answer box. For example, if your answer is $12,300.456 then enter as 12300.46 in the answer box.

Answer 1

Ausg first we find optimal lash balence is equal do 2 limes of average Cash balance then optimal cash = soo x2 2 = $1000 know that Now, we know ca 2 FT for 's 4.4. C = 1000 So value of 2 ft from above is (100092 2 FT y y 1000000 Xooy 2 FT 9 40.000 2ET Now, we find the find the volell volell of c e for ingen ） 40,000 c = R0.9.4. - 666.667

So average Coth balance imal esh balance 2 -666-667 2 333.33 New average Cash ince is $333.33