7. A firm experiences a constant demand for cash totalling US$2,000,000 per annum. It replenishes its bank

Question:

7. A firm experiences a constant demand for cash totalling US$2,000,000 per annum. It replenishes its bank account (which does not pay interest)

by selling constant amounts of securities, which are held as an investment earning 6 % per annum. The cost per sale of securities is a fixed US$12 per sale. Required:

(a) Calculate the optimum amount of cash to be transferred to the firm’s current account.

(b) Calculate the number of transactions to undertake in a year.

(c) Find the average cash balance in the current account.

(d) Calculate the total cost per year of maintaining cash balances.

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