10 Costs and the Baumol Model Saint-Michel SA needs a total of €54,000 in cash during the year for transactions and other purposes. Whenever cash runs low, it sells off €20,000 in securities and transfers the cash in. The interest rate is 3 per cent per year, and selling off securities costs €100 per sale.

(a) What is the opportunity cost under the current policy? The trading cost? With no additional calculations, would you say that Saint-Michel keeps too much or too little cash? Explain.

(b) What is the target cash balance derived using the Baumol model?