Costs and the Baumol Model Debit and Credit Bookkeepers needs a total of $4,000 in cash during the year for transactions and other purposes. Whenever cash runs low, it sells off $300 in securities and transfers the cash in. The interest rate is 6 percent per year, and selling off securities costs $25 per sale.

a. What is the opportunity cost under the current policy? The trading cost? With no additional calculations, would you say that Debit and Credit keeps too much or too little cash? Explain.

b. What is the target cash balance derived using the Baumol model? LO.1