1. A company is having a difficult time forecasting its cash balance levels. The company maintains $2,000 in the checking account at all times. A detailed study of past cash balances revealed that the standard deviation () in daily cash balances equals to $600. It is believed that the nature of the firm will not change and the volatility of cash balances is expected to continue in the future. The transaction costs average $85 and the marketable securities yield 6%. [Use 360-day year].

a. What is the optimal return point for the firm?

b. What is the upper limit?

c .Draw your and explain the decisions that would be made using this model and the amount marketable securities that would bought and sold.