Question
Barenbaum Corporation projects that cash outlays of N$4,5 million will occur uniformly throughout the year. Barenbaum plans to meet its cash requirements by periodically selling
Barenbaum Corporation projects that cash outlays of N$4,5 million will occur uniformly throughout the year. Barenbaum plans to meet its cash requirements by periodically selling marketable securities from its portfolio. The cost per transaction of converting securities to cash is N$27. Using the Baumol Alias Tobin (BAT) model the firm has determined its optimal transaction size for transfers from marketable securities to cash to be $45,000.
(i). What is the interest rate on the firms marketable securities? (5 marks)
(ii) If the return on marketable securities was 15%, what will be the optimal cash balance according to the BAT model?
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