Question
Barenbaum Industries projects that cash outlays of $4.5 million will occur uniformly Throughout the year. Barenbaum plans to meet its cash requirements by periodically Selling
Barenbaum Industries projects that cash outlays of $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 firm's marketable securities
Are invested to earn 12%, and the cost per transaction of converting securities to
Cash is $27.
a. Use the Baumol model to determine the optimal transaction size for transfers from
Marketable securities to cash.
b. What will be Barenbaum's average cash balance?
c. How many transfers per year will be required?
d. What will be Barenbaum's total annual cost of maintaining cash balances? What
Would the total cost be if the company maintained an average cash balance of $50,000
Or of $0 (it deposits funds daily to meet cash requirements)?
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