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how to answer question a? A risk-neutral firm needs to determine the amount of cash it should hold. The firm's amount of cash is C.

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A risk-neutral firm needs to determine the amount of cash it should hold. The firm's amount of cash is C. Holding more cash is costly because the firm cannot use it to undertake investment opportunities. Let the cost >0 be proportional to the amount of cash the firm holds so that if the firm holds C worth of cash then the cost of foregone investment opportunities is C. Given the amount of cash C the probability that the firm needs to raise external financing is eC. If the firm needs to raise external financing it incurs a fixed cost K with K>. a. What is the optimal amount of cashC the firm should hold? b. Given this optimal amount of cash, what is the probability that the firm needs to raise external financing? c. Assuming 2

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