Solved – Bildersee Industries projects that cash outlays of $4.5 million will occur uniformly throughout the year. Bildersee plans to meet its cash

Question

Bildersee Industries projects that cash outlays of $4.5 million will occur uniformly throughout the year. Bildersee 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 Bildersee’s average cash balance?

c. How many transfers per year will be required?

d. What will be Bildersee’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)?

Answer

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