The assistant treasurer of Monroe Tires. INC is trying to determine what the appropriate cash return level should be. The company's cash balances have been fluctuating widely because of unpredictable and wide-ranging receipts and disbursements. The best estimate of annual disbursements is 5,000,000. The investment broker charges 75$ per securities transaction. Short-term investment interest rates are 12%. The company does not mind a 0$ cash balance but does not want the balance to be negative.
a) What the cash return level be, according to the Baumol Model?
b) What will the average cash balance be if the company's cash outflows fit the assumptions of the Baumol Model?
c) How many security sales will Monroe have in a year, assuming the model's assumptions are valid?
d) WHAT will the total period costs be for a year?
e) Do you recommend that monroe uses the baumol model? Why or why not?