The Duckett Group is trying to determine its optimal average cash balance. The firm has determined that it will need $8,100,000 net new cash during the coming year. The fixed transaction cost of converting securities to cash is $30, and the firm earns 8 percent on its marketable securities investments.
a. According to the Baumol model, what is the optimal transaction size for transfers from marketable securities to cash?
b. According to the Baumol model, what should be Duckett’s average cash balance?
c. What will be the total cost to Duckett of maintaining the optimal average cash balance, as determined by the Baumol model?