The Duckett Group is trying to determine its optimal average cash balance. The firm has determined that it will need $5,000,000 net new cash during the coming year. The fixed transaction cost of converting securities to cash is $50, and the firm earns 10 percent on its marketable securities investments.
1. According to the Baumol model, what is the optimal transaction size for transfers from marketable securities to cash?
a. $ 7,071
b. $ 38,357
c. $ 70,711
d. $102,956
e. $ 87,000
2. According to the Baumol model, what should be Duckett’s average cash balance?
a. $35,356
b. $ 3,536
c. $22,157
d. $70,711
e. $42,918