Problem
Costs and the Model Baumol Debit and Credit Bookkeepers needs a total of $4,000 in cash during the year for certain transactions and other purposes. Whenever the amount of cash is reduced, he sells $300 worth of securities and transfers the cash. The interest rate is 6% per year and it costs $25 per sale to sell the securities.
1. What is the opportunity cost with the current policy? And the transaction cost? Without further calculations, would you say Debit and Credit holds a lot or a little cash? Explain your answer.
2. What is the optimal target cash balance using the Baumol model?