Assignment:
The Timberline firm expects a total need of €12,500 over the next 3 months. They have a beginning cash balance of €1,500, and cash is replenished when it hits zero. The fixed cost of selling securities to replenish cash balances is €3.50. The interest rate on marketable securities is 8% per annum. There is a constant rate of cash disbursement and no cash receipts during the month.
1)Based on the firm's current practice, what is the average daily cash balance (a month has 30 days)?
2)What is the total saving to the firm if it switches from its current practice to the optimum practice (as given by the Baumol model)?
3)Using the Baumol model, what is the optimum cash holding?
4)If interest rates were to rise to 1.00% per month, what would the firm's total savings be if it switches from its current practice to the optimum practice (as given by the Baumol model)?
5)If interest rates were to rise to 12.00% per annum, what would be the firm's optimum cash balance using the Baumol model?