1. You have just been hired as the cash manager of the Lamm Company. Your first task is to determine the target cash balance. The firm expects to need $1,000,000 of net new cash during the coming year. This requirement occurs at a relatively constant rate over the year. The firm plans to meet this cash requirement by borrowing from Bank A at an annual rate of 10%. The fixed cost of transferring funds from the bank is $50 per transfer.
What average cash balance is indicated by the Baumol model? How many cash transfers are expected over the year?
2. What are the general benefits and costs of relaxing a firm's credit term?