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Determine the optimal value of government securities

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Question - A company seeks to determine the optimal cash balance to maintain for its business. The interest rate on securities issued by the federal government is 8% effective per annum, which are the instruments in which the company keeps its resources invested; each sale of securities costs it $28.00. The company disburses cash at a rate of $85,000.00 per month.

The general manager says that he must work with a margin of safety equal to zero. Using the Baumol model, determine:

a. Determine the optimal value of government securities to sell each time the firm runs out of cash.

b. Determine the number of times per month that the firm will have to sell government securities.

c. Determine the average cash balance.

Reference no: EM133111831

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