SEE ATTACHED PROBLEM 28-2

*PLEASE WORK OUT SOLUTIONS WITH FORMULAS SHOWN IN EXCEL*

CORRECT ANSWERS HAVE BEEN PROVIDED

*PLEASE WORK OUT SOLUTIONS WITH FORMULAS SHOWN IN EXCEL* CORRECT SOLUTIONS ARE PROVIDED BELOW Barenbaum Industries projects that cash outlays of $4.5 million will occur uniformly throughout the year. Barenbaum plans to meet its cash requirements by periodically selling marketable securities from its portfolio. The firm's marketable securities are invested to earn 12%, and the cost per transaction of converting securities to cash is $27. a. Use the Baumol model to determine the optimal transaction size for transfers from marketable securities to cash. b. What will be Barenbaum's average cash balance? c. How many transfers per year will be required? d. What will be Barenbaum's total annual cost of maintaining cash balances? What would the total cost be if the company maintained an average cash balance of $50,000 or of $0 (it deposits funds daily to meet cash requirements)? SP SOLUTIONS a. C* = Optimal 2(F)(T) = . F = $27; T = $4,500,000; r = 12%. transaction size r C* = 2($27)($4,500,000) = $45,000. 0.12 b. Average cash balance = $45,000/2 = $22,500. c. Transfers per year = $4,500,000/$45,000 = 100, or one approximately every 3.6 4 days. d. Total cost C* T (r) + (F) C * 2 $4,500,000 $45,000 = (0.12) + ($27) $45,000 2 = $2,700 + $2,700 = $5,400. =