Rose Axels faces a smooth annual demand for cash of $5.06 million, incurs transa

Question

Rose Axels faces a smooth annual demand for cash of $5.06 million, incurs transaction costs of $281 every time the company sells marketable securities, and can earn 4.9 percent on its marketable securities.

What will be its optimal cash replenishment level? (Enter your answer in dollars not in millions. Round your answer to 2 decimal places.)

Rose Axels faces a smooth annual demand for cash of $5.06 million, incurs transaction costs of $281 every time the company sells marketable securities, and can earn 4.9 percent on its marketable securities.

Explanation / Answer

The Optimal cash replenishment level will be:

C* = (2TF/i)^1/2

= [((2)($5,060,000)($281))/0.049]^1/2

= $240,904.76

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