HotFoot Shoes would like to maintain its cash account at a minimum level of $44,

Question

HotFoot Shoes would like to maintain its cash account at a minimum level of $44,000 but expects the standard deviation in net daily cash flows to be $3,900, the effective annual rate on marketable securities to be 2.6 percent per year, and the trading cost per sale or purchase of marketable securities to be $390 per transaction.

What will be its optimal upper cash limit? (Use 365 days a year. Do not round intermediate calculations and round your answer to 2 decimal places.)

HotFoot Shoes would like to maintain its cash account at a minimum level of $44,000 but expects the standard deviation in net daily cash flows to be $3,900, the effective annual rate on marketable securities to be 2.6 percent per year, and the trading cost per sale or purchase of marketable securities to be $390 per transaction.

Explanation / Answer

Daily rate = 2.6% /365 days = 0.00712328

Z = [ 3*390*(3900^2) / (4* 0.00712328) ] ^0.33 +$44000 = $51,808

Optimal upper cash limit = ( $51,808 *3 ) - (2*$44,000) = $67,424

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