HotFoot Shoes would like to maintain its cash account at a minimum level of $43,

Question

HotFoot Shoes would like to maintain its cash account at a minimum level of $43,000 but expects the standard deviation in net daily cash flows to be $3,800, the effective annual rate on marketable securities to be 2.7 percent per year, and the trading cost per sale or purchase of marketable securities to be $380 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.) Optimal upper cash limit $?

Explanation / Answer

Using Baumol and Miller-Orr model for determining the cash policy

Ddaily interest rate for marketable securities=1.027^(1/365)-1=0.00007299

Optimal cash return point=(3*380*3800^2/(4*0.00007299))^(1/3)+43000

=81,345.66

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