alue: 10.00 points HotFoot Shoes would like to maintain its cash account at a mi

Question

alue: 10.00 points HotFoot Shoes would like to maintain its cash account at a minimum level of $33,000, but expects the standard deviation in net daily cash flows to be $4,800, the effective annual rate on marketable securities to be 7.3 percent per year, and the trading cost per sale or purchase of marketable securities to be $280 per transaction What will be its optimal cash return point? (Use 365 days a year. Do not round intermediate calculations. Round your final answer to 2 decimal places.) Optimal cash return point

Explanation / Answer

Optimal cash return point = ((3*F*V)/(4*r))^(1/3) + M

where F is the fixed cost of a securities transaction = 280

V is the daily cash variance = 4800^2 = 23,040,000

r is the daily interest rate on marketable securities = 7.3%/365 = 0.0002

M is the minimum cash balance = 33000

so putting above values in formula

we get optimal cash return point = ((3*280*23040000)/(4*.00002))^(1/3) + 33000

= $ 61,921.71

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