Question

Gemini Inc.'s optimal cash transfer amount, using the Baumol model, is $60,000. The firm's fixed cost per cash transfer of marketable securities to cash is $180, and the total cash needed for transactions annually is $960,000. On what opportunity cost of holding cash was this analysis based?

Answer 1

Answer:

cost for holding cash: 9.60% per annum

Explanation:

Baumol formula:

$C = \sqrt{\frac{2TF}{k}}$

T = total cash needed = 960,000

F = fixed cost of selling securities = 180

k = opportunity cost for holding cash (interest rate) = ?

C = optimum = 60,000

$60,000 = \sqrt{\frac{2(960,000)(180)}{k}}$

$k =  = \frac{2(960,000)(180)}{60,000^2}$

k = 0.096 = 9.60%