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NEW QUESTION: 1
A company uses the following formula in determining its optimal level of cash.

Where: b = Fixed cost per transaction i = Interest rate on marketable securities T = Total demand for cash
over a period of time
This formula is a modification of the Economic Order Quantity (EOQ) formula used for inventory
management. Assume that the fixed cost of selling marketable securities is $10 per transaction, and the
interest rate on marketable securities is 6 percent per year. The company estimates that it will make cash
payments of $12,000 over a one-month perioD. What is the average cash balance (rounded to the
nearest dollar)?
A. $6,928
B. $3,464
C. $1,000
D. $2,000
Answer: B
Explanation:
Choice "c" is correct. Like the EOQ, this formula represents the amount of cash brought in by the sale of
marketable securities. Also like the EOQ, this cash goes to zero (or the safety level) over time. The
average cash (like the average inventory) is one half of the amount collected. Remember also to convert
the interest rate to a per month figure of 0.5%

Choices "a", "b", and "d" are incorrect, per above.

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