Exhibit Duckett Group
The Duckett Group is trying to determine its optimal average cash balance.The firm has determined that it will need $5,000,000 net new cash during the coming year.The fixed transaction cost of converting securities to cash is $50, and the firm earns 10 percent on its marketable securities investments.
-Refer to Exhibit Duckett Group.According to the Baumol model, what is the optimal transaction size for transfers from marketable securities to cash?
A) $7,071
B) $38,357
C) $70,711
D) $102,956
E) $87,000

Question

Quizplus · Accepted Answer

Using the Baumol model: 
- Annual cash need = $5,000,000 
- Fixed transaction cost = $50 
- Investment rate = 10%

Optimal transaction size formula: 
Transaction size = √(2 × Annual cash need × Fixed cost / Investment rate) 
Transaction size = √(2 × $5,000,000 × $50 / 0.10) 
Transaction size = $70,711

Therefore, the optimal transaction size for transfers from marketable securities to cash is $70,711.

Exhibit Duckett Group The Duckett Group Is Trying to Determine Its Optimal Average