Question

1. A firm needs for sure $250,000 in cash for transaction purposes over the next 2 months and this cash is currently available. Marketable securities yield 6 percent and transaction costs are $50 per transaction. The firm does not carry any safety cash balances.

        What is the optimal cash conversion size?

        What is the total cost of holding cash balances?

Answer 1

Total Cost of holding cash balance =

Here,

F = the fixed transaction Cost = $50
T = total cash transaction Size = $250,000
i = the interest rate on marketable securities for 02 Months = Annual Rate / 06 = 6% / 06 = 1%

C = optimal cash conversion size

Now

C = 50,000

Ans : optimal cash conversion size = 50,000

Total Cost of holding cash balance =

=250 + 250

= 500

total cost of holding cash balances = $ 500