You have been asked to estimate the optimal cash balance for a firm, that

uses up $25 million in cash, at a steady rate, on an annual basis.
could earn interest at an annualized rate of 12%, if its funds were not tied up in a cash balance
spends $100 every time it has to convert interest-bearing securities into cash.

a. Estimate the optimal using the Baumol model.

b. How would your answer change if the firm were able to earn 3% on cash (i.e., it uses an interest bearing checking account)?

Question

You have been asked to estimate the optimal cash balance for a firm, that

    uses up $25 million in cash, at a steady rate, on an annual basis.
    could earn interest at an annualized rate of 12%, if its funds were not tied up in a cash balance
    spends $100 every time it has to convert interest-bearing securities into cash. 

a. Estimate the optimal using the Baumol model.

b. How would your answer change if the firm were able to earn 3% on cash (i.e., it uses an interest bearing checking account)?