Hollywood Shoes Would Like to Maintain Their Cash Account at a Minimum

question 134

Multiple Choice

Hollywood Shoes would like to maintain their cash account at a minimum level of $50,000, but expects the standard deviation in net daily cash flows to be $4,000, the effective annual rate on marketable securities to be 6 percent per year, and the trading cost per sale or purchase of marketable securities to be $100 per transaction. What will be their optimal cash return point?

• A) $59,094.77
• B) $69,588.47
• C) $181,131.66
• D) $54,000.00

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Definitions:

Profit-Maximizing Price

The price at which a business can sell its product or service to achieve the highest possible profit.

Marginal Cost

The cost added by producing one additional unit of a product or service.

Kink

A sudden change in the rate or direction of a curve or line, often used in economics to describe a sharp change in a demand or supply curve.

Kinked Demand Curve

A demand curve that has a distinct bend or kink, typically used in oligopoly models, suggesting that a firm will face different elasticities for price increases versus price decreases.