The Norris Company Is Trying to Determine Its Optimal Average

question 24

Multiple Choice

The Norris Company 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.
-What will be the total cost to Norris of maintaining the optimal average cash balance, as determined by the Baumol model?

• A) $35,356
• B) $ 7,071
• C) $18,493
• D) $70,711

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Definitions:

Good X

A term typically used in economics to denote a specific commodity or product in theoretical models and discussions.

Budget Constraint

A concept in economics that represents all the combinations of goods and services a consumer can afford given their income and the prices of goods and services.

Horizontal Axis

In a graph or chart, the x-axis that runs from left to right, commonly used to represent the independent variable.

Vertical Axis

A line or reference point on a graph or chart that typically represents the dependent variable or outcome in an analysis.