A Firm Using Baumol's Model Will Do One of the Following

question 31

Multiple Choice

A firm using Baumol's model will do one of the following if the interest rate on short-term securities went up.

• A)increase the average cash balance
• B)increase the collection period
• C)decrease the collection period
• D)decrease the average cash balance

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Definitions:

Expected Return

The weighted average of all possible returns for a given investment, accounting for the likelihood of each outcome.

Average Stock

Average Stock is a metric used to estimate the average amount of inventory a company holds over a certain period of time.

Market Risk Premium

The additional return an investor requires from a market portfolio over the risk-free rate as compensation for bearing higher risk.

Risk-free Rate

The theoretical return on an investment with zero risk, typically represented by the yield on government securities.