5. ABB Ltd is trying to determine whether its cash management strategy is...
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| 5. | ABB Ltd is trying to determine whether its cash management strategy is optimal. The company generates 20,000 excess cash each month, which it intends to invest in short-term marketable securities. The interest rate it expects to earn on such investments is 7 per cent per year. The transaction costs related to each individual investment in short-term marketable securities is a constant 115. Use the BAT model to find: | |||
| (a) | The optimal amount that should be invested in each transaction. | |||
| (b) | The number of transactions there will be each year. | |||
| (c) | The annual cost of making these transactions. | |||
| (d) | The annual opportunity cost of holding cash. | |||
| Is the current cash management strategy optimal? Explain why or why not. | ||||
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