Homework 2023 Business Finance

2023 17 8 Assume that interest rate parity holds In both the spot market and the 90 day

17-8 Assume that interest rate parity holds. In both the spot market and the 90-day forward

market, 1 Japanese yen equals 0.0086 dollar. In Japan, 90-day risk-free securities yield

4.6%. What is the yield on 90-day risk-free securities in the United States?



28-1. The Gentry Garden Center sells 90,000 bags of lawn fertilizer annually. The optimal safety

stock (which is on hand initially) is 1,000 bags. Each bag costs the firm $1.50, inventory

carrying costs are 20%, and the cost of placing an order with its supplier is $15.

a. What is the Economic Ordering Quantity?

b. What is the maximum inventory of fertilizer?

c. What will be the firm’s average inventory?

d. How often must the company order?


28-2. Barenbaum Industries projects that cash outlays of $4.5 million will occur uniformly

throughout the year. Barenbaum plans to meet its cash requirements by periodically

selling marketable securities from its portfolio. The firm’s marketable securities

are invested to earn 12%, and the cost per transaction of converting securities to

cash is $27.

a. Use the Baumol model to determine the optimal transaction size for transfers from

marketable securities to cash.

b. What will be Barenbaum’s average cash balance?

c. How many transfers per year will be required?

d. What will be Barenbaum’s total annual cost of maintaining cash balances? What

would the total cost be if the company maintained an average cash balance of $50,000

or of $0 (it deposits funds daily to meet cash requirements)?

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