C

C/2

(C/2) x R

$4,800,000

$2,400,000

$240,000

2,400,000

1,200,000

120,000

1,200,000

600,000

60,000

600,000

300,000

30,000

300,000

150,000

15,000

In our original case, in which the initial cash balance is $1.2 million, the average balance is $600,000. The interest Golden Socks could have earned on this (at 10 percent) is $60,000, so this is what the firm gives up with this strategy. Notice that the opportunity costs increase as the initial (and average) cash balance rises.

The Trading Costs To determine the total trading costs for the year, we need to know how many times Golden Socks will have to sell marketable securities during the year. First of all, the total amount of cash disbursed during the year is $600,000 per week, so

Ross et al.: Fundamentals of Corporate Finance, Sixth Edition, Alternate Edition

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