
B-326 SOLUTIONS
APPENDIX 19A
1. a. Decrease. This will lower the trading costs, which will cause a decrease in the target cash balance.
b. Decrease. This will increase the holding cost, which will cause a decrease in the target cash
c. Increase. This will increase the amount of cash that the firm has to hold in non-interest bearing
d. Decrease. If the credit rating improves, then the firm can borrow more easily, allowing it to lower
e. Increase. If the cost of borrowing increases, the firm will need to hold more cash to protect against
f. Either. This depends somewhat on what the fees apply to, but if direct fees are established, then the
compensating balance may be lowered, thus lowering the target cash balance. If, on the other hand,
2. The target cash balance using the BAT model is:
C
* = [(2T × F)/R]1/2
C
* = [2($8,500)($25)/.06]1/2
3. The holding cost is the average daily cash balance times the interest rate, so:
Holding cost = ($1,300)(.05)
Holding cost = $65.00
The trading costs are the total cash needed times the replenishing costs, divided by the average daily
balance times two, so: