Asked by Fernando Oropeza on Jul 23, 2024
Verified
Which of the following is true regarding trading costs and the size of the firm's cash balance?
A) Total trading costs are inversely related to the fixed cost of making a securities trade.
B) Trading costs will not change as the size of the cash balance is increased.
C) The lower the trading costs, the lower will be the firm's target cash balance in the BAT model.
D) The total cost to a firm of maintaining a specific cash balance is inversely related to the amount of trading costs incurred to maintain that balance.
E) Trading costs are irrelevant in determining the optimal cash balance in the Miller-Orr model, but not in other models.
Trading Costs
Expenses associated with buying and selling securities, including commissions, spreads, and slippage.
- Understand the impact of decisions related to cash management on opportunity costs and the expenses associated with trading.
Verified Answer
SR
Savanna RomainJul 24, 2024
Final Answer :
C
Explanation :
EC) In the Baumol-Tobin (BAT) model, lower trading costs reduce the cost of converting securities to cash, encouraging firms to keep a lower cash balance since it's cheaper to replenish.E) The Miller-Orr model allows for variable cash flows and sets an upper and lower limit on cash balances. It considers trading costs in its formula to determine the optimal cash balance, unlike some other models where trading costs might be considered irrelevant or treated differently.
Learning Objectives
- Understand the impact of decisions related to cash management on opportunity costs and the expenses associated with trading.