Thoroughbred Industries Has Been Practicing Cash Management for Some Time

Multiple Choice

Thoroughbred Industries has been practicing cash management for some time by using the Baumol model for determining cash balances. Some time ago, the model called for an average balance (C*/2) of $500; at that time, the rate on marketable securities was 4 percent. A rapid increase in interest rates has driven the interest rate up to 9 percent. What is the appropriate average cash balance now?

A) $200
B) $333
C) $414
D) $500
E) $666