## Calculate the optimum amount of funds to transfer, Financial Management

Assignment Help:

Q. Calculate the optimum amount of funds to transfer?

The Baumol model is derived from the EOQ model and is able to be applied in situations where there is a constant demand for cash or cash disbursements. Regular transfers are made as of interest-bearing short-term investments or cash deposits into a current account. The Baumol model believes the annual demand for cash (D) the cost of each cash transfer (C) and the interest difference between the rate paid on short-term investments (r1) and the rate paid on a current account (r2) in order to calculate the optimum amount of funds to transfer (F). The model is like follows.

F = ((2 × D × C)/(r1 - r2))0.5

By optimising the amount of money to transfer the Baumol model minimises the opportunity cost of holding cash in the current account thereby reducing the costs of cash management. Nevertheless the Baumol model is unlikely to be of assistance to Thorne Co because of the assumptions underlying its formulation. Steady annual demand for cash is assumed whereas its cash budget suggests that Thorne Co has a varying need for cash. The model presumes that each interest rate and the cost of each cash transfer are constant and known with certainty. In reality interest rates as well as transactions costs aren't constant and interest rates, in particular can change frequently. A cash management model which is able to accommodate a variable demand for cash such as the Miller-Orr model may be more suited to the needs of the company.

#### Define major causes for the current account deficits, The United States has...

The United States has experienced continuous current account deficits as the early 1980s. What do you think are the major causes for the deficits? What would be the results of cont

#### Price volatility characteristic of bond with embedded option, The price of ...

The price of the embedded option comprises two components. The first is the value of the same bond assuming it has no embedded option (option-free bond), th

#### How debt securities is different from term loan, How Debt securities is dif...

How Debt securities is different from term loan Debt securities are different from term loans provided by financial institutions and banks to the company. Term loans are long t

#### Determine firm sales revenue, a) Gross profit shows the difference between ...

a) Gross profit shows the difference between a firm's sales revenues and its direct cost of sales (COGS). Net profit, however, is calculated after deducting overheads (expenses) fr

#### Apv capital budgeting framework helpful for foreign capital, What makes the...

What makes the APV capital budgeting framework helpful for analyzing foreign capital expenditures? The APV framework is a value- additivity method. As international projects fr

#### Stock valuation, I just purchased a stock that would pay the dividends of t...

I just purchased a stock that would pay the dividends of the first four years as D1 = \$0.65, D2 = \$0.74, D3 = \$0.79, D4 = \$0.84. I also told that the dividends would grow continual

#### Cost of equity from new common stock, Weaver Chocolate Co. expects to gain ...

Weaver Chocolate Co. expects to gain \$3.50 per share during the present year, its expected dividend payout ratio is 65%, its expected constant dividend growth rate is 6.0%, and its

#### Define the meaning of procurement, Define the meaning of procurement T...

Define the meaning of procurement Term procurement was used in a broad sense so as to include the whole gamut of raising funds externally.

#### Prepare monetary statements using accounting standards, Entity A is signifi...

Entity A is significantly smaller than B in terms of revenue and would not impact LOP's revenue to the same extent. However A earns a noticeably better gross profit margin at 26% a

#### Accrual bond, It is a bond that does not give periodic interest payments. I...

It is a bond that does not give periodic interest payments. In spite of that, interest is added to the principal balance of the bond and is either paid at maturity or, at some poin

### Write Your Message!

#### Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd