Example of baumol's model, Finance Basics

Example of Baumol's Model

ABC Ltd. creates cash payments of Shs.10, 000 per week.  The interest rate at marketable securities is 12 percent and every moment the company sells marketable securities, it incurs a cost as Shs.20.

Required

a) Find out the optimal amount of marketable securities to be transformed into cash every moment the company creates the move.

b) Find out the entire number of shifts from marketable securities to cash per year.

c) Find out the entire cost of sustaining the cash balance per year.

d) Find out the firm's average cash balance.

Solution

a)         

16_Baumol’s Model.png

Whereas:  b = Shs.20

               T = 52 x 20,000

                  = Shs.520, 000

                i = 12 percent

211_Example of Baumol’s Model.png

Hence the optimal amount of marketable securities to be transformed to cash every moment a sale is made is Sh.13, 166.

b) Sum the no. of transfers = T / C*

                                       = 520,000 / 13,166

                                       =  39.5

                                       ≈  40 times

c) TC = ½ (Ci) + T/c (b)

         = (13,166* 0.12 / 2) + (520,000* 20 / 13,166)

         = 790 + 790 = Shs.1, 580

Consequently the whole cost of keeping the above cash balance is of Sh.1, 580.

d) The firm's average cash balance is = ½C

                                                      = 13,166 / 2

                                                      =   Shs.6,583

Posted Date: 2/1/2013 2:28:51 AM | Location : United States







Related Discussions:- Example of baumol's model, Assignment Help, Ask Question on Example of baumol's model, Get Answer, Expert's Help, Example of baumol's model Discussions

Write discussion on Example of baumol's model
Your posts are moderated
Related Questions
Venture Capital Venture capital is a form of investment in new small risky enterprises utilized to get them started via specialists called venture capitalists. Venture capital

Classification of Debenture Finance i) Secured Debentures These are those types of debentures which a company will secure generally in two ways, secured along with a fixe

I need a conclusion for my assignment for financial accounting vs management accounting

Valuation of Bonds and Debentures It will depend on expected cash flows consisting of annual interest in additional the principal amount to be obtained at maturity.  The suita

You own a two-bond portfolio. Each has a par value of $1,000. Bond A matures in five years, has a coupon rate of 8 percent, and has an annual yield to maturity of 9.20 percent. Bon

Definition of 'Capital Budgeting': The process in which a business calculates whether projects such as building a new plant or investing in a long-term risk are worth pursuing

the real risk-free rate of interest is 4%. inflation is expected to be 2% this year and 4% during the next 2 years. assume that the maturity risk premium is zero. what is the yield

Important points for Working Capital Cycle A lengthy working capital cycle is a sign of poor management of debtors and stock reflecting low turnover of debtors and stock and l

Market Model - Methods of Computing Cost of Capital This model is utilized to establish the percentage cost of ordinary share capital cost of equity (K e ). If an investor is

Market For Funds Market for Funds and Financial Institutions in Middle Asia 1. Financial markets refer to an elaborate system of the financial institution and arrange