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
Looking at the income statement, balance sheet and cash flow statement of the company and relating it with the non financial factors, I have the important observations as below:-

Question 1: a) What is dependency ratio and why is it important for pensions? b) For which types of schemes is dependency ratio mostly relevant? Explain c) What is the

Suggestion regarding Credit limit. Should it be approved or not, what should be the amount of credit limit that electronics give to Booth Plastics.

Dow theory elliot wave theory

Solutions to agency problem The bondholders might receive the following procedures to protect themselves from the process of the shareholders that might dilute the value of th

Agency Theory The agency problem between managers and shareholders can be resolved via paying high dividends. If retention is low, managers are necessary to increase additiona

Asset Based Valuation  This method acquires into account the entire business along with reference to its assets and then divides the resultant value via the number of shares i

Dividend yield or Gordon's Model This model is used to determine the cost of various capital components in particular: Cost of equity - K e Cost of preferenc

Floatation of New Shares Rules for floatation of new shares The company must contain an issued share capital of at least Kshs.20 M. The company must contain c

MRP systems and Functions of MRP systems Where dependent demand exists, for example between finished product and its constituent parts, item forecasting or inventory control t