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
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

Mermaid Coffee Corporation (MCC) has 1,000,000 shares of stock currently trading at $42 per share. The company has issued 20,000 bonds, each with market value $928.59 and yield to

I have a question regarding assignment help, once completed, will I receive the assignment via email?

Determine the Component of Return Rate of return from an investment consists of the two: (i) Yield: Interest or dividend received is called yield. (ii) Capital Appreci

What are the types of financial assets? Types of Financial Assets: a. Loans b. Bank Deposits c. Stocks A share of ownership within a company d. Bonds A promis

(Interest-rate risk) Philadelphia Electric has many bonds trading on the New York Stock Exchange. Suppose PhilEl''s bonds have identical coupon rates of 9.125% but that one issue m

Jobbers or Speculators - Stock Market 1. This is a dealer who that trades in securities in his own right like a principal. 2. He can set prices and make active the market w

Important Points for Capital Market Authority Apart from the above roles, CMA can assume the given steps to encourage progress of stock exchanges in US or other countries.

Lock-Box System In a lock-box system, the customer sent the payments to a post office box. The post office box is emptied with the firm's bank at minimum once or twice all bus

1. Suppose company A expects to increase unit sales of i-phone by 15% per year for the next 5 years. If you currently sell 3 million i-phones in one year, how many phones do you ex