1. Briefly explain TWO disadvantages of centralized treasury management. The Baumol model aims to determine the optimum amount of cash that is held under conditions of certainty. The objective of this model is to minimize the sum of the costs of transactions (selling investments or borrowing money short-term) and the opportunity cost of holding cash balances. (www.netdreams.co.uk) 2. Roadworks Ltd. requires $20,000,000 each year. The conversion costs of marketable securities is $65 per transaction. Marketable securities earn 5.7% per annum. a. Identify TWO types of marketable securities in which Roadworks Ltd. May invest. b. Compute the optimal level of cash holding under the Baumol model. c. Compute the total transaction cost for the year. d. Compute the total holding cost for the year. e. What is the total cost of cash management for the year. f. What would be the change in optimal cash holding if the cost per transaction were to be reduced to $50? g. Based on the original data, What would be the optimal cash holding if the rate earned by marketable securities were to be reduced to 4% h. Review your answer to parts b, f and g. Explain how transactions costs and holding costs impact the level of cash held by the business.
1. Briefly explain TWO disadvantages of centralized treasury management. The Baumol model aims to determine the optimum amount of cash that is held under conditions of certainty. The objective of this model is to minimize the sum of the costs of transactions (selling investments or borrowing money short-term) and the opportunity cost of holding cash balances. (www.netdreams.co.uk) 2. Roadworks Ltd. requires $20,000,000 each year. The conversion costs of marketable securities is $65 per transaction. Marketable securities earn 5.7% per annum. a. Identify TWO types of marketable securities in which Roadworks Ltd. May invest. b. Compute the optimal level of cash holding under the Baumol model. c. Compute the total transaction cost for the year. d. Compute the total holding cost for the year. e. What is the total cost of cash management for the year. f. What would be the change in optimal cash holding if the cost per transaction were to be reduced to $50? g. Based on the original data, What would be the optimal cash holding if the rate earned by marketable securities were to be reduced to 4% h. Review your answer to parts b, f and g. Explain how transactions costs and holding costs impact the level of cash held by the business.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Question
Transcribed Image Text:Financial Management 2
Homework
1. Briefly explain TWO disadvantages of centralized treasury management.
The Baumol model aims to determine the optimum amount of cash that is held
under conditions of certainty. The objective of this model is to minimize the sum
of the costs of transactions (selling investments or borrowing money short-term)
and the opportunity cost of holding cash balances. (www.netdreams.co.uk)
2. Roadworks Ltd. requires $20,000,000 each year. The conversion costs of
marketable securities is $65 per transaction. Marketable securities earn 5.7% per
annum.
a. Identify TWO types of marketable securities in which Roadworks Ltd. May
invest.
b. Compute the optimal level of cash holding under the Baumol model.
c. Compute the total transaction cost for the year.
d. Compute the total holding cost for the year.
e. What is the total cost of cash management for the year.
f. What would be the change in optimal cash holding if the cost per
transaction were to be reduced to $50?
g. Based on the original data, What would be the optimal cash holding if the
rate earned by marketable securities were to be reduced to 4%
h. Review your answer to parts b, f and g. Explain how transactions costs
and holding costs impact the level of cash held by the business.
N.B. When answering parts b -g, you should.
i. State the formula
ii.
iii.
iv. Solve
Identify the variables
Substitute the variables into the formula
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 2 steps
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Recommended textbooks for you
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education