BAUMOL MODEL 1. Rosal Inc. is trying to determine its optimum average cash balance. The firm has determined that it will require P5,000,000 net new cash during the coming year. Converting securities to cash has a fixed transaction cost of P50, and the company gains 10% on its marketable securities investments. a) According to the Baumol model, what is the optimal transaction size for transfers from marketable securities to cash? b) According to the Baumol model, what should be Rosal's average cash balance? c) What will be the total cost to Rosal of maintaining the optimal average cash balance, as determined by the Baumol model?

BAUMOL MODEL 1. Rosal Inc. is trying to determine its optimum average cash balance. The firm has determined that it will require P5,000,000 net new cash during the coming year. Converting securities to cash has a fixed transaction cost of P50, and the company gains 10% on its marketable securities investments. a) According to the Baumol model, what is the optimal transaction size for transfers from marketable securities to cash? b) According to the Baumol model, what should be Rosal's average cash balance? c) What will be the total cost to Rosal of maintaining the optimal average cash balance, as determined by the Baumol model?

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter23: Other Topics In Working Capital Management

Section: Chapter Questions

Problem 2P: Optimal Cash Transfer Barenbaum Industries projects that cash outlays of 4.5 million will occur...

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Concept explainers

Short-term Financing

Short-term financing occurs when a company finds an external funding source to run the business for a short period of time that takes less than a year to pay off. Working capital financing is another term for short-term financing. When a company's cash flow from operations is uneven, short-term financing is used to generate cash flow and cover operating expenses. Short-term finance is typically used by businesses to fund inventory, accounts receivable, and loans.

Question

a) What is the optimal transaction size?

b) What should be Rosal's average cash balance?

c) What is the total cost?

BAUMOL MODEL
1. Rosal Inc. is trying to determine its optimum average cash balance. The firm has determined
that it will require P5,000,000 net new cash during the coming year. Converting securities to cash
has a fixed transaction cost of P50, and the company gains 10% on its marketable securities
investments.
a) According to the Baumol model, what is the optimal transaction size for transfers from
marketable securities to cash?
b) According to the Baumol model, what should be Rosal's average cash balance?
c)
What will be the total cost to Rosal of maintaining the optimal average cash balance, as
determined by the Baumol model?

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