Explore BrainMass

Explore BrainMass

    Cash Management using Baumol Model

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    1) Company A is using the Baumol model to find cash balances. Recently the model called for an average balance (C*/2) of $500 and the rate on marketable securities was 4%. A rapid increase in interest rates has driven the interest rate up to 9% What is the appropriate average cash balance now?

    2) Company A receives $2 million in payments of which $500,000 is needed for cash payments made during the next year. Each time the company deposits money in its account, a charge of $2.00 is assessed to cover certain admin costs. If the company can hold marketable securities which yield 5% and then convert these securities to cash at a cost of only the $2 deposit charge, what is the total cost for one year of holding the minumum cost cash balance based on the Baumol model?

    © BrainMass Inc. brainmass.com June 3, 2020, 6:38 pm ad1c9bdddf
    https://brainmass.com/business/cash-management/cash-management-using-baumol-model-69198

    Solution Preview

    1) Company A is using the Baumol model to find cash balances. Recently the model called for an average balance (C*/2) of $500 and the rate on marketable securities was 4%. A rapid increase in interest rates has driven the interest rate up to 9% What is the appropriate average cash balance now?

    The Baumol Model
    C = square root of ( 2 x Total Demand during the period x Fixed Transaction Cost)/ Interest rate
    1000 = square root of ( 2 x Total Demand during the period x Fixed Transaction Cost)/ 4%
    Or (Total Demand during the period x ...

    Solution Summary

    Calculates cash balance using Baumol Model.

    $2.19

    ADVERTISEMENT