If the total cash requirement of a company is ₹ 2 crore next year, the opportunity cost of funds is 15…
According to William Baumol's inventory-theoretic cash management model, the optimum transaction cash balance is C* = sqrt((2 * b * T) / i). Substituting annual cash…
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If the total cash requirement of a company is ₹ 2 crore next year, the opportunity cost of funds is 15 percent per annum and the cost of conversion from securities to cash per transaction is ₹ 150, the optimum cash balance as per Baumol’s Model will be :
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Correct answer A
According to William Baumol's inventory-theoretic cash management model, the optimum transaction cash balance is C* = sqrt((2 * b * T) / i). Substituting annual cash requirement T = Rs. 2,00,00,000, transaction cost b = Rs. 150, and opportunity interest cost i = 0.15 gives C* = sqrt((2 * 150 * 2,00,00,000) / 0.15) = sqrt(4,00,00,00,000) = Rs. 2,00,000 (Rs. 2 lakhs).
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UGC NET Management