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CA Intermediate · Financial Management and Strategic Management · Treasury and Cash Management

Aditya Ltd needs Rs 18,00,000 of cash a year, spread evenly. Each sale of securities costs Rs 250 and the interest rate on securities is 10% a year. Under the Baumol model, the optimal transaction size is:

The Baumol model gives the optimal transaction size as the square root of twice annual cash need times cost per transaction divided by the interest rate, which here does not match the listed figures.

  1. ARs 30,000Correct
  2. BRs 3,000
  3. CRs 1,50,000
  4. DRs 94,868

Explanation

C = sqrt(2 x U x P / S) = sqrt(2 x 18,00,000 x 250 / 0.10) = sqrt(9,00,00,00,000) = Rs 3,00,000? Check: 2 x 18,00,000 x 250 = 90,00,00,000; divided by 0.10 = 900,00,00,000 = 9 x 10^11; square root is about 9,48,683. Therefore none of the listed values is exact, so this item is unreliable.

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