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

Annual cash requirement of Kaveri Traders is ₹7,20,000, spread evenly. Each sale of securities to raise cash costs ₹150 per transaction, and the interest rate on securities is 12% per annum. Under the Baumol model, the optimal cash conversion size is:

Using the Baumol formula, the optimal conversion size is the square root of twice the annual requirement times transaction cost divided by the interest rate, which gives about ₹42,426. None of the options shown matches this value.

  1. A₹6,000Correct
  2. B₹3,000
  3. C₹60,000
  4. D₹4,243

Explanation

C = sqrt(2 × 7,20,000 × 150 / 0.12) = sqrt(1,80,00,00,000) ... compute: 2×7,20,000×150 = 21,60,00,000; divided by 0.12 = 1,80,00,00,000; square root = 42,426. Hence the correct value is ₹42,426, not listed correctly; recheck: 21,60,00,000/0.12 = 1,800,000,000, sqrt = 42,426. Thus option A is wrong in magnitude.

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