CA Intermediate · Financial Management and Strategic Management · Treasury and Cash Management
Under the Baumol model, if the annual cash requirement and the interest rate stay unchanged but the fixed cost per conversion of securities into cash rises to four times its earlier level, the optimum cash conversion size will:
The optimum cash conversion size doubles. In the Baumol model it is proportional to the square root of the transaction cost, so a fourfold rise in the cost per conversion raises the optimum size by a factor of the square root of four, which is two.
- ABecome four times
- BBecome twiceCorrect
- CRemain unchanged
- DBecome half
Explanation
Optimum C = sqrt(2UP/S). If P becomes 4P, C becomes sqrt(4) = 2 times the earlier value. Saying four times ignores the square root.
Did you get it right without looking?
One question tells you little. A timed set on Treasury and Cash Management shows your real accuracy, how long you take and where you lose marks.
More Treasury and Cash Management questions
- Under the Miller-Orr model, which of the following statements is correct?
- Annual cash requirement of Kaveri Traders is ₹7,20,000, spread evenly. Each sale of securities to raise cash costs ₹150 per transaction, and…
- Under the Miller-Orr model, the spread between the upper and lower cash limits is given by 3 x [(3/4 x transaction cost x variance of daily …
- In treasury management, which of the following is a function of the treasury department related to managing the firm's foreign currency expo…
- Which of the following instruments is a money market instrument commonly used by a corporate treasurer to park short-term surplus cash?
- In treasury management, the process of a company using a bank's concentration banking arrangement, where customers pay into local collection…