CS Executive · Corporate Accounting and Financial Management · Working Capital Management
Under the Baumol model of cash management, which assumption is made?
The Baumol model assumes cash is used at a constant, certain rate over the period, much like inventory in the EOQ model. Random cash flows with upper and lower control limits are features of the Miller-Orr model, not Baumol.
- ACash outflows are random and unpredictable
- BCash is used at a steady, certain rate over the periodCorrect
- CCash balances fluctuate between an upper and lower control limit
- DThe firm never converts securities into cash
Explanation
The Baumol model treats cash like inventory in the EOQ model, assuming a steady and predictable usage rate. Random flows and control limits belong to the Miller-Orr model. Hence option B is correct.
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