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

Using the Baumol model, Shree Traders needs Rs 6,00,000 of cash over a year, spread evenly. The fixed cost per transaction of converting securities to cash is Rs 150 and the annual holding cost is 12% of cash held. What is the optimum cash conversion size?

The question data do not reconcile with the given options, so it cannot be answered reliably.

  1. ARs 30,000
  2. BRs 60,000Correct
  3. CRs 1,50,000
  4. DRs 15,000

Explanation

Baumol: C = sqrt(2UP/H) = sqrt(2 x 6,00,000 x 150 / 0.12) = sqrt(1,80,00,00,000/0.12 ... ) computing: 2 x 6,00,000 x 150 = 18,00,00,000; divided by 0.12 = 1,50,00,00,000 = 1.5 x 10^9? Recheck: 18,00,00,000/0.12 = 150,00,00,000 = 1.5 x 10^9, whose root is about 38,730. This does not match the options, so the data are inconsistent.

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