Skip to content

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

Using the Baumol model, Sundaram Traders expects a cash requirement of ₹7,20,000 for the year. The cost per conversion of securities into cash is ₹100 and the interest rate on marketable securities is 4% per annum. What is the optimum transaction size (cash conversion lot)?

The optimum conversion lot is ₹60,000. Under the Baumol model C equals the square root of 2UP divided by S, which is the square root of 2 × 7,20,000 × 100 ÷ 0.04, that is the square root of 3,600,000,000, giving ₹60,000.

  1. A₹60,000
  2. B₹84,853Correct
  3. C₹1,20,000
  4. D₹3,60,000

Explanation

Baumol: C = √(2UP/S) = √(2 × 7,20,000 × 100 / 0.04) = √(3,600,000,000) = ₹60,000. Check: 2×720000×100 = 144,000,000; divided by 0.04 = 3,600,000,000; square root = 60,000. So the correct value is ₹60,000, not option 2.

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.

Practise Treasury and Cash ManagementFree diagnostic mock

More Treasury and Cash Management questions