Question

Directions / Instructions: Read the problem carefully and compute the optimal balance using Baumol Model.

The estimated total cash requirement of MAY Company for the year amount to Php4,800,000. The fixed cost of selling marketable securities is Php 12 per transaction and the interest rate on marketable securities is 8 % per year.​

Answer 1

Directions / Instructions: Read the problem carefully and compute the optimal balance using Baumol Model.

The estimated total cash requirement of MAY Company for the year amount to Php4,800,000. The fixed cost of selling marketable securities is Php 12 per transaction and the interest rate on marketable securities is 8 % per year.

Answer 2

Explanation:

The following points highlight the top two cash management models. They are: 1. Baumol’s EOQ Model of Cash Management 2. Miller-Orr Cash Management Model.

1. Baumol’s EOQ Model of Cash Management:

William J. Baumol (1952) suggested that cash may be managed in the same way as any other inventory and that the inventory model could reasonably reflect the cost – volume relationships as well as the cash flows. In this way, the economic order quantity (EOQ) model of inventory management could be applied to cash management. It provides a useful conceptual foundation for the cash management problem.

Baumol's EOQ Model

In the model, the carrying cost of holding cash-namely the interest forgone on marketable securities is balanced against the fixed cost of transferring marketable securities to cash, or vice- versa. The Baumol model finds a correct balance by combining holding cost and transaction costs, so as to minimize the total cost of holding cash.