Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FM Exams › Baumol model
- This topic has 7 replies, 2 voices, and was last updated 7 years ago by John Moffat.
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- November 21, 2016 at 3:55 pm #350377
Sir according to ur lecture we have an interest benefit of holding cash lesser than that of short term securities so we take the difference. But in one of the questions I was doing, the interest cost of new funds is 12% and that short term securities is 9%. How do we do this?
November 22, 2016 at 5:16 am #350487I would need to see the whole question – if it is in the BPP Revision Kit then tell me the number and name of the question; if it is a past exam question then tell me the name and which exam.
November 22, 2016 at 5:18 am #350488Sir its in the BPP F9 text. Page 130
The full question: Finder Co faces a fixed cost of $4,000 to obtain new funds. There is a requirement for $24,000 of cash over each period of one year for the foreseeable future. The interest cost of new funds is 12% per annum; the interest rate earned on short-term securities is 9% per annum. How much finance should Finder raise at a time?
November 22, 2016 at 6:15 am #350530I only have the Revision Kit 🙂
However, the interest to use in the formula is 12 – 9 = 3%.
November 22, 2016 at 9:48 am #350582Ok sir np, but if u cud just let me know the reason for deducting interest on security from finance cost it wud be great. 🙁
November 22, 2016 at 3:15 pm #350666They are paying 12% to borrow the money, but then earning 9% by investing it in the short terms deposits.
So the net cost of the money is the difference of 3%.November 22, 2016 at 5:27 pm #350715Oh okay. Thank you.
November 23, 2016 at 7:11 am #350880You are welcome 🙂
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