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- July 3, 2023 at 4:23 pm #687607
A division requires $1.5m per year; cash use is constant throughout the year. Transaction costs are
$150 per transaction and deposit interest is generated at 7.5% and interest on short-term financial
securities is 12%.Required
What is the optimal economic quantity of cash transfer into this division’s sub-account and how
frequently?
A) $1,500,000 once a year
B) $77,500, 19 times a year
C) $61,200, 25 times a year
D) $100,000, 15 times a year (CORRECT)Option D is the right answer.
Hello tutor!!
They calculate the answer by putting 4.5% in denominator as holding cost for cash meanwhile, in the scenario above only two types of interest rates are given then how’s the 3rd interest rate they calculated ?
July 3, 2023 at 4:30 pm #6876094.5% is the net interest cost of holding cash (12% less 7.5%).
July 3, 2023 at 10:02 pm #687614Could you please explain it further in more detail ?
July 5, 2023 at 8:10 am #687639I am not sure what further explanation you require.
Have you watched my free lectures on the Baumol model where I explain the whole thing?
The lectures are a complete free course for Paper FM and cover everything needed to be able to pass the exam well.
July 10, 2023 at 8:41 pm #687825I mean to say what does these two interest rate represent and why we use the difference of them ?
July 11, 2023 at 8:27 am #68783312% is the cost of borrowing finance. 7.5% is the interest earned on depositing cash.
So the net cost of holding cost is the 12% paid for borrowing it less the 7.5% earned from then depositing it.
Again, have you watched my free lectures on this?
July 11, 2023 at 7:56 pm #687851Okay now I understood it clearly.
I will watch your lectures surely.
Thank you so much 🙂
July 12, 2023 at 9:39 am #687865You are welcome.
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