Forums › ACCA Forums › ACCA FM Financial Management Forums › Cash Management Model

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- April 9, 2015 at 4:05 am #240579
FInder Co Faces a fixed cost of $4000 to obtain new funds. There is a requirement for $24000 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?

Solution:

The cost of Holding cash is 12%-9%=3%The optimum level of Q(the re-order quantity is)

Q= [(2*4000*24000)/0.03]^1/2

Q= $80,000.Reference: BPP Learning Programe: F9 Study text for 2015

My Query:

As far as i understand, the denominator on this Baumol model is the opportunity cost of holding cash instead of investing. That is the percentage of return forgone due to holding cash. However, here the difference of cost of fund and rate on investment is taken as denominator.

I could not find the logic behind using the difference as (i:e 3% or 0.03) denominator.?Thank you already!!

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