CA Inter P6 · Chapter 9 · Question 3 of 9
Ankur Ltd needs ₹ 72,00,000 cash during the year, spread evenly. The fixed cost of each conversion of marketable securities into cash is ₹ 150, and the interest rate on marketable securities is 10% per annum. Using the Baumol model, the optimum cash conversion size is closest to:
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: B) ₹ 1,46,969
Explanation
Baumol's model: C = √(2 x annual cash requirement x cost per transaction / interest rate) = √(2 x 72,00,000 x 150 / 0.10) = √21,600,000,000 = ₹ 1,46,969 (rounded to the nearest rupee). Leaving out the factor 2 gives about ₹ 1,03,923.
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