For Leo, Inc. and according to the Baumol model, what is the optimal transaction size for transfers from marketable securities if the total cash needed for transactions annually is $7,569,000 and the company can hold marketable securities that yield 10 percent and then convert these securities to cash at a cost of only $50 per transaction.
Baumol's model of cash optimization refers to management of cash in such a way that the holding and the conversion cost of cash is minimal. It is similar to the EOQ or the Economic order quantity in inventory management.
Answer and Explanation:
As per the Baumol's Model,
Optimal transaction size = (2 x A x F / H)^(1/2)
A = Annual cash requirements = $7,569,000.00
F = Fixed...
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from Finance 101: Principles of FinanceChapter 18 / Lesson 4