Question
1. The Baumol model You are the newly appointed senior assistant to Hayley Henderson, the CFO of Flynn Corporation, a successful company with $80 million
1. The Baumol model
You are the newly appointed senior assistant to Hayley Henderson, the CFO of Flynn Corporation, a successful company with $80 million in sales. Following up on a comment made during the board meeting last week, Hayley Henderson has asked you to verify that the cash transfers between the companys portfolio of marketable securities and its principal bill-paying checking account are the lowest cost possible. Currently, Flynn tends to fund its monthly cash requirements by either selling its marketable securities or borrowing funds in increments of $60,678.
You have collected the following data and only need to complete your calculations to address Hayley Hendersons concerns and answer the questions that follow. (Note: To make your computations easier, round all dollar amounts to the nearest whole dollar.)
Cash Transfer Data for Flynn Corporation
| Monthly cash requirement | $833,333 |
| Return earned on marketable securities portfolio | 11.00% |
| Securities-to-cash conversion cost | $25.00 |
Given the cash transfer data for Flynn, complete the following table:
| Cash Transfer Analysis for Flynn Corporation | ||
|---|---|---|
| Activities Suggested by the Baumol Model | Current Activities | |
| Transaction size | $60,678 | |
| Average cash balance | ||
| Total annual cash-related holding costs | ||
| Annual number of transactions | ||
| Total annual transaction costs | ||
| Total annual cost of cash balances |
Should you recommend to Hayley Henderson that the size and frequency of the companys cash transfers be changed? Why?
No, because the total holding costs associated with transfers based on the Baumol model are less than those associated with the current transfers.
Yes, because the total cash costs associated with the current transfers are less than those associated with transfers based on the Baumol model.
No, because the total transaction costs associated with transfers based on the Baumol model are greater than those associated with the current transfers.
Yes, because the total cash costs associated with transfers based on the Baumol model are less than those associated with the current transfers.
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Fundamentals of Database Systems
Authors: Ramez Elmasri, Shamkant Navathe
6th edition
136086209, 978-0136086208
