Baumol Model

ABC Corporation would like to know what is its optimal cash balance for a disbursement account. The daily average disbursement is P40,000. Cost to transfer money into the account average P500 each time. If the money is not in this account, it could have been kept in a mutual fund account that would let ABC earn 3% per year.

Required:

1. Optimum cash balance

2. Total cost of holding and maintaining the optimal cash balance

Disbursement Float

ABC disburses P100,000 each day. It would like to issue checks instead of its current policy of paying in cash. Opening a

disbursement account will cost P500 outright but another P400 per month will be incurred for the checkbook. The

disbursement float will be 7 days based on expert advice. The return on money marketable securities is 5%.

Required:

3. Disbursement float in pesos if the entity issues checks

4. Annual return on the disbursement float

5. Cost of the checking account for the first year

6. Net Advantage or (Disadvantage) of opening the disbursement account

Effective Cost of Trade Payables:

ABC has a major supplier that offers a credit term of 2/15, n/60. Cash can be temporarily invested for a return of 3%.

Required: Compute for the effective rate of the payable for each of the following independent cases:

7. Paying on the 10th day instead of the 60th day (simple)

8.Paying on the 10th day instead of the 60th day (compounded)

9.Paying on the 10th day instead of the 75th (simple)

10.Paying on the 10th day instead of the 75th (compounded)

Effective cost of Shortterm Loan:

ABC would need cash of P5,000,000. Several banks offered different loan conditions. One of the loans has a term of 6 months,

interest of 5%, and compensating balance of P50,000

Required:

11. How much should the face value of the loan be?

12. How much is the simple effective annual interest?

Effective cost of Shortterm Loan:

ABC will be acquiring a P4,000,000 loan from XYZ Bank. 13. The detail are 6month term, 3% interest, P40,000 bank charge

and P50,000 compensating balance.

Required:

13. How much is the compound effective annual interest?