1. (OPTIMAL CASH BALANCE) The Mapera Corporation plans to have P1 million in steady cash outlays
for next year. The firm believes that it will face an opportunity interest rate of 15 percent and will
incur a cost of P200 each time it borrows (or withdraws).
Required: using the Baumol model
1) Determine the transactions demand for cash (the optimal borrowing or withdrawal lot size) for
Mapera Company
2) What will be the cash cycle for the firm (in days) ?
3) What will be the average cash balance for the firm?
4) Compute the relevant cost of cash balance
1) Optimum cash balance
Annual cash demand P1,oo0,000
Optimum cash balance
√
2(P1,000,000 x P200)/0.15 P51,640
2) Average cash balance P51,640/2 P25,820
3) Number of cash transfer P1,000,000/P51,640 19.36 times
4) Total relevant cost:
Transaction cost: (19.36 x P200) = P3,873
Carrying cost: (P25,820 x 0.15) = P3,873 P7,746
2. (OPTIMAL CASH BALANCE) North Corp. has two dates where it receives cash inflows: June 15 and
November 15. On each of these dates, it expects to receive P80 million in revenues. Cash
expenditures are expected to be steady throughout the subsequent 6 months. Presently, the return on
investment in marketable securities is 8 percent per annum, and the cost of transfer from securities
to cash is P125 each time a transfer occurs.
Required:
1) What is the optimal transfer size using the Baumol model? What is the average cash balance?
2) What would be your answer if the return on investment were 12 percent per annum and the
transfer cost were P75?
Optimum cash balance
Annual cash demand P80,000,000 x 2 P160,oo0,000
Optimum cash balance
√
2(P160,000,000 x P125)/0.08 P707,107
Average cash balance P707,107/2 P353,553.5
Number of cash transfer P160,000,000/P707,107 226.27 times
Total relevant cost:
Transaction cost: (226.27 x P125) = P28,284
Carrying cost: (P353,553.5 x 0.08) = P28,284 P56,568
Optimum cash balance
Annual cash demand P80,000,000 x 2 P160,oo0,000
Optimum cash balance
√
2(P160,000,000 x P75)/0.12 P447,214
Average cash balance P447,214/2 P223,607
Number of cash transfer P160,000,000/P447,214 357.77 times
Total relevant cost:
Transaction cost: (357.77 x P75) = P26,833
Carrying cost: (P223,607 x 0.12) = P26,833 P53,666
3. (NET FLOAT). On a typical day, Trojan Corp. writes P10,000 in checks. It generally takes four days
for those checks to clear. Each day, the firm typically receives P10,000 in checks that takes three
days to clear. What is the firm’s average net float?
Net float: (P10,000 x 4) – (P10,000 x 3)
P40,000 - P30,000
= P10,000
