Question 1

**Section A**

RetailCorp requires $2,000,000 in cash over the next year to meet its steady operational needs. The cost of converting marketable securities into cash is $50 per transaction. The annual opportunity cost of holding cash is 5%.

Using the Baumol cash management model, what is the optimal cash conversion amount (to the nearest whole dollar)?

Accepted Answer

Apply the Baumol model formula: Q = square root of [(2 * C * D) / i], where C is transaction cost, D is annual demand, and i is the interest rate.

Question 2

What mistakes do candidates make on this ACCA question?

Accepted Answer

Using a percentage (5) instead of a decimal (0.05) for the interest rate in the denominator.

How to approach this question

Full Answer

Common mistakes

Practice the full ACCA FM — Financial Management Practice Exam 4

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