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PEMBELANJAAN PEMBELANJAAN PERUSAHAANPERUSAHAAN
PEMBELANJAAN PEMBELANJAAN PERUSAHAANPERUSAHAAN
LECTURE 3a– LECTURE 3a– CASH CONVERSIONCASH CONVERSION
PP/MB-IPB/10 22
Cash Conversion ModelsCash Conversion Models
These models are used to help determine the These models are used to help determine the optimal optimal
quantity of marketable securities to convert into cash when quantity of marketable securities to convert into cash when
neededneeded (and vice versa). (and vice versa).
The cash conversion quantity depends on:The cash conversion quantity depends on:
- the - the fixed costfixed cost of transferring funds between cash and marketable of transferring funds between cash and marketable
securities, securities,
- the rate of - the rate of interestinterest, ,
- the firms - the firms demanddemand for cash. for cash.
Objective: Objective: to balance the costs and benefitsto balance the costs and benefits of holding cash of holding cash
versus investing in marketable securities.versus investing in marketable securities.
PP/MB-IPB/10 33
Cash Conversion ModelsCash Conversion Models
The The Baumol modelBaumol model is a simple approach that provides for is a simple approach that provides for
cost-efficient cash balances by determining the optimal cost-efficient cash balances by determining the optimal
cash conversion quantity.cash conversion quantity.
The firm manages its cash inventory by calculating two The firm manages its cash inventory by calculating two
costs:costs:
the the cost of convertingcost of converting marketable securities into cash and vice marketable securities into cash and vice
versa, andversa, and
the the cost of holdingcost of holding cash rather than marketable securities. cash rather than marketable securities.
Baumol Model
PP/MB-IPB/10 44
Cash Conversion ModelsCash Conversion Models
The Baumol model may be written as shown in The Baumol model may be written as shown in
Equation below:Equation below:
Baumol Model
ECQ = Economic Conversion Quantity