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PEMBELANJAAN PEMBELANJAAN PERUSAHAANPERUSAHAAN

PEMBELANJAAN PEMBELANJAAN PERUSAHAANPERUSAHAAN

LECTURE 3a– LECTURE 3a– CASH CONVERSIONCASH CONVERSION

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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.

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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

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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

PP/MB-IPB/10

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