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    Question

    The 'Baumol Model' in financial management is used for

    determining the:
    A Optimal level of inventory. Correct Answer Incorrect Answer
    B Optimal cash balance under conditions of certainty. Correct Answer Incorrect Answer
    C Optimal credit policy. Correct Answer Incorrect Answer
    D Optimal debt-equity mix. Correct Answer Incorrect Answer

    Solution

    The Baumol Model is a cash management model that applies the Economic Order Quantity (EOQ) concept to cash balances. It helps determine the optimal amount of cash a firm should hold by balancing the opportunity cost of holding cash (foregone interest) against the transaction cost of converting securities to cash.

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