The economic order quantity (EOQ) formula can be adapted in order for a firm to determine the optimal split between cash and marketable securities. Th... Accounting MCQs | Accounting MCQs

The economic order quantity (EOQ) formula can be adapted in order for a firm to determine the optimal split between cash and marketable securities. The EOQ model assumes all of the following except that

The cost of a transaction is independent of the dollar amount of the transaction.
Interest rates are constant over the short run.
There is an opportunity cost associated with holding cash, beginning with the first dollar.
Cash flow requirements are random.Show Result

Correct - Your answer is correct.

Wrong - Your answer is wrong.

Detailed Answer

Answer (D) is correct. The EOQ formula is a deterministic model that requires a known demand for inventory or, in this case, the amount of cash needed. Thus, the cash flow requirements cannot be random. The model also assumes a given carrying (interest) cost and a flat transaction cost for converting marketable securities to cash, regardless of the amount withdrawn.