Baumol's model is not suitable for a firm that experiences:

Question

Quizplus · Accepted Answer

Baumol's model assumes that cash flows are stable and predictable, and therefore may not be suitable for a firm experiencing increasing variability of cash flow. This could result in an inaccurate estimation of optimal cash balance and lead to suboptimal cash management. A high cost of selling securities and low annual cash disbursements may still be compatible with Baumol's model, and a high average cash balance may even suggest that the firm is already implementing the model effectively.

Baumol's Model Is Not Suitable for a Firm That Experiences