The Baumol model is based on the following assumptions: - The cash is used evenly over a period of time. - The cash requirements of the firm are known with certainty in advance. - The transaction cost is known and is constant. - By holding the cash balances, the firm would incur the opportunity cost of interest forgone by not investing in marketable securities. The rate of carrying cost is known and is assumed to be constant. - The short term marketable securities can be freely bought and sold.