Asked by Clara Candelario on Jul 14, 2024
Verified
Your firm spends $35,000 a week to pay bills and maintain a lower cash balance limit of $10,000. The standard deviation of the disbursements is $7,000. The applicable weekly interest rate is.055 % and the fixed cost of transferring funds is $40. What is your cash balance target based on the Miller-Orr model?
A) $10,156
B) $12,990
C) $18,884
D) $23,878
E) $25,726
Miller-Orr Model
A financial model used to manage cash balances by setting upper and lower limits on cash reserves within which no financing is needed.
Cash Balance Target
A financial strategy that involves setting a specific amount of cash reserves that a company aims to maintain to meet future expenses, emergencies, or investment opportunities.
Interest Rate
The fee a lender imposes on a borrower for utilizing assets, represented as a percentage of the principal amount.
- Evaluate the significance of the BAT and Miller-Orr models in determining the ideal cash equilibrium and overseeing cash operations.
Verified Answer
JB
Jaspreet BoyalJul 18, 2024
Final Answer :
D
Explanation :
The Miller-Orr Model calculates the target cash balance using the formula: Target Cash Balance = Lower Limit + (3/4 * Transaction Cost * Variance of Cash Flows / Interest Rate)^1/3. Plugging in the given values: Lower Limit = $10,000, Transaction Cost = $40, Variance of Cash Flows = $7,000^2 = $49,000,000, and Interest Rate = 0.055%. Converting the interest rate to a decimal gives 0.00055. Substituting these values into the formula gives a target cash balance of approximately $23,878.
Learning Objectives
- Evaluate the significance of the BAT and Miller-Orr models in determining the ideal cash equilibrium and overseeing cash operations.