Question

variance of daily net cash flows = 500,000

short term inv. rates = 1.75%

transaction costs = $100
annual cash disbursements = 14,709,000

firm préfère minimum cash position = 25,000

use miller-Orr to determine value for z*, the return point, and upper control lim.

Answer 1

Miller Orr model is used in businesses with uncertain cash flows. It uses upper and lower limits and allows the business to attain target level of cash.

K = Interest rate/365 = 1.75%/365 = 0.0057945%

Here K is daily opportunity cost

Spread = 3 [ (3/4)(Transaction cost)(Variance cash flow)/K ]^(1/3)

= 3 [ (3/4)($100)($500,000)/(0.0057945%) ]^(1/3)

= 3 [ 647,165,415,480 ]^(1/3)

= 3 (8,649.77998)

= 25,949 (rounded off)

Return point (z) = safety cash + (1/3)(Spread)

= 25,000 + (1/3)(25,949)

= $33,650 (rounded off)

Upper limit = safety cash + Spread

= 25,000 + 25,949

= $50,949