Question

Veggie Burgers, Inc., would like to maintain its cash account at a minimum level of $262,000 but expects the standard deviation in net daily cash flows to be $13,700, the effective annual rate on marketable securities to be 4.0 percent per year, and the trading cost per sale or purchase of marketable securities to be $36.00 per transaction. What will be its optimal cash return point? (Use 365 days a year. Do not round intermediate calculations and round your answer to 2 decimal places.) Optimal cash return point $

Answer 1

Interest Rate on Securities = 4 % per annum or (4/365) = 0.01096 % per day = r

Fixed Cost on Marketable Security Transaction = F = $ 36

Variance in Daily Cash Flow = V = (Standard Deviation)^(2) = (13700)^(2) = $ 187690000

Minimum Cash Balance = M = $ 262000

Optimal Cash Level (Optimal Cash Return Point) as per the Miller-Orr Model:

Cash* = [(3 x F x V) / (4 xr)]^(1/3) + M = [{(3 x 36 x 187690000) / (4 x 0.0001096)}^(1/3) + 262000] = $ 297892.04

Upper Limit on Cash Level = 3 x Optimal Cash Level - 2 x Minimum Cash Balance = 3 x 297892.04 - 2 x 262000 = $ 369676.11