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?

Question

Quizplus · Accepted Answer

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.

Your Firm Spends $35,000 a Week to Pay Bills and Maintain