Your firm spends $21,000 a week to pay bills and maintain a lower cash balance limit of $20,000. The standard deviation of the disbursements is $5,000. The applicable weekly interest rate is.065 % and the fixed cost of transferring funds is $45. What is your cash balance target based on the Miller-Orr model?

Question

Quizplus · Accepted Answer

The Miller-Orr model suggests a cash balance target of $30,908. This is calculated as the sum of the lower cash balance limit ($20,000) and the safety stock, which is equal to the product of the standard deviation of disbursements ($5,000) and the square root of the ratio of the fixed cost of transferring funds ($45) to the applicable weekly interest rate (.065%).

Your Firm Spends $21,000 a Week to Pay Bills and Maintain