BullsNBears, a purveyor of financial databases, estimates it they disburses $440,000 monthly in order to pay bills. The firm's opportunity rate is 5%. The fixed cost of transferring money is $25 per transfer. Based on historical data, the standard deviation of monthly cash flows is $15,000 and the lower cash balance limit is $20,000. For Miller-Orr model questions, assume the interest rate is 0.5% per month.

Using the Miller-Orr model, what is the average cash balance?

Question

Using the Miller-Orr model, what is the average cash balance?

Quizplus · Accepted Answer

The average cash balance is $32,599. The Miller-Orr model is used to determine the optimal cash balance for a firm. The model takes into account the firm's opportunity cost of holding cash, the fixed cost of transferring money, and the standard deviation of monthly cash flows. The optimal cash balance is the level of cash that minimizes the total cost of holding cash and transferring money. In this case, the firm's opportunity cost is 5%, the fixed cost of transferring money is $25, and the standard deviation of monthly cash flows is $15,000. The optimal cash balance is $32,599.

BullsNBears, a Purveyor of Financial Databases, Estimates It They Disburses