Your firm spends $82,000 a week to pay bills and maintains a lower cash balance limit of $40,000. The standard deviation of the disbursements is $8,000. The applicable weekly interest rate is.07 % and the fixed cost of transferring funds is $55. 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 + (1/3 * (3/4 * Fixed Cost * Variance of Cash Flows / Interest Rate)^(1/3)). Plugging in the values: Lower Limit = $40,000, Fixed Cost = $55, Variance = $8,000^2, Interest Rate = 0.0007, we get the target cash balance as approximately $55,564.

Your Firm Spends $82,000 a Week to Pay Bills and Maintains