Daycor Metals spends $68,000 a week to pay bills and maintain a lower cash balance limit of $15,000. The standard deviation of the disbursements is $12,000. The applicable weekly interest
Rate is .055 percent 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 * (3 * Transaction Cost * Variance of Cash Flows / Interest Rate)^(1/3)). Plugging in the values: Lower Limit = $15,000, Transaction Cost = $40, Variance = $12,000^2, Interest Rate = 0.00055, the target cash balance is approximately $34,878.

Daycor Metals Spends $68,000 a Week to Pay Bills and Maintain