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

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. 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. Using these inputs, the Miller-Orr model calculates the optimal cash balance to be $32,599.

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