Happy Feet would like to maintain their cash account at a minimum level of $75,000, but expects the standard deviation in net daily cash flows to be $5,000, the effective annual rate on marketable securities to be 7 percent per year, and the trading cost per sale or purchase of marketable securities to be $150 per transaction. What will be their optimal cash return point?
A) $80,000.00
B) $99,755.64
C) $76,593.42
D) $82,548.18

Question

Quizplus · Accepted Answer

The optimal cash return point can be calculated using the Miller-Orr model. The formula for the return point is: Return Point = Minimum Cash Balance + (1/3 * Spread). The Spread is calculated as: Spread = (3/4 * (3 * Transaction Cost * Variance of Cash Flows / Interest Rate)^(1/3)). Using the given values, the optimal cash return point is approximately $99,755.64.

Happy Feet Would Like to Maintain Their Cash Account at a Minimum