Joe's Burgers would like to maintain their cash account at a minimum level of $300,000, but expects the standard deviation in net daily cash flows to be $20,000; the effective annual rate on marketable securities to be 5.2 percent per year; and the trading cost per sale or purchase of marketable securities to be $22.55 per transaction. What will be their optimal upper cash limit?
A)$320,000.00
B)$336,492.68
C)$409,478.04
D)$1,009,478.04

Question

Quizplus · Accepted Answer

The optimal upper cash limit can be calculated using the Miller-Orr model. The formula for the upper limit is: Upper Limit = Lower Limit + 3 * (Transaction Cost * Variance of Cash Flows / Interest Rate)^(1/3). Plugging in the values: Lower Limit = $300,000, Transaction Cost = $22.55, Variance = $20,000^2, Interest Rate = 0.052/365, we find the upper limit to be approximately $409,478.04.

Joe's Burgers Would Like to Maintain Their Cash Account at a Minimum