The management of the Book Warehouse Company wishes to apply the Miller-Orr model to manage its cash investment. They have determined that the cost of either investing in or selling marketable securities is $100. By looking at Book Warehouse’s past cash needs, they have determined that the variance of daily cash flows is $20,000. Book Warehouse’s opportunity cost of cash, per day, is estimated to be 0.03%. Based on experience, management has determined that the cash balance should never fall below $10,000. Calculate the lower limit, the return point, and the upper limit based on the Miller-Orr model of cash management.
1. The management of the Book Warehouse Company wishes to apply the Miller-Orr model to manage its cash investment.
They have determined that the cost of either investing in or selling marketable securities is $100.
By looking at Book Warehouse’s past cash needs, they have determined that the variance of daily cash flows is $20,000.
Book Warehouse’s opportunity cost of cash, per day, is estimated to be 0.03%.
Based on experience, management has determined that the cash balance should never fall below $10,000.
Calculate the lower limit, the return point, and the upper limit based on the Miller-Orr model of cash management.
2. The Seminole Company wishes to apply the Miller-Orr model to manage its cash investment.
Seminole’s management has determined that the cost of either investing in or selling marketable securities is $200.
By looking at Seminole Company’s past cash needs, they have determined that the variance of daily cash flows is $10,000.
Seminole Company’s opportunity cost of cash, per day, is estimated to be 0.05%.
Seminole management has figured, based on their experience dealing with the cash flows of the company,
that there should be a cushion— a safety stock—of cash of $20,000.
3. Buccaneer, Inc., has determined that it needs $10 million in cash per week.
If Buccaneer needs additional cash, it can sell marketable securities, incurring a fee of $100 for each transaction.
If Buccaneer leaves funds in its marketable securities, it expects to earn approximately 0.2% per week on their investment.
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