How frequently woll ll itpl lhpimo 26. Your firm\'s management of its cash posit

Question

How frequently woll ll itpl lhpimo 26. Your firm's management of its cash position is based on the Miller-Orr model. The weekely standard deviation of the disbursements is $8.600. The applicable weekly interest rate is 0.054 percent and the fixed cost of transferring funds is S65. Suppose your firm's target cash balance. C 68,830 (i) What lower cash balance limit (L) is consistent with this information. (i)i Find U", the firm's implied maximum cash balance limit. (l Find our fimv over time (iv)Using your answer to part (ii), find the average dollar cost incurred by the firm from holding cash over a two-week period.

Explanation / Answer

As per Miller-Orr model:

Target Cash balance C*=L+((3/4)*F*(V/R))^(1/3)

L=minimum cash balance

F=Fixed cost of transferring funds=$65

V=Variance of cash flow per period=(standard deviation ^2)=(8600^2)=8600*8600

R=Opportunity cost= weekly interest rate=0.054%=0.00054

C*=Target cash balance=68,830

68,830=L+((3/4)*65*((8600*8600)/0.00054))^(1/3)=L+ $ 18,830.39

Lower cash balance limit=68830-18830=$50,000

.(i) Lower cash balance limit=$50,000

U=Implied maximum cash balance limit=3C*-2L

U=(3*68830)-(2*50000)

        U= $ 106,490

.(ii)Implied maximum cash balance limit=$106,490

Average Cash Balance held over time=(4C*-L)/3

Average Cash Balance held over time=((4*68830)-50000)/3= $ 75,107

.(iii) Average Cash Balance held over time=$75,107

(iv)Average dollar cost incurred by the firm from holding cash over a two week period

Interest rate for two week period=0.00054*2=0.00108

Average Cash balance=$75,107

Average dollar cost incurred by the firm from holding cash over a two week period=75107*0.00108= $ 81.12

Related Questions

Navigate

• Browse (All)
• Browse H
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.