Question
As the chief financial officer for ABC Company, you have to deal with unpredictable and large receipts and disbursements. Your company has adopted the use
As the chief financial officer for ABC Company, you have to deal with unpredictable and large receipts and disbursements. Your company has adopted the use of the Miller-Orr model for management of checking balances. The variance of daily net cash flows is $14,392,000. The cost of making a purchase or sale of marketable securities is $170, and the rate you earn on marketable securities is 8%. Your company wishes to maintain a minimum balance in the checking account of $11,000.
a. Calculate the return point given by the Miller-Orr model (6 points).
b. Calculate the average balance in the checking account if the Miller-Orr model is used (6 points).
c. State the action that would be taken if the checking balance is $9,027 at the end of the day. Give a precise description including the dollar amount of any transfer (8 points).
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