( Miller-Orr model of cash management)

Alpha Ltd standard deviation () of the daily cash balance during the last year was $500, and the transaction cost was $5. The company also has the opportunity to invest idle cash in marketable securities at an annual interest rate of 10%.

Required

1. Determine the daily opportunity cost ( interest rate) and the variance of daily cash flow
2. Calculate the targeted cash balance for the firm
3. The upper limit of cash balance and the average cash balance.
4. State the amount of short-term securities to be purchase or sold once the upper limit or lower limit is reach.
5. How would you evaluate this approach to cash management?