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1. USING MILLER-ORR(LO2) Slap Shot Corporation has a fixed cost of $40 associated with buying and selling marketable securities. The interest rate is currently .013 percent per day, and the firm has estimated that the standard deviation of its daily net cash flows is $80. Management has set a lower limit of $1,500 on cash holdings. Calculate the target cash balance and upper limit using the Miller-Orr model. Describe how the system will work.

2. INTERPRETING MILLER-ORR(LO2) Based on the Miller-Orr model, describe what will happen to the lower limit, the upper limit, and the spread (the distance between the two) if the variation in net cash flow grows. Give an intuitive explanation for why this happens. What happens if the variance drops to zero?