Problem 6. The assistant treasurer of Monroe Tires, Inc., is trying to determine what the appropriate cash return level should be. The companys cash balances have been fluctuating wildly because of unpredictable and wide-ranging and disbursements. The best estimate of annual disbursements is $5,000,000. The investment broker charges $75 per securities transaction. Short-term investment interest rates are 12 percent. The company does not mind a $0 cash balance but does not want the balance to be negative.

9. Conduct a Miller-Orr analysis using the data in problem 6 but with a lower cash limit of $5,000.

1. What Should the cash return level be, using the Miller-Orr model?
2. What is your estimate of the average cash balance if the Miller-Orr calculation is used to set the cash return level?
3. How do you explain your finding in part a to the assistant treasurer, who wants to know how to use the information provided by the model?
4. If the variance of daily net cash flows is $10,000,000 instead of $5,000,000, how does this change the answer determined in part a? Is the cash return level double your earlier result? How do you interpret this?

Problems J. WASHAM CALCULATORS 2007 $75 ASSUMPTIONS (current assets shaded) ( Cash & Equivalents Accounts Receivable Inventory Net Fixed Assets Total Assets 2008 $75 400 BALANCE SHEETS 2009 2010 $90 $100 600 550 2011 $100 500 300 150 250 350 250 250 525 575 610 $1,650 540 $1,440 $1,050 $1,300 465 $1,315 $250 $225 $200 (current liabilities shaded) Accounts Payable Notes Payable Accrued Operating Exp. Long-Term Debt $125 165 $175 162 178 136 99 161 76 60 500 165 300 89 100 400 50 Cash Holdings 65 402 890.2 Shareholders Equity Total Liabilities & NW & 200 $1,050 7572 $1,650 890.2 $1,315 $1,300 $1,440 $2,250 $1,500 600 INCOME STATEMENTS $3,000 $2,000 $1,500 1,200 800 600 900 Revenues (Sales) Cost of Goods Sold Operating Expenses Depreciation Interest 600 797 895 750 725 35 50 65 70 75 30 33 28 25 10 36 188 142 94 141 325 4872 213 Taxes Net Profit Dividends 54 282 80 40 132 80 54