Question 2

( 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 marks]
2. Calculate the targeted cash balance for the firm [4 marks]
3. The upper limit of cash balance and the average cash balance. [3 marks]
4. State the amount of short-term securities to be purchased or sold once the upper limit or lower limit is reach. [2 marks]
5. How would you evaluate this approach to cash management? [4 marks]