SSI Inc. has hired you as a consultant to analyze their cash management policy and suggest the most efficient parameters. They have estimated their current daily variance of net cash flow to be $40,000. Their bank requires them to maintain a minimum compensating balance in their account of $1,000. They have negotiated a fixed transaction cost with their broker of $15 per transaction and they are currently able to earn an annual return of 5% on their investment in marketable securities.

Compute their optimal cash balance target (C^*), optimal upper bound (U^*) and lower bound (L), as well as the average cash balance (ACB) that they will have on hand so that you can also tell them their annual opportunity cost of maintaining the average cash balance.

C^* =

U^* =

L =

ACB =

Annual

Opportunity =

Cost ($)

Provide one reason why the Miller-Orr Model is more realistic than the BAT Model.