ACCA FM · Chapter 5 · Question 2 of 10
A company uses the Miller-Orr model. The minimum cash balance is $20,000, the cost of each transaction in securities is $50, the standard deviation of daily cash flows is $4,000 and the interest rate is 7.3% a year (365-day year). What is the upper limit for the cash balance (to the nearest $)?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: D) $63,267
Explanation
Daily interest rate = 7.3% / 365 = 0.02%. Variance = 4,000^2 = 16,000,000. Spread = 3 x (0.75 x 50 x 16,000,000 / 0.0002)^(1/3) = 3 x (3,000,000,000,000)^(1/3) = 3 x 14,422.5 = $43,267. Upper limit = $20,000 + $43,267 = $63,267 (to the nearest $). A common error is to use the standard deviation instead of the variance.
More Cash management and working capital funding MCQs
- Q4Under the Miller-Orr cash management model, what action should a company take when its cash balance reaches the upper limit?
- Q5Which of the following is the main purpose of preparing a cash budget?
- Q6Which of the following describes an aggressive working capital funding policy?
- Q7What is meant by 'permanent current assets'?
- Q8Compared with an aggressive policy, which of the following is a consequence of adopting a conservative working capital funding policy?