Using the Miller-Orr model, a firm sets its lower cash limit at ₹ 50,000. The cost per transaction in marketable securities is ₹ 200, the variance of daily net cash flows is ₹ 40,00,000 (in rupees squared) and the daily interest rate is 0.03%. The return point is closest to:

Correct answer: A) ₹ 62,599

Explanation

Spread = 3 x [(3/4) x transaction cost x variance / daily interest rate]^(1/3) = 3 x [0.75 x 200 x 40,00,000 / 0.0003]^(1/3) = 3 x (2 x 10^12)^(1/3) = 3 x 12,599.2 = ₹ 37,798. Return point = lower limit + spread/3 = 50,000 + 12,599 = ₹ 62,599. The upper limit is 50,000 + spread = ₹ 87,798.