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Working capital management – Cash and funding strategies

Question 6

Miller Orr model

A company uses the Miller Orr cash management model, with the following
figures:

Minimum cash balance: $25,000

Transaction cost: $20 per transaction

Standard deviation of cash flows: $3,000 per day (i.e. variance of cash flows =
2
2
(standard deviation) = $3,000 = $9,000,000 per day
Interest rate: 10.95% per annum (i.e. 0.03% per day)

Use the Miller Orr model to calculate the spread, the return point and the upper
limit.

1/3
Spread = 3 × [0.75 × $20 × $9,000,000/0.0003] = $22,989
Return point = $25,000 + (1/3 × $22,989) = $32,663

Upper limit = $25,000 + $22,989 = $47,989

Illustrations and further practice

Now try TYU questions 3 and 4 from Chapter 10.

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