Question

HotFoot Shoes would like to maintain its cash account at a minimum level of $42,000 but expects the standard deviation in net daily cash flows to be $3,700, the effective annual rate on marketable securities to be 2.8 percent per year, and the trading cost per sale or purchase of marketable securities to be $370 per transaction.

What will be its optimal upper cash limit? (Use 365 days a year. Do not round intermediate calculations. Round your final answer to 2 decimal places.)

Optimal upper cash limit

$

Answer 1

Given Variance Daily Cash Transaction Cost Daily interest (2.8%/365) = || minimum level 3700 $ 370 $ 0.0000767 42000 Solution We know that as per miller-ore model upper limit is Lower limit + 37, where z is represented as:- Za [ 3* Transaction Cost x variance 3 X Transaction Cost X Variance 4X1 ] } ZE 4107000 0.0003068 NN 13384419643 ^ 0.33 2374.29 $ Upper Limit = minimum limit + 3z 49122.86 $ Hence, Optimal upper cash limit is 49122.86$