Miller-orr model, Finance Basics

Assignment Help:

Miller-Orr Model

Unlike the Baumol's Model, Miller-Orr Model is a stochastic or like probabilistic model that creates the more realistic assumption of doubt in cash flows.

Merton Miller and Daniel Orr assumed such the distribution of daily total cash flows is around normal.  Each day, the total cash flow could be the expected value of some lower and higher value drawn from a usual distribution.  Consequently, the daily net cash tags a trendless alternatively walk. From the graph underneath, the Miller-Orr Model sets lower and higher control units, H and L respectively, and an objective cash balance, Z.  Whenever the cash balance reaches H as like point A then H-Z shillings are transferred from cash to marketable securities.  Correspondingly, when the cash balance hits L or like on point B then Z-L shillings are transferred from marketable securities cash.

The Lower Limit is generally set via management. The target balance is given via the given formula as:

Z = [3B δ2 / 4i] 1/3 + L

And the highest limit, H, is given via as:

H = 3Z - 2L

The average cash balance = (4Z - L) / 3

 Whereas:  Z = target cash balance

                  L = Lower Limit

                  H = Upper Limit

                  b = Fixed transaction costs

                  δ² = variance of net daily cash flows

                  i = Opportunity cost on daily basis


Related Discussions:- Miller-orr model

What is the impact of c on interest rates, Comments : The approved budget f...

Comments : The approved budget for 1997, reduced government spending in housing and urban development, health and human service, and education. Ignoring any other modifications, ho

Management of inventories, Management of Inventories Manufacturing fir...

Management of Inventories Manufacturing firms contains three major kinds of inventories as: Work-in-progress Finished goods inventory Raw materials The firm

#title. EM13545112., Define benefit plan for the employee participants

Define benefit plan for the employee participants

Short term fianacing, discuss the three approaches to the short -term finan...

discuss the three approaches to the short -term financing problem and provide relevant examples of each.

IS LM, After carefully reading all the available information, prepare a two...

After carefully reading all the available information, prepare a two page (double-spaced) essay and answer the following questions: Assume that we have the following data: C=100+0.

#title.financial leverage., Evaluate the importance of leverage of financia...

Evaluate the importance of leverage of financial management of a small scale company

Factors to increasing the profitability of a business, Factors contribute t...

Factors contribute to increasing the profitability of a business Several other factors contribute to increasing the profitability of a business. For companies that are highly d

Financial statement, Review the budget below and answer the questions follo...

Review the budget below and answer the questions following the budget. FINANCIAL ACCOUNTING—STATEMENT OF REVENUE AND EXPENSES Statement of Revenue and Expenses for Group Practice f

Cash management techniques, Cash Management Techniques The basic strat...

Cash Management Techniques The basic strategies that must be employed via the business firm in managing its cash are as: i) To pay account payables as behind as possible wi

Weighted average cost of capital, Weighted Average Cost of Capital We...

Weighted Average Cost of Capital Weighted Average Cost of Capital or WACC is also called the overall or composite cost of capital. Since various capital components have diffe

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd