Miller-orr model, Finance Basics

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

Posted Date: 2/1/2013 2:32:33 AM | Location : United States







Related Discussions:- Miller-orr model, Assignment Help, Ask Question on Miller-orr model, Get Answer, Expert's Help, Miller-orr model Discussions

Write discussion on Miller-orr model
Your posts are moderated
Related Questions
Question 1: (a) What do you meant by the term ‘Life Insurance Contract'? (b) Many people prefer to choose Single life policies compared to Joint life policies. Why is t

Measuring Business Performance Definition Financial analysis is a process via that finance identifies the company's financial performances with comparing the entities in

Task The following information has been extracted from the accounts of R Ltd., a manufacturer and distributor of home cordless phone in Hong Kong.

Do you guys provide Cost of Debentures assignment help. I need writing a report on Cost of Debentures and it is about 2000 words. Let me know. I need to buy your solution.

a debt off Rs1000 with interest at 10% compounded quarterly will be repaid by payments Rs. 200 at the end of 3 months and three equal payments at the end of 6 9 and 12 months. find

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


ADan lives in Duncan, a small town in Arizona. Because of a rare blood disease, Dan is required to take special medical treatments once a month. The closest place these treatments

(a) State the most appropriate drivers for the following direct expenses: (i) New business administration department's salary costs (ii) Medical examinations for temporary life

Limitations of Middle Asia Stock Exchange Index 1. The twenty (20) company's sample whose share prices are utilized to calculate the index are not true representatives. 2.