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CA Intermediate · Financial Management and Strategic Management · Treasury and Cash Management

Under the Miller-Orr model, a firm sets the lower limit at Rs 50,000. The spread between upper and lower limits is computed as Rs 90,000. What are the upper limit and the return point?

The upper limit is lower limit plus spread, Rs 50,000 + Rs 90,000 = Rs 1,40,000. The return point is lower limit plus one-third of the spread, Rs 50,000 + Rs 30,000 = Rs 80,000.

  1. AUpper limit Rs 1,40,000; return point Rs 80,000Correct
  2. BUpper limit Rs 1,40,000; return point Rs 1,10,000
  3. CUpper limit Rs 90,000; return point Rs 80,000
  4. DUpper limit Rs 1,40,000; return point Rs 95,000

Explanation

Upper limit = lower limit + spread = 50,000 + 90,000 = Rs 1,40,000. Return point = lower limit + spread/3 = 50,000 + 30,000 = Rs 80,000. Adding half the spread gives Rs 95,000 and is wrong; adding two-thirds gives Rs 1,10,000, also wrong.

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