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

Under the Miller-Orr model, which of the following statements is correct?

In the Miller-Orr model the cash balance may wander between a lower and an upper control limit, and securities are bought or sold only when a limit is reached, returning the balance to the return point. It suits uncertain cash flows, unlike Baumol.

  1. AThe cash balance is allowed to fluctuate between a lower and an upper limit, and action is taken only when a limit is touchedCorrect
  2. BCash is replenished at fixed intervals regardless of balance
  3. CCash needs are assumed to be perfectly predictable and steady
  4. DThe return point is always set at the upper limit

Explanation

Miller-Orr is designed for uncertain, random cash flows. It sets a lower limit, a return point and an upper limit; transactions occur only when the balance hits a limit, and the balance is then restored to the return point. The Baumol model is the one assuming steady, predictable flows.

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