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

Which of the following is a feature of the Miller-Orr model of cash management that distinguishes it from the Baumol model?

The Miller-Orr model uses upper and lower control limits and a return point to manage cash when daily flows are random and unpredictable. Baumol, by contrast, assumes steady certain outflows. Transaction costs and opportunity costs both feature in the Miller-Orr formula.

  1. AIt assumes cash outflows are steady and certain
  2. BIt sets upper and lower control limits with a return point, allowing for random daily cash flowsCorrect
  3. CIt ignores transaction costs of converting securities
  4. DIt requires cash balance to be zero at each period end

Explanation

Miller-Orr deals with uncertain, random cash flows by fixing a lower limit, a return point and an upper limit. Baumol assumes steady, predictable usage, so the first option describes Baumol, not Miller-Orr. Transaction costs are included in Miller-Orr.

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