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

Which statement about the Miller-Orr cash management model is correct?

The spread between the upper and lower limits widens when the variability of daily cash flows rises. The Miller-Orr spread formula contains the variance of net cash flows under a cube root, so greater uncertainty needs a wider band, while the model assumes random flows.

  1. AIt assumes cash flows are perfectly predictable each day
  2. BThe spread between upper and lower limits widens when the variability of daily cash flows increasesCorrect
  3. CThe return point is always equal to the upper limit
  4. DCash is converted into securities whenever the balance touches the lower limit

Explanation

The Miller-Orr spread is 3 × (3/4 × transaction cost × variance / interest rate)^(1/3), so it rises with variance. The model assumes random cash flows, not predictable ones. The return point lies between the limits, and at the lower limit securities are sold to restore cash, not purchased.

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