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CS Executive · Corporate Accounting and Financial Management · Working Capital Management

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

The Miller-Orr model assumes irregular, random cash flows and fixes a lower limit, a return point and an upper limit for the cash balance. Securities are bought at the upper limit and sold at the lower limit to restore the return point.

  1. AIt assumes cash flows are random and sets an upper limit, a lower limit and a return pointCorrect
  2. BIt assumes cash outflows are steady and predictable
  3. CIt sets only a single fixed cash balance with no limits
  4. DIt ignores the transaction cost of converting securities

Explanation

Miller-Orr deals with uncertain daily cash flows. Management sets a lower limit, and the model derives a return point and an upper limit. When cash hits the upper limit, securities are bought to return to the return point; at the lower limit, securities are sold. The steady-outflow assumption belongs to Baumol.

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