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# Miller-Orr Cash Management Approach

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A company uses a Miller-Orr cash management approach with a lower limit of \$50,000, an upper limit of \$130,000, and a target balance of \$75,000. Explain what each of these points represents; then explain how the system will work.

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A company uses a Miller-Orr cash management approach with a lower limit of \$50,000, an upper limit of \$130,000, and a target balance of \$75,000. Explain what each of these points represents; then explain how the system will work.

Lower Limit = \$50,000
Return Point = \$75,000
Lower Limit = \$130,000
According to Miller Orr cash management approach, the cash balance meanders unpredictably until it reaches an upper limit. At this point the firm buys enough securities to return the cash balance to a more normal level. Thus, in this case, the company will wait till the cash balance reaches \$130,000. When it reaches \$130,000, company will buy securities to bring back its level of cash balance at \$75,000.
Once again the cash balance is allowed to meander until this time it hits a lower limit. When it hits \$50,000, the firm sells enough securities to restore the balance to a normal level (\$75,000). Thus the rule is to allow the cash holding to wander freely until it hits an upper or lower limit. When this happens, the firm should buy or sell securities to regain the desired balance.

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