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Question - The management of the Book Warehouse Company wishes to apply the Miller-Orr model to manage its cash investment. They have determined that the cost of either investing in or selling marketable securities is $100. By looking at Book Warehouse's past cash needs, they have determined that the variance of daily cash flows is $20,000. Book Warehouse's opportunity cost of cash, per day, is estimated to be 0.03%. Based on experience, management has determined that the cash balance should never fall below $10,000.
Required -
1. How much is the cost per transaction?
2. How much is the upper limit based on the Miller-Orr model of cash management?
3. How much is the return point based on the Miller-Orr model of cash management?
4. How much is the lower limit based on the Miller-Orr model of cash management?
5. How much is the opportunity cost of cash, per day?
6. How much is the variance of daily cash flows?
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