UGC NET COMMERCE June 2019 Q32
0. Miller-Orr model is used in the management of:
- Option : D
- Explanation : The Miller-Orr Model (Miller and Orr, 1966), for cash management improves on Baumol’s economic order quantity model (EOQ) methodology in significant ways. Miller and Orr start with the assumption that the firm has only two forms of assets: cash and marketable securities. The model allows for cash balance movement in both positive and negative directions and it can state the optimal cash balance as a range of values, rather than a single-point estimate. This makes the model especially useful for firms with unpredictable day-to-day cash inflows and outflows.
While the Miller-Orr model is an improvement over the EOQ model, it too makes some assumptions. The most important is the assumption that cash flows are random, which in many cases is not completely valid. Under certain circumstances and at particular times of the year, consecutive periods’ cash flows may be dependent upon one another, the volatility of net cash flow may sharply increase, or cash balances may demonstrate a definite trend. The frequency and extent of these events will affect the Miller-Orr model’s effectiveness. Actual tests using daily cash flow for various firms indicate that the model minimizes cash holding costs as well as or better than the intuitive decisions of these firms’ financial managers. However, others studies have shown that simple rules of thumb have performed just as well. Still, the Miller- Orr model is valuable because of the insight it offers concerning the forces that influence a firm’s optimal cash balance.
