Sigma Plus Corporation Has a Variance of Daily Cash Flow

question 1

Essay

Sigma Plus Corporation has a variance of daily cash flow of $8. The daily interest rate is.021% (.00021). Sigma desires a minimum cash balance of $80. The fixed cost of a security transaction is $2.00. Using the Miller-Orr model, calculate Sigma's target cash balance, the upper limit on cash balances, and the average daily cash balance. Explain how this is used to manage cash.

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Definitions:

Equity Beta

A metric that measures the volatility of a stock or portfolio in relation to the overall market; a measure of systemic risk.

Capital Structure

The mix of debt and equity that a company uses to finance its operations and growth.

Unlevered Cost

The cost of an investment that does not include the impact of borrowing; essentially the expense borne without considering the effect of leverage.

Targeted Cost

The desired or estimated cost of a product or project, set in order to achieve competitiveness and profitability objectives.