Gold Star Ltd and Silver Star Ltd both manage their cash flows according to the Miller–Orr model. Gold Star’s daily cash flow is controlled between

£95,000 and £205,000, whereas Silver Star’s daily cash flow is controlled between

£120,000 and £230,000. The annual interest rates Gold Star and Silver Star can get are 5.8 per cent and 6.1 per cent, respectively, and the costs per transaction of trading securities are

£2,800 and £2,500, respectively.

(a) What are their respective target cash balances?

(b) Which firm’s daily cash flow is more volatile?