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19Student:
___________________________________________________________________________
1. Yesterday, the president of RB Enterprises received a phone
call from DLK, a competitor. DLK is a sole proprietorship. An
unexpected family situation has caused the owner to suddenly want
to retire and relocate closer to his family. Thus, the assets of
DLK are being offered to RB Enterprises at a bargain basement
price. While RB Enterprises had not anticipated purchasing these
assets, it was decided that the opportunity was too good to pass
up. This illustrates which of the following needs to hold cash?
A. precautionaryB. transactionC. speculativeD. compensationE.
float
2. GT Motors regularly issues short-term debt to finance its
daily operations. Suddenly, the credit markets froze and no funds
were available for borrowing. Fortunately, the firm had some cash
reserves saved that it was able to use to fund its operations until
additional credit was available. The need to retain cash for
situations such as this is referred to as which one of the
following motives for holding cash?
A. speculativeB. floatC. compensatingD. precautionaryE.
transaction
3. The cash found in a cash drawer that a check-out clerk uses
to make change is an example of which of the following motives for
holding cash?
A. speculativeB. daily floatC. compensating balanceD.
precautionaryE. transaction
4. Float is defined as the:
A. amount of cash a firm can immediately withdraw from its bank
account.B. difference between book cash and bank cash.C. change in
a firm's cash balance from one accounting period to the next.D.
amount of cash a firm has on hand.E. cash balance according to a
firm's records.
5. A lockbox is a:
A. special safe used by a firm for overnight storage of any cash
or undeposited checks.B. special safe used by a firm that can only
be opened at prespecified times of the day.C. box located in a
bank's vault that is rented by a firm and used to hold unprocessed
checks.D.
special post office box which can only be opened by prespecified
postal inspectors for direct delivery to the addressee.
E. post office box strategically located so that a firm's
receivables can be collected faster.
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6. The Presque Isle Center has branch operations in three
states. Each branch deals with a local bank. However, all excess
funds in these branch bank accounts are transferred on a daily
basis to the firm's primary bank located near the firm's home
office. This routine of transferring cash to the primary bank on a
regular basis is referred to as:
A. cash concentration.B. strategic cash disbursement.C. transfer
flotation.D. payables management.E. float management.
7. An account into which funds are deposited only in an amount
equal to the value of the checks presented for payment that day is
called a _____ account.
A. lockboxB. concentrationC. zero-balanceD. compensating
balanceE. revolving
8. An account into which a firm transfers funds, usually from a
master account, in an amount sufficient to cover the checks
presented for payment that day is called a _____ account.
A. lockboxB. cleanupC. compensating balanceD. revolvingE.
controlled disbursement
9. The Snow Hut has analyzed the carrying and shortage costs
associated with its cash holdings and determined that the firm
should ideally maintain a cash balance of $3,600. This $3,600
represents which one of the following to the firm?
A. target cash balanceB. concentration balanceC. available
balanceD. selected cash amountE. compensating balance
10. Adjustment costs is another name for which one of the
following?
A. borrowing costsB. shortage costsC. cash transfer costsD. cash
wire costsE. excess cash costs
11. Why do firms need liquidity?
I. to meet compensating balance requirements
II. to take advantage of an opportunity that suddenly arises
III. to conduct daily business activities
IV. to be prepared for a financial emergency
A. I and II onlyB. III and IV onlyC. I, III, and IV onlyD. II,
III, and IV onlyE. I, II, III, and IV
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12. Cash management primarily involves:
A. optimizing a firm's collections and disbursements of cash.B.
maximizing the income a firm earns on its cash reserves.C.
reconciling a firm's book balance with its bank balance.D.
determining the optimal level of liquidity a firm should
maintain.E. determining the best method of raising capital.
13. Disbursements float:
A. occurs when a deposit is recorded but the funds are
unavailable.B. causes the book balance to exceed the bank
balance.C. has tended to increase since the enactment of the Check
Clearing Act for the 21st Century.D. is a recommended source of
funds for short-term investments.E. is eliminated when payments are
made electronically.
14. Collection float:
A. is more desirable to firms than disbursement float.B. is
totally eliminated by the installation of a lockbox system.C.
exists when a firm's available balance exceeds its book balance.D.
can be avoided by collecting payments electronically at the time of
sale.E. is eliminated by implementing a concentration banking
system.
15. Which one of the following statements is correct?
A. Net float decreases every time a firm issues a check to pay
one of its suppliers.B. A positive net float indicates that
collection float exceeds disbursements float.C. Firms prefer a zero
net float over a positive net float.D. Net float is equal to
collection float minus disbursement float.E. Net float is equal to
a firm's available balance minus its book balance.
16. Check kiting is:
A. used by most firms as an ethical means of handling its cash
reserves.B. the process of withdrawing all funds from a bank
account as soon as the funds are available.C. the central core of a
good cash management system.D. using uncollected cash to invest in
short-term, liquid assets.E. increasingly popular due to recent
banking law changes.
17. Which of the following will reduce collection time?
I. billing customers electronically rather than by mail
II. accepting debit cards but not checks as payment for a
sale
III. offering cash discounts for early payment
IV. reducing the processing delay by one day
A. I and II onlyB. I and III onlyC. I, II, and III onlyD. II,
III, and IV onlyE. I, II, III, and IV
18. Which of the following should help reduce the total
collection time for a firm?
I. opening a post office box so mail can be received earlier in
the morning
II. assigning additional staff in the morning to process
incoming payments
III. providing a discount for customers who pay
electronically
IV. establishing preauthorized payments from customers
A. I and II onlyB. III and IV onlyC. II, III, and IV onlyD. I,
II, and IV onlyE. I, II, III, and IV
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19. Which one of the following collection times is correctly
described?
A.
The processing delay starts when a firm mails out a billing
statement and ends when the payment is received from a
customer.
B. Mailing time begins when a firm mails out a billing statement
and ends when the payment is received.C.
Collection time begins when a firm mails out a billing statement
and ends when the cash payment for that billing is available to the
firm.
D.
Availability delay begins when a firm deposits a customer's
check into its bank account and ends when the cash from that
payment is available to the firm.
E.
Processing delay begins when a firm mails out billing statements
and ends when the firm deposits the payment for that statement into
its bank account.
20. A lockbox system:
A. entails the use of a bank which is centrally located to
collect payments on a nationwide basis.B.
is designed to deposit a customer's check into the firm's bank
account prior to recording the receipt of that check to a
customer's account.
C. is used to reduce the disbursement float of a firm.D. is
efficient regardless of the locations selected for lockbox
destinations.E.
automatically records payments to a customer's account when the
customer's check is received at the lockbox location.
21. Lockboxes:
A. should be geographically located close to a firm's primary
customers.B. should be located in remote locations to increase the
net disbursement float.C.
offer no additional benefit to a firm now that the Check
Clearing Act for the 21st Century has been enacted.
D. tend to be negative net present value projects for firms with
a large number of sizeable transactions.E. tend to also be used as
concentration accounts.
22. Cash concentration accounts:
A. tend to increase the funds available for short-term
investing.B. tend to increase the complexity of a firm's cash
management system.C. that utilize wire transfers rather than
automated clearing house transfers are less expensive to
maintain.D. receive checks directly from all of a firm's
customers.E. are all zero-balance accounts.
23. Which one of the following statements is correct?
A. Funds received via automated clearinghouse transfers are
available that day.B.
A depository transfer check is the most costly means of
transferring funds into a cash concentration account.
C.
The means selected to transfer funds into a concentration
account depends primarily upon the size of the transfers.
D. Concentration accounts are used to transfer funds to lockbox
locations as needed.E. The most expedient means of transferring
funds into a concentration account is a wire transfer.
24. A cash concentration account:
A. is frequently used as a source of funds for short-term
investments.B. cannot be used to cover a compensating balance
requirement.C. cannot be used to transfer funds into zero-balance
accounts.D. is generally the only bank account a firm needs to
efficiently manage its cash.E. is another name for a controlled
disbursement account.
25. The main purpose of a cash concentration account is to:
A. decrease collection float.B. decrease disbursement float.C.
consolidate funds.D. replace a lockbox system.E. cover compensating
balance requirements.
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26. Which one of the following statements is correct concerning
a cash management system that employs both lockboxes and a
concentration bank account?
A. All customer payments must be submitted to a lockbox.B.
The party which collects the checks from the lockbox is
responsible for recording the payment on the customer's
account.
C. Payments received in a lockbox are transferred immediately to
the concentration account.D. The firm's cash manager determines how
the funds in the concentration account are disbursed.E. The
concentration account must be zeroed out on a daily basis.
27. A zero-balance account:
A. is used to cover the compensating balance requirement of a
line of credit agreement.B. is only used to deposit funds received
at local lockboxes.C. is funded on an as-needed basis only.D. is
limited to handling payroll disbursements.E. requires a
compensating balance.
28. Which one of the following statements is correct concerning
zero-balance accounts?
A. Each zero-balance account is offset by a compensating balance
account.B. Zero-balance accounts are used for depositing incoming
funds.C. A master account must be used in conjunction with a
zero-balance account.D. Zero-balance accounts are used solely in
conjunction with a lockbox system.E. Zero-balance accounts are
still required to maintain a minimal balance.
29. Which one of the following statements is correct?
A. The money market refers to securities that mature in two
years or less.B. Banks are prohibited from investing cash surpluses
on behalf of their customers on a short-term basis.C. Short-term
securities tend to have a high degree of interest rate risk.D. A
cyclical firm may purchase marketable securities as part of its
short-term financing plan.E.
Corporations are not permitted to invest in money market mutual
funds but can invest in bank money market accounts.
30. Which two of the following are the primary reasons why firms
temporarily accumulate large cash surpluses?
I. cyclical activities
II. desire to invest funds
III. daily operations
IV. fixed asset purchases
A. I and III onlyB. II and IV onlyC. I and II onlyD. III and IV
onlyE. I and IV only
31. Which one of the following statements is correct?
A. Money market accounts are low-risk, high-return
investments.B. The rate of return earned on short-term securities
tends to exceed that earned on long-term securities.C. U.S.
Treasury bills are well suited for short-term investments.D. The
income earned on U.S. Treasury bills is exempt from all taxation.E.
Short-term investments tend to have high levels of default
risk.
32. Municipal bonds:
A. are less liquid than U.S. Treasury bills.B. produce income
that is subject to federal income taxation.C. generally pay a
higher coupon than corporate bonds.D. are also referred to as
commercial paper.E. are issued by the federal government.
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33. Money market securities have which of the following
characteristics?
I. long maturities
II. low default risk
III. high degree of liquidity
IV. low rates of return
A. I and III onlyB. II and III onlyC. I and IV onlyD. II, III,
and IV onlyE. I, II, III, and IV
34. A jumbo CD:
A. is issued by the federal government.B. generally matures
between 2 and 5 years.C. is a loan of $100,000 or more to a
municipality.D. is a loan of $1 million or more on a short-term
basis.E. is a short-term loan of $100,000 or more to a commercial
bank.
35. Brown Trucking is buying a U.S. Treasury bill today with the
understanding that the seller will buy it back tomorrow at a
slightly higher price. This investment is known as a:
A. commercial paper transaction.B. repurchase agreement.C.
private certificate of deposit.D. revenue anticipation note.E. bill
anticipation note.
36. A repurchase agreement generally has a maximum life of:
A. 1 day.B. a few days.C. one month.D. one to three months.E.
three to six months.
37. A money market preferred stock:
A. has a floating dividend.B. is sold only under a repurchase
agreement.C. is a special form of commercial paper.D. has more
price volatility than an ordinary preferred.E. has its interest
rate reset daily.
38. Which of the following costs related to holding cash are
minimized when the level of cash a firm holds is optimized?
A. opportunity costsB. trading costsC. total costsD. both
trading and opportunity costsE. trading costs, opportunity costs,
and total costs
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39. Which of the following statements related to the BAT model
is correct?
I. The BAT model is used to determine the target cash balance
for a firm.
II. The BAT model is rarely used in business due to its complex
nature.
III. The BAT model is a model that helps eliminate a firm's
collection float.
IV. One disadvantage of the BAT model is the fact that it
assumes all cash outflows are known with certainty.
A. I and II onlyB. III and IV onlyC. II and III onlyD. I and III
onlyE. I and IV only
40. Which of the following variables are included in the BAT
model?
I. upper cash limit
II. interest rate on marketable securities
III. opportunity cost of holding cash
IV. fixed cost of each securities trade
A. II onlyB. I and III onlyC. II and IV onlyD. II, III, and IV
onlyE. I, III, and IV only
41. The BAT model is used to:
A. maximize the benefits of leverage.B. determine the optimal
cash position of a firm.C. eliminate all daily cash surpluses.D.
analyze the cash balance given fluctuating cash inflows and
outflows.E. maximize the opportunity costs of holding cash.
42. The Miller-Orr model assumes that:
A. the cash balance is depleted at regular intervals.B. all cash
flows are known with certainty.C. the average change in the daily
cash flows is positive.D. management will set both the lower and
the upper desired levels of cash.E. the cash balance fluctuates in
a random manner.
43. The Miller-Orr model:
A. recommends selling securities in an amount equal to (U* - C)
when the cash balance reaches L.B. requires that marketable
securities be sold whenever the cash balance falls below the target
level.C. bases the optimal level of cash solely on the opportunity
costs of holding cash.D. supports the argument that the target cash
balance declines as order costs increase.E.
advocates investing an amount described as (U* - C) in
marketable securities when the cash balance reaches U*.
44. Which of the following statements is correct?
A.
A firm has a greater likelihood of needing an unexpected loan
when its cash flows are relatively constant over time.
B. The cost of borrowing affects the target cash balance of a
firm.C. Management's desire to maintain a low cash balance has no
effect on the borrowing needs of a firm.D. The target cash balance
increases as the interest rate rises.E. The target cash balance
decreases as the order costs increase.
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45. The Hobby Shop has a checking account with a ledger balance
of $692. The firm has $1,063 in uncollected deposits and $846 in
outstanding checks. What is the amount of the disbursement float on
this account?
A. $0B. $217C. $846D. $909E. $1,063
46. On an average day, Plastics Enterprises writes 42 checks
with an average amount of $587. These checks clear the bank in an
average of 2 days. What is the average amount of the disbursement
float?
A. $1,174B. $5,805C. $24,654D. $49,308E. $73,962
47. On average, your firm receives 62 checks a day from
customers. These checks, on average, are worth $39.90 each and
clear the bank in 1.5 days. In addition, your firm disburses 38
checks a day with an average amount of $89.50. These checks clear
your bank in 2 days. What is the average amount of the collection
float?
A. $2,473.80B. $3,401.00C. $3,710.70D. $5,101.50E. $6,802.00
48. When Chris balanced her business checkbook, she had an
adjusted bank balance of $11,418. She had 2 outstanding deposits
worth $879 each and 11 checks outstanding with a total value of
$3,648. What is the amount of the collection float on this
account?
A. -$1,890B. $1,758C. $3,648D. $5,406E. $6,012
49. Your company has an available balance of $7,911. A deposit
of $2,480 that was made this morning is not yet included in the
bank's balance. There are also 4 checks outstanding with a value of
$325 each. What is the net float?
A. net collection float of $1,180B. net collection float of
$2,480C. net float of $6,731D. net disbursement float of $1,300E.
net disbursement float of $2,480
50. A firm has $16,718 in outstanding checks that have not
cleared the bank. The firm also has $13,450 in deposits that have
been recorded by the firm but not by the bank. The current
available balance is $11,407. What is the status of the net
float?
A. net collection float of $8,138B. net collection float of
$2,043C. net collection float of $13,450D. net disbursement float
of $3,268E. net disbursement float of $5,311
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51. Your firm generally receives 4 checks a month. The check
amounts and the collection delay for each check is shown below.
Given this information what is the amount of the average daily
float? Assume a 30 day month.
A. $1,070B. $2,333C. $2,640D. $2,900E. $3,416
52. Hoyes Lumber generally receives 3 checks a month. The check
amounts and the collection delay for each check are shown below.
Given this information, what is the amount of the average daily
float? Assume each month has 30 days.
A. $1,386.67B. $1,407.19C. $4,750.00D. $6,833.33E. $6,933.33
53. The Blue Star generally receives only 3 checks a month. The
check amounts and the collection delay for each check are shown
below. Given this information, what is the amount of the average
daily float? Assume every month has 30 days.
A. $971.43B. $1,456.67C. $3,351.33D. $5,666.67E. $6,800.00
54. The Food Wholesaler generally receives 4 checks a month. The
check amounts and the collection delay for each check are shown
below. Given this information, what is the amount of the average
daily float? Assume every month has 30 days.
A. $3,963.89B. $21,750.00C. $22,236.67D. $28,133.33E.
$35,675.00
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55. Hot Tub Builders sells to three retail outlets. Each
retailer pays once a month in the amounts shown below. The
collection delay associated with each payment is also given below.
What is the amount of the average daily receipts if you assume each
month has 30 days?
A. $2,389.70B. $8,190.00C. $14,608.13D. $23,896.97E.
$81,900.00
56. Atlas Builders deals strictly with five customers. The
average amount each customer pays per month along with the
collection delay associated with each payment is shown below. Given
this information, what is the amount of the average daily receipts?
Assume every month has 30 days.
A. $1,143.33B. $2,546.67C. $2,983.33D. $6,166.67E. $6,860.00
57. National Exporters deals strictly with two customers. The
average amount each customer pays per month along with the
collection delay associated with each payment is shown below. Given
this information, what is the amount of the average daily receipts?
Assume that every month has 30 days.
A. $2,653.33B. $3,006.33C. $5,306.67D. $7,811.67E. $8,600.00
58. Cross Country Trucking provides transportation services
exclusively for four customers. The average amount each customer
pays per month along with the collection delay associated with each
payment is shown below. Given this information, what is the
weighted average delay? Assume each month has 30 days.
A. 2.11 daysB. 2.27 daysC. 2.46 daysD. 2.50 daysE. 2.78 days
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59. High Brow Express deals strictly with two customers. The
average amount each customer pays per month along with the
collection delay associated with each payment is shown below. Given
this information, what is the weighted average delay? Assume that
every month has 30 days.
A. 1.79 daysB. 1.84 daysC. 2.00 daysD. 2.07 daysE. 2.16 days
60. The Metallurgical Specialty Co. deals strictly with four
customers. The average amount each customer pays per month along
with the collection delay associated with each payment is shown
below. Given this information, what is the weighted average delay?
Assume each month has 30 days.
A. 1.98 daysB. 2.04 daysC. 2.09 daysD. 2.16 daysE. 2.23 days
61. On an average day, Goose Down Feathers receives $2,400 in
checks from customers. These checks clear the bank in an average of
1.7 days. The applicable daily interest rate is 0.04 percent. What
is the present value of the float? Assume each month has 30
days.
A. $115.20B. $618.40C. $2,400.00D. $4,080.00E. $4,256.50
62. On an average day, Town Center Hardware receives $2,420 in
checks from customers. These checks clear the bank in an average of
2.1 days. The applicable daily interest rate is 0.025 percent. What
is the maximum amount this store should pay to completely eliminate
its collection float? Assume each month has 30 days.
A. $1,152.38B. $1,288.15C. $2,109.16D. $4,637.33E. $5,082.00
63. On an average day, your firm receives $11,800 in checks from
customers. These checks clear the bank in an average of 2.1 days.
The applicable daily interest rate is 0.015 percent. What is the
highest daily fee your firm should pay to completely eliminate the
collection float? Assume each month has 30 days.
A. $3.42B. $3.72C. $17.78D. $34.18E. $37.20
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64. On an average day, Wilson & Wilson receives $7,800 in
checks from customers. These checks clear the bank in an average of
1.7 days. The applicable daily interest rate is 0.022 percent. What
is the highest daily fee this firm should pay to completely
eliminate its collection float? Assume each month has 30 days.
A. $1.72B. $2.92C. $17.20D. $24.30E. $29.17
65. Your average customer is located 4.3 mailing days away from
your firm. You have determined that, on average, it is taking your
staff 1.5 days to process payments received from customers. In
addition, it takes an average of 2.2 days for your funds to be
available for use once you have made your bank deposit. What is
your firm's collection time?
A. 2.2 daysB. 3.7 daysC. 4.3 daysD. 5.8 daysE. 8.0 days
66. It takes your firm 4.5 days to prepare and mail out all the
monthly statements to your customers. On average, the mail time
between your firm and your customers is 2.6 days. Customer checks
take an average of 1.8 days to clear the bank. You have determined
that your total average collection time is 6.1 days. How long, on
average, does it take your firm to process the payments from
customers?
A. 1.7 daysB. 2.6 daysC. 4.4 daysD. 4.8 daysE. 6.2 days
67. Currently, your firm requires 2 days to process the checks
which customers mail in to pay for their credit purchases. The
average mail time associated with these payments is 2.3 days and
the check clearing time is 2.1 days. If your firm adopts a lockbox
system, the mail time will be cut in half. In addition, if
employees are reassigned, checks could be processed the same day
they are received. How long will your collection time be if both
the lockbox system and the job reassignments are implemented?
A. 3.85 daysB. 4.10 daysC. 4.25 daysD. 4.40 daysE. 4.55 days
68. You are considering implementing a lockbox system for your
firm. The system is expected to reduce the average collection time
by 1.2 days. On an average day, your firm receives 320 checks with
an average value of $99 each. The daily interest rate on Treasury
bills is 0.014 percent. What is the anticipated amount of the daily
savings if this system is implemented?
A. $2.61B. $3.29C. $4.45D. $5.32E. $5.78
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69. Roger's Distributors receives an average of 216 checks a
day. The average amount per check is $629. The firm is considering
a lockbox system which it anticipates will reduce the average
collection time by 1.5 days. The daily interest rate on Treasury
bills is 0.011 percent. What is the amount of the expected daily
savings of the lockbox system?
A. $2.04B. $6.92C. $14.95D. $18.10E. $22.42
70. Hand Tools, Inc. receives an average of 611 checks a day.
The average amount per check is $425. The firm is considering a
lockbox system which it anticipates will reduce the average
collection time by 1 day. The bank charges $0.275 a check for this
service. The daily interest rate on Treasury bills is 0.013
percent. What is the average daily cost of the lockbox system?
A. $31.16B. $54.19C. $168.03D. $180.11E. $199.19
71. You are considering implementing a lockbox system for your
firm. The system is expected to reduce the average collection time
by 1.3 days. On an average day, your firm receives 136 checks with
an average value of $219 each. The daily interest rate on Treasury
bills is 0.021 percent. The bank charge per check is $0.22. What is
the anticipated daily cost of the lockbox system?
A. $3.48B. $6.25C. $12.60D. $29.92E. $36.17
72. You are considering implementing a lockbox system for your
firm. The system is expected to reduce the average collection time
by 2.8 days. On an average day, your firm receives 2,419 checks
with an average value of $1,287 each. The daily interest rate on
Treasury bills is 0.016 percent. The bank charge per check is
$0.30. What is the net present value of this lockbox
arrangement?
A. -$4,535,625B. -$2,611,575C. $187,419D. $4,181,483E.
$13,252,733
73. Rosewell International receives an average of 268 checks a
day with an average amount per check of $820. The firm is
considering a lockbox system which it anticipates will reduce the
average collection time by 1.4 days. The bank charges $0.21 a check
for this service. The daily interest rate on Treasury bills is 0.02
percent. What is the net present value of this lockbox
arrangement?
A. -$61,640B. -$26,264,C. $26,264D. $30,820E. $61,640
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74. The Eliot Co. needs $185,000 a week to pay bills. The
standard deviation of the weekly disbursements is $17,600. The firm
has established a lower cash balance limit of $75,000. The
applicable interest rate is 5.5 percent and the fixed cost of
transferring funds is $47. Based on the BAT model, what is the
optimal initial cash balance?
A. $90,668B. $97,515C. $104,141D. $128,224E. $136,509
75. Theo's Bar & Grill needs $147,000 a week to pay bills.
The standard deviation of the weekly disbursements is $9,600. The
firm has established a lower cash balance limit of $40,000. The
applicable interest rate is 3.5 percent and the fixed cost of
transferring funds is $45. Based on the BAT model, what is the
optimal average cash balance?
A. $36,199B. $49,568C. $70,100D. $99,136E. $112,400
76. Parkway Express needs $318,000 a week to pay bills. The
standard deviation of the weekly disbursements is $31,000. The firm
has established a lower cash balance limit of $60,000. The
applicable interest rate is 4.5 percent and the fixed cost of
transferring funds is $65. Based on the BAT model, what is the
opportunity cost of holding cash?
A. $3,873B. $4,918C. $5,207D. $109,283E. $110,440
77. Penco Supply spends $428,000 a week to pay bills and
maintains a lower cash balance limit of $75,000. The standard
deviation of its disbursements is $18,900. The applicable interest
rate is 5 percent and the fixed cost of transferring funds is $65.
What is the firm's optimal initial cash balance based on the BAT
model?
A. $150,600B. $158,929C. $170,096D. $221,506E. $240,553
78. Your firm spends $54,000 a week to pay bills and maintains a
lower cash balance limit of $45,000. The standard deviation of your
disbursements is $12,100. The applicable interest rate is 4.5
percent and the fixed cost of transferring funds is $55. What is
your opportunity cost of holding cash based on the BAT model?
A. $1,318B. $1,864C. $2,204D. $2,311E. $3,709
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79. Rosie O'Grady's spends $98,000 a week to pay bills and
maintains a lower cash balance limit of $95,000. The standard
deviation of the disbursements is $14,600. The applicable interest
rate is 4.8 percent and the fixed cost of transferring funds is
$50. What is this firm's total cost of holding cash based on the
BAT model?
A. $1,431B. $2,862C. $3,034D. $4,912E. $4,946
80. Your firm spends $346,000 a week to pay bills and maintains
a lower cash balance limit of $150,000. The standard deviation of
your disbursements is $28,700. The applicable interest rate is 5
percent and the fixed cost of transferring funds is $60. What is
your optimal average cash balance based on the BAT model?
A. $103,900B. $146,500C. $182,200D. $207,800E. $249,900
81. The Cow Pie Spreader Co. spends $214,000 a week to pay bills
and maintains a lower cash balance limit of $175,000. The standard
deviation of the disbursements is $16,000. The applicable weekly
interest rate is 0.025 percent and the fixed cost of transferring
funds is $49. What is the firm's cash balance target based on the
Miller-Orr model?
A. $208,511B. $247,560C. $251,006D. $254,545E. $258,878
82. The Blue Moon Hotel and Spa spends $359,000 a week to pay
bills and maintains a lower cash balance limit of $250,000. The
standard deviation of the disbursements is $46,800. The applicable
weekly interest rate is 0.045 percent and the fixed cost of
transferring funds is $60. What is the hotel's optimal upper cash
limit based on the Miller-Orr model?
A. $430,836B. $447,905C. $528,700D. $739,459E. $861,672
83. Donaldson, Inc. spends $94,000 a week to pay bills and
maintains a lower cash balance limit of $50,000. The standard
deviation of the disbursements is $13,000. The applicable weekly
interest rate is 0.045 percent and the fixed cost of transferring
funds is $52. What is your optimal average cash balance based on
the Miller-Orr model?
A. $78,778B. $82,623C. $231,969D. $236,334E. $247,868
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84. The Burger Stop spends $52,000 a week to pay bills and
maintains a lower cash balance limit of $60,000. The standard
deviation of the disbursements is $7,500. The applicable weekly
interest rate is 0.04 percent and the fixed cost of transferring
funds is $50. What is your optimal average cash balance based on
the Miller-Orr model?
A. $79,116B. $83,208C. $110,315D. $237,348E. $249,624
85. Your firm spends $48,000 a week to pay bills and maintains a
lower cash balance limit of $50,000. The standard deviation of the
disbursements is $8,600. The applicable weekly interest rate is
0.054 percent and the fixed cost of transferring funds is $65. What
is your cash balance target based on the Miller-Orr model?
A. $48,156B. $49,990C. $54,884D. $68,830E. $75,726
86. Travel Inn Express spends $109,000 a week to pay bills and
maintains a lower cash balance limit of $125,000. The standard
deviation of the disbursements is $14,400. The applicable weekly
interest rate is 0.039 percent and the fixed cost of transferring
funds is $58. What is the inn's cash balance target based on the
Miller-Orr model?
A. $28,492B. $31,359C. $153,492D. $156,359E. $225,417
87. Explain how a lockbox system operates and why a firm might
consider implementing such a system.
88. Explain how the Check Clearing Act for the 21st Century
affects both collection and disbursement float.
89. Explain how the unethical use of uncollected funds has been
impacted by the growth of on-line retailing and banking.
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90. Float management systems may provide only minimal benefits
to a firm. Given that most firms have other projects with higher
positive net present values, why should a firm's managers spend
time implementing a float management system?
91. Explain what a zero-balance account is, how it is used, and
how it affects cash management.
92. Each business day, on average, a company writes checks
totaling $26,000 to pay its suppliers. The usual clearing time for
the checks is 5 days. Meanwhile, the company is receiving payments
from its customers each day, in the form of checks, totaling
$40,000. The cash from the payments is available to the firm after
2 days. What is the amount of the firm's average net float?
A. $30,00B. $50,000C. $80,000D. $110,000E. $130,000
93. Purple Feet Wine, Inc. receives an average of $6,000 in
checks per day. The delay in clearing is typically 3 days. The
current interest rate is 0.025 percent per day. Assume 30 days per
month. What is the highest daily fee the company should be willing
to pay to eliminate its float entirely?
A. $1.50B. $3.00C. $3.75D. $4.50E. $6.00
94. Your neighbor goes to the post office once a month and picks
up two checks, one for $18,000 and one for $4,000. The larger check
takes 4 days to clear after it is deposited; the smaller one takes
6 days. Assume 30 days per month. What is the weighted average
delay?
A. 4.21 daysB. 4.36 daysC. 4.78 daysD. 5.00 daysE. 6.00 days
95. Your firm has an average receipt size of $60. A bank has
approached you concerning a lockbox service that will decrease your
total collection time by 1 day. You typically receive 28,000 checks
per day. The daily interest rate is 0.016 percent. What is the NPV
of the lockbox project if the bank charges a fee of $210 per
day?
A. $367,500B. $427,500C. $903,350D. $1,412,500E. $1,680,000
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96. A mail-order firm processes 5,000 checks per month. Of
these, 55 percent are for $55 and 45 percent are for $65. The $55
checks are delayed 2 days on average; the $65 checks are delayed 5
days on average. Assume each month has 30 days. The interest rate
is 6 percent per year. How much should the firm be willing to pay
to reduce the weighted average float by 1.4 days?
A. $4,165B. $13,883C. $41,650D. $138,883E. $416,500
97. Paper Submarine Manufacturing is investigating a lockbox
system to reduce its collection time. It has determined the
following:
The total collection time will be reduced by 2 days if the
lockbox system is adopted. What is the NPV of adopting the lockbox
system?
A. $600,000B. $775,000C. $975,000D. $1,200,000E. $1,425,000
98. Home Roasted Turkeys disburses checks every 4 weeks that
average $70,000 and take 5 days to clear. How much interest can the
company earn if it delays transfer of funds from an
interest-bearing account that pays 0.02 percent per day for these 5
days? Ignore the effects of compound interest. Assume 52 weeks in a
year.
A. $36B. $91C. $182D. $364E. $910
99. Never Again Enterprises has an agreement with The Worth Bank
whereby the bank handles $3.12 million in collections a day and
requires a $1,000,000 compensating balance. Never Again is
contemplating canceling the agreement and dividing its eastern
region so that two other banks will handle its business. Banks A
and B will each handle $1.56 million of collections a day, and each
requires a compensating balance of $1,550,000. Never Again's
financial management expects that collections will be accelerated
by one day if the eastern region is divided. The T-bill rate is 5
percent annually. What is the amount of the annual net savings if
this plan is adopted?
A. $10,200B. $51,000C. $76,500D. $102,000E. $125,000
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100.Mountaintop Inns, a Kentucky company, has determined that a
majority of its customers are located in the Pennsylvania area. It
therefore is considering using a lockbox system offered by a bank
located in Pittsburgh, Pennsylvania. The bank has estimated that
use of the system will reduce collection time by one day. In
addition to the variable charge shown below, there is also a fixed
charge of $4,320 per year for the lockbox system. Assume a year has
365 days. What is the NPV of the lockbox system given the following
information?
A. -$156,727B. -$131,301C. -$74,208D. $11,507E. $26,433
101.Cow Chips, Inc., a large fertilizer distributor based in
California, is planning to use a lockbox system to speed up
collections from its customers located on the East Coast. A
Philadelphia-area bank will provide this service for an annual fee
of $25,000 plus 10 cents per transaction. The estimated reduction
in collection and processing time is one day. The average customer
payment in this region is $8,200. Treasury bills are currently
yielding 5 percent per year. Assume a year has 365 days.
Approximately how many customers each day, on average, are needed
to make the system profitable for Cow Chips, Inc.?
A. 56B. 67C. 74D. 83E. 89
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19 Key 1. C
2. D
3. E
4. B
5. E
6. A
7. C
8. E
9. A
10. B
11. E
12. A
13. E
14. D
15. E
16. D
17. E
18. E
19. D
20. B
21. A
22. A
23. C
24. A
25. C
26. D
27. C
28. C
29. D
30. E
31. C
32. A
33. D
34. E
35. B
36. B
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37. A
38. C
39. E
40. D
41. B
42. E
43. E
44. B
45. C
46. D
47. C
48. B
49. A
50. D
51. A
52. A
53. B
54. C
55. B
56. A
57. C
58. C
59. E
60. E
61. D
62. E
63. B
64. B
65. E
66. A
67. C
68. D
69. E
70. C
71. D
72. D
73. C
74. D
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75. C
76. B
77. E
78. B
79. E
80. A
81. A
82. A
83. B
84. B
85. D
86. C
Feedback: Refer to section 19.387. A lockbox system entails
opening post office boxes in various geographic locations. These
locations are selected such that they are close to the firm's key
customers. At each of those sites, a representative from a local
bank collects the incoming checks and deposits them into the firm's
account. The information on the deposits is forwarded to the firm
so customer accounts can be credited for the payments. The firm
transfers funds from these remote bank accounts into one or more
centralized bank accounts on a routine basis. A lockbox system
reduces mailing and processing times, and creates a one-time cash
inflow for the firm.
Feedback: Refer to section 19.288. Check 21 eliminated the need
to present an original check to the check writer's bank to receive
payment. Now, the bank receiving the check as a deposit can
electronically transmit a copy of the check to the check writer's
bank and receive immediate payment. This reduces both collection
and disbursement float times.
Feedback: Refer to section 19.289. Whenever cash is moved
electronically, both collection and disbursement float disappears.
Reducing float limits the ability of a firm to earn income by
investing uncollected cash.
Feedback: Refer to section 19.290. Students should explain that
any project with a positive net present value adds value to the
overall firm and should be implemented. Generally speaking, the
majority of employee or management time required by a float
management system is spent on the implementation of the system.
Once the system is in place, management and employee time required
for float management tends to be rather minimal.
Feedback: Refer to section 19.491. A zero-balance account is a
checking account which is frequently used either for payroll or
accounts payable purposes. Funds are transferred from a master
account into the zero-balance account only as needed to cover
checks presented for payment. All excess funds are held in the
master account. By concentrating the firm's safety stock of cash in
one account, the firm can better utilize its funds.
92. B
93. D
94. B
95. A
96. B
97. E
98. E
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99. B
100. B
101. B
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19 Summary Category # of Questions
AACSB: Analytic 52AACSB: Ethics 1AACSB: N/A 43AACSB: Reflective
thinking 4AACSB: Reflective thinking and Ethics 1Difficulty: Basic
84Difficulty: Intermediate 17EOC #: 19-10 1EOC #: 19-11 1EOC #:
19-12 1EOC #: 19-2 1EOC #: 19-3 1EOC #: 19-4 1EOC #: 19-5 1EOC #:
19-6 1EOC #: 19-7 1EOC #: 19-9 1Learning Objective: 19-1 37Learning
Objective: 19-2 32Learning Objective: 19-3 32Ross - Chapter 19
101Section: 19.1 5Section: 19.2 32Section: 19.3 28Section: 19.4
5Section: 19.5 9Section: 19.A 22Topic: Adjustment costs 1Topic:
Average daily float 5Topic: Average daily receipts 3Topic: BAT
model 10Topic: Cash balance 1Topic: Cash concentration 6Topic: Cash
management 1Topic: Check Clearing Act for the 21st Century 1Topic:
Collection float 3Topic: Collection time 6Topic: Controlled
disbursement account 1Topic: Cost of float 3Topic: Disbursement
float 3Topic: Ethical issue 1Topic: Float 1Topic: Internet banking
1Topic: Lockbox 3Topic: Lockbox daily cost 2Topic: Lockbox daily
savings 2Topic: Lockbox net present value 2Topic: Lockbox NPV
3Topic: Lockbox systems 1Topic: Management of cash surplus 2Topic:
Maximum daily fee 2Topic: Miller-Orr model 8Topic: Motives for
liquidity 1
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Topic: Net float 4Topic: NPV of float management 1Topic: NPV of
float reduction 1Topic: Precautionary motive 1Topic: Short-term
securities 7Topic: Speculative motive 1Topic: Target cash balance
2Topic: Transaction motive 1Topic: Transactions required 1Topic:
Value of delay 1Topic: Weighted average delay 4Topic: Zero-balance
accounts 4