Chapter 19
Cash and Liquidity Management
Multiple Choice Questions
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. precautionary
B. transaction
C. speculative
D. compensation
E. 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. speculative
B. float
C. compensating
D. precautionary
E. 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. speculative
B. daily float
C. compensating balance
D. precautionary
E. 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.
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. lockbox
B. concentration
C. zero-balance
D. compensating balance
E. 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. lockbox
B. cleanup
C. compensating balance
D. revolving
E. 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 balance
B. concentration balance
C. available balance
D. selected cash amount
E. compensating balance
10. Adjustment costs is another name for which one of the following?
A. borrowing costs
B. shortage costs
C. cash transfer costs
D. cash wire costs
E. 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 only
B. III and IV only
C. I, III, and IV only
D. II, III, and IV only
E. I, II, III, and IV
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 only
B. I and III only
C. I, II, and III only
D. II, III, and IV only
E. 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 only
B. III and IV only
C. II, III, and IV only
D. I, II, and IV only
E. I, II, III, and IV
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.
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 only
B. II and IV only
C. I and II only
D. III and IV only
E. 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.
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 only
B. II and III only
C. I and IV only
D. II, III, and IV only
E. 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 costs
B. trading costs
C. total costs
D. both trading and opportunity costs
E. trading costs, opportunity costs, and total costs
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 only
B. III and IV only
C. II and III only
D. I and III only
E. 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 only
B. I and III only
C. II and IV only
D. II, III, and IV only
E. 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.
45. The Hobby Shop has a checking account with a ledger balance of $692. The firm
has $1,063 in uncollected deposits and $930 in outstanding checks. What is the
amount of the disbursement float on this account?
A. $0
B. $217
C. $930
D. $990
E. $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. $1,174
B. $5,805
C. $24,654
D. $49,308
E. $73,962
47. On average, your firm receives 65 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. $2,473.80
B. $3,401.00
C. $3,890.25
D. $5,101.50
E. $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. -$1,890
B. $1,758
C. $3,648
D. $5,406
E. $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 $360 each. What is the net float?
A. net collection float of $1,040
B. net collection float of $2,480
C. net float of $6,731
D. net disbursement float of $1,300
E. 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 $8,138
B. net collection float of $2,043
C. net collection float of $13,450
D. net disbursement float of $3,268
E. net disbursement float of $5,311
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. $1,120
B. $2,333
C. $2,640
D. $2,900
E. $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. $1,386.67
B. $1,407.19
C. $4,750.00
D. $6,833.33
E. $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. $971.43
B. $1,376.67
C. $3,351.33
D. $5,666.67
E. $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. $3,963.89
B. $21,750.00
C. $22,236.67
D. $28,133.33
E. $35,675.00
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. $2,389.70
B. $8,513.33
C. $14,608.13
D. $23,896.97
E. $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. $1,143.33
B. $2,546.67
C. $2,983.33
D. $6,166.67
E. $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. $2,653.33
B. $3,006.33
C. $4,533.33
D. $7,811.67
E. $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 days
B. 2.27 days
C. 2.46 days
D. 2.50 days
E. 2.78 days
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 days
B. 1.84 days
C. 2.00 days
D. 2.07 days
E. 2.55 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 days
B. 2.04 days
C. 2.09 days
D. 2.16 days
E. 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 2.2 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. $115.20
B. $618.40
C. $4,080.00
D. $5,280.00
E. $6,256.50
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. $1,152.38
B. $1,288.15
C. $2,109.16
D. $4,637.33
E. $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 2.8 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. $3.72
B. $4.96
C. $17.78
D. $34.18
E. $37.20
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. $1.72
B. $2.92
C. $17.20
D. $24.30
E. $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 2.8 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 days
B. 3.7 days
C. 4.3 days
D. 5.8 days
E. 8.6 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 days
B. 2.6 days
C. 4.4 days
D. 4.8 days
E. 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 3.4 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 days
B. 4.10 days
C. 4.80 days
D. 4.90 days
E. 5.55 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. $2.61
B. $3.29
C. $4.45
D. $5.32
E. $5.78
69. Roger's Distributors receives an average of 310 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. $2.04
B. $6.92
C. $14.95
D. $22.42
E. $32.17
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. $31.16
B. $54.19
C. $168.03
D. $180.11
E. $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
$0.26. What is the anticipated daily cost of the lockbox system?
A. $3.48
B. $6.25
C. $12.60
D. $35.36
E. $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. -$4,535,625
B. -$2,611,575
C. $187,419
D. $4,181,483
E. $13,252,733
73. Rosewell International receives an average of 268 checks a day with an average
amount per check of $780. 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. -$61,640
B. -$11,256
C. $11,256
D. $30,820
E. $61,640
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. $90,668
B. $97,515
C. $104,141
D. $128,224
E. $136,509
75. Theo's Bar & Grill needs $153,000 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 $40. Based on the BAT model, what is the optimal
average cash balance?
A. $36,199
B. $49,568
C. $67,426
D. $99,136
E. $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. $3,873
B. $4,918
C. $5,207
D. $109,283
E. $110,440
77. Penco Supply spends $325,000 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. $150,600
B. $158,929
C. $170,096
D. $221,506
E. $209,619
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. $1,318
B. $1,864
C. $2,204
D. $2,311
79. Rosie O'Grady's spends $115,000 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. $1,431
B. $2,862
C. $3,034
D. $4,912
E. $5,358
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. $103,900
B. $146,500
C. $182,200
D. $207,800
E. $249,900
81. The Cow Pie Spreader Co. spends $214,000 a week to pay bills and maintains a
lower cash balance limit of $150,000. 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. $183,511
B. $208,511
C. $251,006
D. $254,545
E. $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. $430,836
B. $447,905
C. $528,700
D. $739,459
E. $861,672
83. Donaldson, Inc. spends $94,000 a week to pay bills and maintains a lower cash
balance limit of $25,000. 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. $48,334
B. $57,623
C. $82,623
D. $236,334
E. $247,334
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. $79,116
B. $83,208
C. $110,315
D. $237,348
E. $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 $8,100. 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. $48,156
B. $49,990
C. $54,884
D. $68,093
E. $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. $28,492
B. $31,359
C. $153,492
D. $156,359
E. $225,417
87. 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. $30,00
B. $50,000
C. $80,000
D. $110,000
E. $130,000
88. Purple Feet Wine, Inc. receives an average of $6,000 in checks per day. The
delay in clearing is typically 4 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. $1.50
B. $3.00
C. $3.75
D. $6.00
E. $6.50
89. 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 days
B. 4.36 days
C. 4.78 days
D. 5.00 days
E. 6.00 days
90. 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 25,000 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. $187,500
B. $367,500
C. $903,350
D. $1,412,500
E. $1,680,000
91. 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. $4,165
B. $13,883
C. $41,650
D. $138,883
E. $416,500
92. 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. $600,000
B. $675,000
C. $695,000
D. $745,000
E. $795,000
93. 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. $36
B. $91
C. $182
D. $364
E. $910
94. 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 4 percent annually. What is the amount of the
annual net savings if this plan is adopted?
A. $10,200
B. $40,800
C. $76,500
D. $102,000
E. $125,000
95. 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. -$156,727
B. -$131,301
C. -$74,208
D. $11,507
E. $26,433
96. 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 12 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. 56
B. 68
C. 74
D. 83
E. 89
Essay Questions
97. Explain how a lockbox system operates and why a firm might consider
implementing such a system.
98. Explain how the Check Clearing Act for the 21st Century affects both collection
and disbursement float.
99. Explain how the unethical use of uncollected funds has been impacted by the
growth of on-line retailing and banking.
100.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?
101.Explain what a zero-balance account is, how it is used, and how it affects cash
management.
Chapter 19 Cash and Liquidity Management Answer Key
Multiple Choice Questions
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. precautionary
B. transaction
C. speculative
D. compensation
E. float
Refer to section 19.1
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 19-01 The importance of float and how it affects the cash balances.
Section: 19.1
Topic: Speculative motive
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. speculative
B. float
C. compensating
D. precautionary
E. transaction
Refer to section 19.1
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 19-01 The importance of float and how it affects the cash balances.
Section: 19.1
Topic: Precautionary motive
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. speculative
B. daily float
C. compensating balance
D. precautionary
E. transaction
Refer to section 19.1
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 19-01 The importance of float and how it affects the cash balances.
Section: 19.1
Topic: Transaction motive
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.
Refer to section 19.2
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 19-01 The importance of float and how it affects the cash balances.
Section: 19.2
Topic: Float
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.
Refer to section 19.3
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 19-02 How firms manage their cash and some of the collection; concentration; and disbursement
techniques used.
Section: 19.3
Topic: Lockbox
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.
Refer to section 19.3
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 19-02 How firms manage their cash and some of the collection; concentration; and disbursement
techniques used.
Section: 19.3
Topic: Cash concentration
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. lockbox
B. concentration
C. zero-balance
D. compensating balance
E. revolving
Refer to section 19.4
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 19-02 How firms manage their cash and some of the collection; concentration; and disbursement
techniques used.
Section: 19.4
Topic: Zero-balance accounts
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. lockbox
B. cleanup
C. compensating balance
D. revolving
E. controlled disbursement
Refer to section 19.4
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 19-02 How firms manage their cash and some of the collection; concentration; and disbursement
techniques used.
Section: 19.4
Topic: Controlled disbursement account
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 balance
B. concentration balance
C. available balance
D. selected cash amount
E. compensating balance
Refer to section 19.A
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 19-03 The advantages and disadvantages to holding cash and some of the ways to invest idle cash.
Section: 19.A
Topic: Target cash balance
10.
Adjustment costs is another name for which one of the following?
A. borrowing costs
B. shortage costs
C. cash transfer costs
D. cash wire costs
E. excess cash costs
Refer to section 19.A
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 19-03 The advantages and disadvantages to holding cash and some of the ways to invest idle cash.
Section: 19.A
Topic: Adjustment 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 only
B. III and IV only
C. I, III, and IV only
D. II, III, and IV only
E. I, II, III, and IV
Refer to section 19.1
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 19-01 The importance of float and how it affects the cash balances.
Section: 19.1
Topic: Motives for liquidity
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.
Refer to section 19.1
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 19-01 The importance of float and how it affects the cash balances.
Section: 19.1
Topic: Cash management
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.
Refer to section 19.2
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 19-01 The importance of float and how it affects the cash balances.
Section: 19.2
Topic: Disbursement float
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.
Refer to section 19.2
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 19-01 The importance of float and how it affects the cash balances.
Section: 19.2
Topic: Collection float
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.
Refer to section 19.2
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 19-01 The importance of float and how it affects the cash balances.
Section: 19.2
Topic: Net float
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.
Refer to section 19.2
AACSB: Ethics
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 19-01 The importance of float and how it affects the cash balances.
Section: 19.2
Topic: Ethical issue
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 only
B. I and III only
C. I, II, and III only
D. II, III, and IV only
E. I, II, III, and IV
Refer to section 19.3
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 19-02 How firms manage their cash and some of the collection; concentration; and disbursement
techniques used.
Section: 19.3
Topic: Collection time
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 only
B. III and IV only
C. II, III, and IV only
D. I, II, and IV only
E. I, II, III, and IV
Refer to section 19.3
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 19-02 How firms manage their cash and some of the collection; concentration; and disbursement
techniques used.
Section: 19.3
Topic: Collection time
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.
Refer to section 19.3
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 19-02 How firms manage their cash and some of the collection; concentration; and disbursement
techniques used.
Section: 19.3
Topic: Collection time
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.
Refer to section 19.3
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 19-02 How firms manage their cash and some of the collection; concentration; and disbursement
techniques used.
Section: 19.3
Topic: Lockbox
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.
Refer to section 19.3
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 19-02 How firms manage their cash and some of the collection; concentration; and disbursement
techniques used.
Section: 19.3
Topic: Lockbox
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.
Refer to section 19.3
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 19-02 How firms manage their cash and some of the collection; concentration; and disbursement
techniques used.
Section: 19.3
Topic: Cash concentration
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.
Refer to section 19.3
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 19-02 How firms manage their cash and some of the collection; concentration; and disbursement
techniques used.
Section: 19.3
Topic: Cash concentration
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.
Refer to section 19.3
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 19-02 How firms manage their cash and some of the collection; concentration; and disbursement
techniques used.
Section: 19.3
Topic: Cash concentration
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.
Refer to section 19.3
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 19-02 How firms manage their cash and some of the collection; concentration; and disbursement
techniques used.
Section: 19.3
Topic: Cash concentration
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.
Refer to section 19.3
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 19-02 How firms manage their cash and some of the collection; concentration; and disbursement
techniques used.
Section: 19.3
Topic: Cash concentration
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.
Refer to section 19.4
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 19-02 How firms manage their cash and some of the collection; concentration; and disbursement
techniques used.
Section: 19.4
Topic: Zero-balance accounts
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.
Refer to section 19.4
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 19-02 How firms manage their cash and some of the collection; concentration; and disbursement
techniques used.
Section: 19.4
Topic: Zero-balance accounts
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.
Refer to section 19.5
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 19-03 The advantages and disadvantages to holding cash and some of the ways to invest idle cash.
Section: 19.5
Topic: Management of cash surplus
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 only
B. II and IV only
C. I and II only
D. III and IV only
E. I and IV only
Refer to section 19.5
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 19-03 The advantages and disadvantages to holding cash and some of the ways to invest idle cash.
Section: 19.5
Topic: Management of cash surplus
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.
Refer to section 19.5
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 19-03 The advantages and disadvantages to holding cash and some of the ways to invest idle cash.
Section: 19.5
Topic: Short-term securities
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.
Refer to section 19.5
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 19-03 The advantages and disadvantages to holding cash and some of the ways to invest idle cash.
Section: 19.5
Topic: Short-term securities
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 only
B. II and III only
C. I and IV only
D. II, III, and IV only
E. I, II, III, and IV
Refer to section 19.5
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 19-03 The advantages and disadvantages to holding cash and some of the ways to invest idle cash.
Section: 19.5
Topic: Short-term securities
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.
Refer to section 19.5
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 19-03 The advantages and disadvantages to holding cash and some of the ways to invest idle cash.
Section: 19.5
Topic: Short-term securities
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.
Refer to section 19.5
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 19-03 The advantages and disadvantages to holding cash and some of the ways to invest idle cash.
Section: 19.5
Topic: Short-term securities
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.
Refer to section 19.5
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 19-03 The advantages and disadvantages to holding cash and some of the ways to invest idle cash.
Section: 19.5
Topic: Short-term securities
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.
Refer to section 19.5
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 19-03 The advantages and disadvantages to holding cash and some of the ways to invest idle cash.
Section: 19.5
Topic: Short-term securities
38.
Which of the following costs related to holding cash are minimized when the
level of cash a firm holds is optimized?
A. opportunity costs
B. trading costs
C. total costs
D. both trading and opportunity costs
E. trading costs, opportunity costs, and total costs
Refer to section 19.A
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 19-03 The advantages and disadvantages to holding cash and some of the ways to invest idle cash.
Section: 19.A
Topic: Cash balance
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 only
B. III and IV only
C. II and III only
D. I and III only
E. I and IV only
Refer to section 19.A
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 19-03 The advantages and disadvantages to holding cash and some of the ways to invest idle cash.
Section: 19.A
Topic: BAT model
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 only
B. I and III only
C. II and IV only
D. II, III, and IV only
E. I, III, and IV only
Refer to section 19.A
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 19-03 The advantages and disadvantages to holding cash and some of the ways to invest idle cash.
Section: 19.A
Topic: BAT model
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.
Refer to section 19.A
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 19-03 The advantages and disadvantages to holding cash and some of the ways to invest idle cash.
Section: 19.A
Topic: BAT model
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.
Refer to section 19.A
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 19-03 The advantages and disadvantages to holding cash and some of the ways to invest idle cash.
Section: 19.A
Topic: Miller-Orr model
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*.
Refer to section 19.A
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 19-03 The advantages and disadvantages to holding cash and some of the ways to invest idle cash.
Section: 19.A
Topic: Miller-Orr model
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.
Refer to section 19.A
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 19-03 The advantages and disadvantages to holding cash and some of the ways to invest idle cash.
Section: 19.A
Topic: Target cash balance
45.
The Hobby Shop has a checking account with a ledger balance of $692. The
firm has $1,063 in uncollected deposits and $930 in outstanding checks. What
is the amount of the disbursement float on this account?
A. $0
B. $217
C. $930
D. $990
E. $1,063
Disbursement float = $930
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 19-01 The importance of float and how it affects the cash balances.
Section: 19.2
Topic: Disbursement float
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. $1,174
B. $5,805
C. $24,654
D. $49,308
E. $73,962
Disbursement float = 42 × $587 × 2 = $49,308
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 19-01 The importance of float and how it affects the cash balances.
Section: 19.2
Topic: Disbursement float
47.
On average, your firm receives 65 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. $2,473.80
B. $3,401.00
C. $3,890.25
D. $5,101.50
E. $6,802.00
Collection float = 65 × $39.90 × 1.5 = $3,890.25
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 19-01 The importance of float and how it affects the cash balances.
Section: 19.2
Topic: Collection float
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. -$1,890
B. $1,758
C. $3,648
D. $5,406
E. $6,012
Collection float = $879 × 2 = $1,758
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 19-01 The importance of float and how it affects the cash balances.
Section: 19.2
Topic: Collection float
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 $360 each. What is the net float?
A. net collection float of $1,040
B. net collection float of $2,480
C. net float of $6,731
D. net disbursement float of $1,300
E. net disbursement float of $2,480
Net collection float = $2,480 - (4 × $360) = $1,040
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 19-01 The importance of float and how it affects the cash balances.
Section: 19.2
Topic: Net float
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 $8,138
B. net collection float of $2,043
C. net collection float of $13,450
D. net disbursement float of $3,268
E. net disbursement float of $5,311
Net disbursement float = $16,718 - $13,450 = $3,268
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 19-01 The importance of float and how it affects the cash balances.
Section: 19.2
Topic: Net float
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. $1,120
B. $2,333
C. $2,640
D. $2,900
E. $3,416
Average daily float = [($1,500 × 2) + ($3,900 × 1) + ($6,100 × 3) + ($4,200 ×
2)]/30 = $1,120
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 19-01 The importance of float and how it affects the cash balances.
Section: 19.2
Topic: Average daily float
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. $1,386.67
B. $1,407.19
C. $4,750.00
D. $6,833.33
E. $6,933.33
Average daily float = [($6,100 × 3) + ($5,500 × 1) + ($8,900 × 2)]/30 =
$1,386.67
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 19-01 The importance of float and how it affects the cash balances.
Section: 19.2
Topic: Average daily float
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. $971.43
B. $1,376.67
C. $3,351.33
D. $5,666.67
E. $6,800.00
Average daily float = [($8,800 × 2) + ($2,300 × 3) + ($8,400 × 2]/30 = $1,376.67
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 19-03 The advantages and disadvantages to holding cash and some of the ways to invest idle cash.
Section: 19.2
Topic: Average daily float
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. $3,963.89
B. $21,750.00
C. $22,236.67
D. $28,133.33
E. $35,675.00
Average daily float = [($67,200 × 3) + ($91,600 × 1) + ($54,200 × 2) + ($88,500
× 3)]/30 = $22,236.67
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 19-01 The importance of float and how it affects the cash balances.
Section: 19.2
Topic: Average daily float
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. $2,389.70
B. $8,513.33
C. $14,608.13
D. $23,896.97
E. $81,900.00
Average daily receipts = ($42,500 + $149,800 + $63,100)/30 = $8,513.33
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 19-01 The importance of float and how it affects the cash balances.
Section: 19.2
Topic: Average daily receipts
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. $1,143.33
B. $2,546.67
C. $2,983.33
D. $6,166.67
E. $6,860.00
Average daily receipts = ($6,800 + $8,500 + $2,000 + $9,500 + $7,500)/30 =
$1,143.33
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 19-01 The importance of float and how it affects the cash balances.
Section: 19.2
Topic: Average daily receipts
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. $2,653.33
B. $3,006.33
C. $4,533.33
D. $7,811.67
E. $8,600.00
Average daily receipts = ($63,200 + $72,800)/30 = $4,533.33
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 19-01 The importance of float and how it affects the cash balances.
Section: 19.2
Topic: Average daily receipts
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 days
B. 2.27 days
C. 2.46 days
D. 2.50 days
E. 2.78 days
Total monthly collections = $64,000 + $88,200 + $96,500 + $47,900 =
$296,600
Weighted average delay = [($64,000/$296,600) × 2] + [($88,200/$296,600) × 3]
+ [($96,500/$296,600) × 2] + [($47,900/$296,600) × 3] = 2.46 days
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 19-01 The importance of float and how it affects the cash balances.
Section: 19.2
Topic: Weighted average delay
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 days
B. 1.84 days
C. 2.00 days
D. 2.07 days
E. 2.55 days
Total monthly collections = $478,000 + $575,000 = $1,053,000
Weighted average delay = [($478,000/$1,053,000) × 2] +
[($575,000/$1,053,000) × 3] = 2.55 days
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 19-01 The importance of float and how it affects the cash balances.
Section: 19.2
Topic: Weighted average delay
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 days
B. 2.04 days
C. 2.09 days
D. 2.16 days
E. 2.23 days
Total monthly collections = $287,000 + $416,000 + $139,000 + $233,000 =
$1,075,000
Weighted average delay = [($287,000/$1,075,000) × 4] +
[($416,000/$1,075,000) × 1] + [($139,000/$1,075,000) × 1] +
[($233,000/$1,075,000) × 3] = 2.23 days
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 19-01 The importance of float and how it affects the cash balances.
Section: 19.2
Topic: Weighted average delay
61.
On an average day, Goose Down Feathers receives $2,400 in checks from
customers. These checks clear the bank in an average of 2.2 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. $115.20
B. $618.40
C. $4,080.00
D. $5,280.00
E. $6,256.50
Present value of the float = $2,400 × 2.2 = $5,280
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 19-01 The importance of float and how it affects the cash balances.
Section: 19.2
Topic: Cost of float
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. $1,152.38
B. $1,288.15
C. $2,109.16
D. $4,637.33
E. $5,082.00
Maximum cost = Present value of the float = $2,420 × 2.1 = $5,082.00
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 19-01 The importance of float and how it affects the cash balances.
Section: 19.2
Topic: Cost of float
63.
On an average day, your firm receives $11,800 in checks from customers.
These checks clear the bank in an average of 2.8 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. $3.72
B. $4.96
C. $17.78
D. $34.18
E. $37.20
Maximum daily fee = $11,800 × 2.8 × 0.00015 = $4.96
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 19-01 The importance of float and how it affects the cash balances.
Section: 19.2
Topic: Maximum daily fee
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. $1.72
B. $2.92
C. $17.20
D. $24.30
E. $29.17
Maximum daily fee = $7,800 × 1.7 × 0.00022 = $2.92
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 19-01 The importance of float and how it affects the cash balances.
Section: 19.2
Topic: Maximum daily fee
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 2.8 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 days
B. 3.7 days
C. 4.3 days
D. 5.8 days
E. 8.6 days
Collection time = 4.3 + 1.5 + 2.8 = 8.6 days
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 19-02 How firms manage their cash and some of the collection; concentration; and disbursement
techniques used.
Section: 19.3
Topic: Collection time
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 days
B. 2.6 days
C. 4.4 days
D. 4.8 days
E. 6.2 days
Processing time = 6.1 - 2.6 - 1.8 = 1.7 days
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 19-02 How firms manage their cash and some of the collection; concentration; and disbursement
techniques used.
Section: 19.3
Topic: Collection time
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 3.4 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 days
B. 4.10 days
C. 4.80 days
D. 4.90 days
E. 5.55 days
Collection time = (3.4 × 0.5) + 1 + 2.1 = 4.80 days
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 19-01 The importance of float and how it affects the cash balances.
Section: 19.3
Topic: Collection time
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. $2.61
B. $3.29
C. $4.45
D. $5.32
E. $5.78
Daily savings = 320 × $99 × 1.2 × 0.00014 = $5.32
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 19-02 How firms manage their cash and some of the collection; concentration; and disbursement
techniques used.
Section: 19.3
Topic: Lockbox daily savings
69.
Roger's Distributors receives an average of 310 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. $2.04
B. $6.92
C. $14.95
D. $22.42
E. $32.17
Daily savings = 310 × $629 × 1.5 × 0.00011 = $32.17
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 19-02 How firms manage their cash and some of the collection; concentration; and disbursement
techniques used.
Section: 19.3
Topic: Lockbox daily savings
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. $31.16
B. $54.19
C. $168.03
D. $180.11
E. $199.19
Daily cost = 611 × $0.275 = $168.03
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 19-02 How firms manage their cash and some of the collection; concentration; and disbursement
techniques used.
Section: 19.3
Topic: Lockbox daily cost
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 $0.26. What is the anticipated daily cost of the lockbox system?
A. $3.48
B. $6.25
C. $12.60
D. $35.36
E. $36.17
Daily cost = 136 × $0.26 = $35.36
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 19-02 How firms manage their cash and some of the collection; concentration; and disbursement
techniques used.
Section: 19.3
Topic: Lockbox daily cost
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. -$4,535,625
B. -$2,611,575
C. $187,419
D. $4,181,483
E. $13,252,733
Net present value = [2,419 × $1,287 × 2.8] - [(2,419 × $0.30)/.00016] =
$4,181,483
AACSB: Analytic
Blooms: Analyze
Difficulty: 2 Medium
Learning Objective: 19-02 How firms manage their cash and some of the collection; concentration; and disbursement
techniques used.
Section: 19.3
Topic: Lockbox net present value
73.
Rosewell International receives an average of 268 checks a day with an
average amount per check of $780. 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. -$61,640
B. -$11,256
C. $11,256
D. $30,820
E. $61,640
Net present value = [268 × $780 × 1.4] - [(268 × $0.21)/.0002] = $11,256
AACSB: Analytic
Blooms: Analyze
Difficulty: 2 Medium
Learning Objective: 19-02 How firms manage their cash and some of the collection; concentration; and disbursement
techniques used.
Section: 19.3
Topic: Lockbox net present value
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. $90,668
B. $97,515
C. $104,141
D. $128,224
E. $136,509
AACSB: Analytic
Blooms: Analyze
Difficulty: 2 Medium
Learning Objective: 19-03 The advantages and disadvantages to holding cash and some of the ways to invest idle cash.
Section: 19.A
Topic: BAT model
75.
Theo's Bar & Grill needs $153,000 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 $40. Based on the BAT model, what is the
optimal average cash balance?
A. $36,199
B. $49,568
C. $67,426
D. $99,136
E. $112,400
AACSB: Analytic
Blooms: Analyze
Difficulty: 2 Medium
Learning Objective: 19-03 The advantages and disadvantages to holding cash and some of the ways to invest idle cash.
Section: 19.A
Topic: BAT model
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. $3,873
B. $4,918
C. $5,207
D. $109,283
E. $110,440
AACSB: Analytic
Blooms: Analyze
Difficulty: 2 Medium
Learning Objective: 19-03 The advantages and disadvantages to holding cash and some of the ways to invest idle cash.
Section: 19.A
Topic: BAT model
77.
Penco Supply spends $325,000 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. $150,600
B. $158,929
C. $170,096
D. $221,506
E. $209,619
AACSB: Analytic
Blooms: Analyze
Difficulty: 2 Medium
Learning Objective: 19-03 The advantages and disadvantages to holding cash and some of the ways to invest idle cash.
Section: 19.A
Topic: BAT model
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. $1,318
B. $1,864
C. $2,204
D. $2,311
AACSB: Analytic
Blooms: Analyze
Difficulty: 2 Medium
Learning Objective: 19-03 The advantages and disadvantages to holding cash and some of the ways to invest idle cash.
Section: 19.A
Topic: BAT model
79.
Rosie O'Grady's spends $115,000 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. $1,431
B. $2,862
C. $3,034
D. $4,912
E. $5,358
Trading cost = [52/($111,616.90/$115,000)] × $50 = $2,678.81
Total cost = $2,678.81 + $2,678.81 = $5,358
AACSB: Analytic
Blooms: Analyze
Difficulty: 2 Medium
Learning Objective: 19-03 The advantages and disadvantages to holding cash and some of the ways to invest idle cash.
Section: 19.A
Topic: BAT model
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. $103,900
B. $146,500
C. $182,200
D. $207,800
E. $249,900
AACSB: Analytic
Blooms: Analyze
Difficulty: 2 Medium
Learning Objective: 19-03 The advantages and disadvantages to holding cash and some of the ways to invest idle cash.
Section: 19.A
Topic: BAT model
81.
The Cow Pie Spreader Co. spends $214,000 a week to pay bills and maintains
a lower cash balance limit of $150,000. 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. $183,511
B. $208,511
C. $251,006
D. $254,545
E. $258,878
Cash balance target = $150,000 + [0.75 × $49 × ($16,0002/.00025)]1/3 =
$183,511
AACSB: Analytic
Blooms: Analyze
Difficulty: 2 Medium
Learning Objective: 19-03 The advantages and disadvantages to holding cash and some of the ways to invest idle cash.
Section: 19.A
Topic: Miller-Orr model
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. $430,836
B. $447,905
C. $528,700
D. $739,459
E. $861,672
Cash balance target = $250,000 + [0.75 × $60 × ($46,8002/.00045)]1/3 =
$310,278.70
Upper cash limit = 3 × $310,278.70 - (2 × $250,000) = $430,836
AACSB: Analytic
Blooms: Analyze
Difficulty: 2 Medium
Learning Objective: 19-03 The advantages and disadvantages to holding cash and some of the ways to invest idle cash.
Section: 19.A
Topic: Miller-Orr model
83.
Donaldson, Inc. spends $94,000 a week to pay bills and maintains a lower
cash balance limit of $25,000. 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. $48,334
B. $57,623
C. $82,623
D. $236,334
E. $247,334
Cash balance target = $25,000 + [0.75 × $52 × ($13,000 2/.00045)]1/3 =
$49,466.94
Average cash balance = [(4 × $49,466.94) - $50,000]/3 = $57,623
AACSB: Analytic
Blooms: Analyze
Difficulty: 2 Medium
Learning Objective: 19-03 The advantages and disadvantages to holding cash and some of the ways to invest idle cash.
Section: 19.A
Topic: Miller-Orr model
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. $79,116
B. $83,208
C. $110,315
D. $237,348
E. $249,624
Cash balance target = $60,000 + [0.75 × $50 × ($7,5002/.0004)]1/3 =
$77,405.96
Average cash balance = [(4 × $77,405.96) - $60,000]/3 = $83,208
AACSB: Analytic
Blooms: Analyze
Difficulty: 2 Medium
Learning Objective: 19-03 The advantages and disadvantages to holding cash and some of the ways to invest idle cash.
Section: 19.A
Topic: Miller-Orr model
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
$8,100. 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. $48,156
B. $49,990
C. $54,884
D. $68,093
E. $75,726
Cash balance target = $50,000 + [.75 × $65 × ($8,1002/.00054)]1/3 = $68,093
AACSB: Analytic
Blooms: Analyze
Difficulty: 2 Medium
Learning Objective: 19-03 The advantages and disadvantages to holding cash and some of the ways to invest idle cash.
Section: 19.A
Topic: Miller-Orr model
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. $28,492
B. $31,359
C. $153,492
D. $156,359
E. $225,417
Cash balance target = $125,000 + [0.75 × $58 × ($14,4002/.00039)]1/3 =
$153,492
AACSB: Analytic
Blooms: Analyze
Difficulty: 2 Medium
Learning Objective: 19-03 The advantages and disadvantages to holding cash and some of the ways to invest idle cash.
Section: 19.A
Topic: Miller-Orr model
87.
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. $30,00
B. $50,000
C. $80,000
D. $110,000
E. $130,000
Net float = 5($26,000) - 2($40,000) = $50,000
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
EOC: 19-2
Learning Objective: 19-01 The importance of float and how it affects the cash balances.
Section: 19.2
Topic: Net float
88.
Purple Feet Wine, Inc. receives an average of $6,000 in checks per day. The
delay in clearing is typically 4 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. $1.50
B. $3.00
C. $3.75
D. $6.00
E. $6.50
Maximum daily fee = ($6,000 × 4) × 0.00025 = $6.00
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
EOC: 19-3
Learning Objective: 19-01 The importance of float and how it affects the cash balances.
Section: 19.2
Topic: Cost of float
89.
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 days
B. 4.36 days
C. 4.78 days
D. 5.00 days
E. 6.00 days
Total monthly receipts = $18,000 + $4,000 = $22,000
Weighted average delay = [($18,000/$22,000) × 4] + [($4,000/$22,000) × 6] =
4.36 days
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
EOC: 19-4
Learning Objective: 19-01 The importance of float and how it affects the cash balances.
Section: 19.2
Topic: Weighted average delay
90.
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 25,000 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. $187,500
B. $367,500
C. $903,350
D. $1,412,500
E. $1,680,000
NPV of service = $60(25,000) - ($210/0.00016) = $187,500
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
EOC: 19-5
Learning Objective: 19-02 How firms manage their cash and some of the collection; concentration; and disbursement
techniques used.
Section: 19.3
Topic: Lockbox NPV
91.
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. $4,165
B. $13,883
C. $41,650
D. $138,883
E. $416,500
Maximum payment = Average daily float = 1.4{[(0.55 × 5,000 × $55) + (0.45 ×
5,000 × $65)]/30} = $13,883
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
EOC: 19-6
Learning Objective: 19-01 The importance of float and how it affects the cash balances.
Section: 19.2
Topic: Average daily float
92.
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. $600,000
B. $675,000
C. $695,000
D. $745,000
E. $795,000
NPV = (2 × 300 × $3,200) - [($0.75 × 300)/0.0002] = $795,000
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
EOC: 19-7
Learning Objective: 19-02 How firms manage their cash and some of the collection; concentration; and disbursement
techniques used.
Section: 19.3
Topic: Lockbox NPV
93.
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. $36
B. $91
C. $182
D. $364
E. $910
Interest = $70,000 (5) (52/4) (0.0002) = $910
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
EOC: 19-9
Learning Objective: 19-02 How firms manage their cash and some of the collection; concentration; and disbursement
techniques used.
Section: 19.3
Topic: Value of delay
94.
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 4 percent annually. What is the
amount of the annual net savings if this plan is adopted?
A. $10,200
B. $40,800
C. $76,500
D. $102,000
E. $125,000
NPV = $3,120,000 - [2($1,550,000) - $1,000,000] = $1,020,000
Net savings = 0.04($1,020,000) = $40,800
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
EOC: 19-10
Learning Objective: 19-02 How firms manage their cash and some of the collection; concentration; and disbursement
techniques used.
Section: 19.3
Topic: NPV of float reduction
95.
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. -$156,727
B. -$131,301
C. -$74,208
D. $11,507
E. $26,433
NPV = (1 × 750 × $1,800) - [($0.30 × 750)/(1.061/365 - 1)] - [$4,320/0.06] = $131,301
AACSB: Analytic
Blooms: Analyze
Difficulty: 2 Medium
EOC: 19-11
Learning Objective: 19-02 How firms manage their cash and some of the collection; concentration; and disbursement
techniques used.
Section: 19.3
Topic: Lockbox NPV
96.
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 12 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. 56
B. 68
C. 74
D. 83
E. 89
NPV = 0 = ($8,200 × 1 × N) - ($0.12 × N)/0.000134 - $25,000/0.05
N = 68 customers per day
AACSB: Analytic
Blooms: Analyze
Difficulty: 2 Medium
EOC: 19-12
Learning Objective: 19-02 How firms manage their cash and some of the collection; concentration; and disbursement
techniques used.
Section: 19.3
Topic: Transactions required
Essay Questions
97.
Explain how a lockbox system operates and why a firm might consider
implementing such a system.
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 19.3
AACSB: Reflective Thinking
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 19-02 How firms manage their cash and some of the collection; concentration; and disbursement
techniques used.
Section: 19.3
Topic: Lockbox systems
98.
Explain how the Check Clearing Act for the 21st Century affects both collection
and disbursement float.
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 19.2
AACSB: Reflective Thinking
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 19-01 The importance of float and how it affects the cash balances.
Section: 19.2
Topic: Check Clearing Act for the 21st Century
99.
Explain how the unethical use of uncollected funds has been impacted by the
growth of on-line retailing and banking.
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 19.2
AACSB: Ethics
AACSB: Reflective Thinking
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 19-01 The importance of float and how it affects the cash balances.
Section: 19.2
Topic: Internet banking
100. 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?
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 19.2
AACSB: Reflective Thinking
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 19-01 The importance of float and how it affects the cash balances.
Section: 19.2
Topic: NPV of float management
101. Explain what a zero-balance account is, how it is used, and how it affects cash
management.
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.
Feedback: Refer to section 19.4
AACSB: Reflective Thinking
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 19-02 How firms manage their cash and some of the collection; concentration; and disbursement
techniques used.
Section: 19.4
Topic: Zero-balance accounts