Question 1

Donaldson, Inc. spends $94,000 a week to pay bills and maintains a lower cash balance limit of $50,000. The standard deviation of the disbursements is $13,000. The applicable weekly interest rate is 0.045 percent and the fixed cost of transferring funds is $52. What is your optimal average cash balance based on the Miller-Orr model?

Accepted Answer

A)  $78,778
B)  $82,623
C)  $231,969
D)  $236,334
E)  $247,868F) A) and B)
G) None of the above

Question 2

Penco Supply spends $428,000 a week to pay bills and maintains a lower cash balance limit of $75,000. The standard deviation of its disbursements is $18,900. The applicable interest rate is 5 percent and the fixed cost of transferring funds is $65. What is the firm's optimal initial cash balance based on the BAT model?

Accepted Answer

A)  $150,600
B)  $158,929
C)  $170,096
D)  $221,506
E)  $240,553F) B) and E)
G) B) and D)

Question 3

Explain how the unethical use of uncollected funds has been impacted by the growth of on-line retailing and banking.

Accepted Answer

Whenever cash is moved electro...

Question 4

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?

Accepted Answer

Students should explain that any project...

Question 5

Rosie O'Grady's spends $98,000 a week to pay bills and maintains a lower cash balance limit of $95,000. The standard deviation of the disbursements is $14,600. The applicable interest rate is 4.8 percent and the fixed cost of transferring funds is $50. What is this firm's total cost of holding cash based on the BAT model?

Accepted Answer

A)  $1,431
B)  $2,862
C)  $3,034
D)  $4,912
E)  $4,946F) A) and B)
G) D) and E)

Question 6

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?

Accepted Answer

A)  $90,668
B)  $97,515
C)  $104,141
D)  $128,224
E)  $136,509F) A) and D)
G) A) and E)

Question 7

The Cow Pie Spreader Co. spends $214,000 a week to pay bills and maintains a lower cash balance limit of $175,000. The standard deviation of the disbursements is $16,000. The applicable weekly interest rate is 0.025 percent and the fixed cost of transferring funds is $49. What is the firm's cash balance target based on the Miller-Orr model?

Accepted Answer

A)  $208,511
B)  $247,560
C)  $251,006
D)  $254,545
E)  $258,878F) D) and E)
G) C) and E) A

Question 8

Collection float:

Accepted Answer

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.F) A) and B)
G) None of the above D

Question 9

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?

Accepted Answer

A)  $1,318
B)  $1,864
C)  $2,204
D)  $2,311
E)  $3,709F) B) and C)
G) All of the above

Question 10

The Miller-Orr model:

Accepted Answer

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*.F) None of the above
G) A) and D)

Question 11

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?

Accepted Answer

A)  speculative
B)  daily float
C)  compensating balance
D)  precautionary
E)  transactionF) C) and E)
G) A) and D)

Question 12

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.

Accepted Answer

A)  $1,386.67
B)  $1,407.19
C)  $4,750.00
D)  $6,833.33
E)  $6,933.33F) None of the above
G) A) and C)

Question 13

Which of the following statements is correct?

Accepted Answer

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.F) A) and B)
G) All of the above B

Question 14

A repurchase agreement generally has a maximum life of:

Accepted Answer

A)  1 day.
B)  a few days.
C)  one month.
D)  one to three months.
E)  three to six months.F) C) and D)
G) B) and D)

Question 15

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.

Accepted Answer

A)  $36
B)  $91
C)  $182
D)  $364
E)  $910F) All of the above
G) B) and C)

Question 16

Lockboxes:

Accepted Answer

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.F) B) and C)
G) All of the above

Question 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

Accepted Answer

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 IVF) All of the above
G) B) and C)

Question 18

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.

Accepted Answer

A)  $1,152.38
B)  $1,288.15
C)  $2,109.16
D)  $4,637.33
E)  $5,082.00F) A) and E)
G) B) and D)

Question 19

Which one of the following statements is correct?

Accepted Answer

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.F) A) and B)
G) None of the above

Question 20

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?

Accepted Answer

A)  speculative
B)  float
C)  compensating
D)  precautionary
E)  transactionF) C) and E)
G) D) and E)

Exam 19: Cash and Liquidity Management

Correct Answer
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Correct Answer
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Explain how the unethical use of uncollected funds has been impacted by the growth of on-line retailing and banking.

Correct Answer
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Whenever cash is moved electro...
View Answer

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?

Correct Answer
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Students should explain that any project...
View Answer

Correct Answer
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Correct Answer
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A

Collection float:

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D

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The Miller-Orr model:

Correct Answer
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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?

Correct Answer
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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.

Correct Answer
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Which of the following statements is correct?

Correct Answer
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B

A repurchase agreement generally has a maximum life of:

Correct Answer
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Correct Answer
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Lockboxes:

Correct Answer
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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

Correct Answer
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Correct Answer
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Which one of the following statements is correct?

Correct Answer
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Correct Answer
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Exam 19: Cash and Liquidity Management

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Explain how the unethical use of uncollected funds has been impacted by the growth of on-line retailing and banking.

Correct AnswerverifiedWhenever cash is moved electro...View AnswerShow Answer

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?

Correct AnswerverifiedStudents should explain that any project...View AnswerShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedA

Collection float:

Correct AnswerverifiedD

Correct AnswerverifiedShow Answer

The Miller-Orr model:

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

Which of the following statements is correct?

Correct AnswerverifiedB

A repurchase agreement generally has a maximum life of:

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Lockboxes:

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which one of the following statements is correct?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct Answer
verified

Correct Answer
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Correct Answer
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Whenever cash is moved electro...
View Answer

Correct Answer
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Students should explain that any project...
View Answer

Correct Answer
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Correct Answer
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Correct Answer
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A

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D

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B

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