Question 1

BullsNBears, a purveyor of financial databases, estimates it they disburses $440,000 monthly in order to pay bills. The firm's opportunity rate is 5%. The fixed cost of transferring money is $25 per transfer. Based on historical data, the standard deviation of monthly cash flows is $15,000 and the lower cash balance limit is $20,000. For Miller-Orr model questions, assume the interest rate is 0.5% per month.

Using the BAT model, what is the total trading cost?

Accepted Answer

The BAT model calculates the total trading cost using the formula: Total Trading Cost = (Fixed Cost per Transfer * Number of Transfers). The number of transfers is calculated as (Total Cash Disbursements / Optimal Transfer Amount). The Optimal Transfer Amount is calculated using the formula: sqrt((2 * Total Cash Disbursements * Fixed Cost per Transfer) / Opportunity Cost). Plugging in the given values, the total trading cost is approximately $1,817.

Question 2

Burke Corporation is investigating a lockbox system to reduce its collection time. It has determined that on average, there are 900 payments with an average value of $425 each. If a lockbox system is implemented, the lockbox fee per transaction will be $0.15. If the collection time can be reduced by 4 days, and the daily interest on money market securities is.02%, then determine the present value of adopting the system.

Accepted Answer

The present value of adopting the system can be calculated as follows:1. Calculate the total amount collected daily: 900 payments * $425 = $382,5002. Calculate the daily interest earned by reducing collection time by 4 days: $382,500 * 0.02% = $76.503. Calculate the total interest earned over 4 days: $76.50 * 4 = $3064. Calculate the total lockbox fees: 900 payments * $0.15 = $1355. Calculate the net benefit per day: $306 - $135 = $1716. Since the interest is compounded daily, the present value of adopting the system over a year (365 days) would be: $171 * 365 = $62,415However, the calculation provided above does not match any of the options given, indicating a misunderstanding in the calculation process. The correct approach to calculate the present value of adopting the system should consider the total value of payments accelerated by the lockbox system and the cost of the lockbox system, not just the daily interest and fees. The correct calculation involves determining the value of accelerating the receipt of payments by 4 days and subtracting the total cost of the lockbox system over the period considered. Without the correct formula and calculation based on the options provided, it's clear there was a mistake in the initial explanation. The correct approach should involve calculating the total value of payments that are accelerated (900 payments * $425 each * 4 days) and applying the daily interest rate to this amount to find the total interest savings, then subtracting the cost of the lockbox system (900 payments * $0.15 * number of days considered, if applicable). However, without the precise calculation steps that align with the options provided, the initial explanation is incorrect. The question seems to require a calculation that directly relates to the options given, which are not achieved with the explanation provided.

Question 3

You are considering implementing a lockbox system for your firm. The system is expected to reduce the collection time by 2 days. On an average day, your firm receives 460 cheques with an average value of $350 each. The daily interest rate on Treasury bills is.01 %. The bank charge per cheque would be $.20. What is the anticipated daily cost of the lockbox system?

Accepted Answer

The anticipated daily cost of the lockbox system is calculated by multiplying the number of cheques received per day by the bank charge per cheque. Therefore, 460 cheques * $0.20 = $92.00.

Question 4

Rainmaker Drains incurs a $35 cost each time it sells securities. The firm needs $128,000 a year for transaction purposes. As a routine, Rainmaker sells securities every time the balance in the account declines to $1,000. The applicable interest rate is 3.5%. What is the target cash balance according to the BAT theory?

Accepted Answer

The answer of Rainmaker Drains incurs a $35 cost each...

Question 5

Your firm generally receives 4 cheques a month. The cheque amounts and the collection delay for each cheque are shown below. Given this information, what is the amount of the average daily float? Assume that a month has 30 days.

Accepted Answer

The answer of Your firm generally receives 4 cheques a...

Question 6

Your firm generally receives 4 cheques a month. The cheque amounts and the collection delay for each cheque are shown below. Given this information, what is the amount of the average daily float? Assume that a month has 30 days.

Accepted Answer

The answer of Your firm generally receives 4 cheques a...

Question 7

Invention, Inc. receives an average of 250 checks a day. The average amount per check is $450. The firm is considering a lockbox system which it anticipates will reduce the average collection time by 3 days. The bank charges $.15 a check for this service. The daily interest rate on Treasury bills is.01 %. What is the net present value of this lockbox arrangement?

Accepted Answer

The answer of Invention, Inc. receives an average of 250...

Question 8

MD Groceries currently sets its initial cash balance at $5,000, which is depleted every four days. The current market rate of return is 4.5% per year. The firm pays $2.50 each time it replenishes its cash account. Use a 360-day year.

What are the opportunity costs for MD's decision regarding its cash balance?

Accepted Answer

The opportunity cost of holding cash is calculated by considering the interest forgone on the cash balance. The formula for the opportunity cost is: (Average Cash Balance * Market Rate of Return) + (Transaction Cost * Number of Transactions per Year). The average cash balance is $5,000/2 = $2,500 (since cash is depleted from $5,000 to $0 every four days, the average is half of $5,000). The market rate of return is 4.5% per year. The transaction cost is $2.50 each time cash is replenished. The number of transactions per year is 360 days / 4 days = 90 times. Therefore, the opportunity cost is ($2,500 * 4.5%) + ($2.50 * 90) = $112.50 + $225 = $337.50. However, since the calculation mistake led to an incorrect total, the correct approach should focus solely on the components given: Opportunity cost from interest = $2,500 * 0.045 = $112.50. The transaction cost component was incorrectly added to the total instead of focusing on the interest opportunity cost alone, which matches option D.

Question 9

The Cherry Hill Furniture Company sets its initial cash balance at $30,000. This amount is evenly disbursed over a 14-day period. As soon as the account is depleted another $30,000 is deposited. The costs of replenishing the account are $20 per transaction. The market rate of return is 8%. Use a 365-day year.

What is the annual opportunity cost of the cash balance?

Accepted Answer

The answer of The Cherry Hill Furniture Company sets its...

Question 10

Your firm deals strictly with three customers. The average amount that 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.

Accepted Answer

The answer of Your firm deals strictly with three customers....

Question 11

Back Woods Lodges has a book balance of $1,680, $1,470 in uncollected deposits, and $2,130 in outstanding cheques. What is the amount of the disbursement float?

Accepted Answer

The disbursement float is the amount of outstanding cheques, which is $2,130.

Question 12

JKL Tools receives an average of $3,300 a day in cheques. The delay in processing averages 4 days. The current interest rate is.02% per day. What is the highest daily fee JKL should pay to eliminate the float entirely?

Accepted Answer

The highest daily fee JKL should pay to eliminate the float entirely can be calculated by multiplying the average daily receipts by the delay in processing and the daily interest rate: $3,300 * 4 days * 0.02% = $2.64.

Question 13

Roze Corporation is investigating a lockbox system to reduce its collection time. It has determined that on average, there are 405 payments with an average value of $1,200 each. If a lockbox system is implemented, the lockbox fee per transaction will be $0.65. If the collection time can be reduced by 4 days, and the daily interest on money market securities is.03%, then determine present value of adopting the system.

Accepted Answer

The present value of adopting the lockbox system is $1,944,000. This is calculated as follows:PV = (CF * PVAF) - (CF * PVAF)where:CF = cash flowPVAF = present value annuity factorThe cash flow is the difference between the cost of the lockbox system and the savings from reduced collection time. The cost of the lockbox system is the lockbox fee per transaction multiplied by the number of transactions. The savings from reduced collection time is the daily interest on money market securities multiplied by the number of days that the collection time is reduced multiplied by the average value of the payments.The PVAF is calculated as follows:PVAF = (1 - (1 + r)^-n) / rwhere:r = interest raten = number of periodsIn this case, the interest rate is .03% and the number of periods is 4.Plugging in the values, we get:PV = ((405 * $1,200 * $0.65) - (405 * $1,200 * .03% * 4)) * (1 - (1 + .03%)^-4) / .03%PV = $1,944,000

Question 14

Your firm generally receives 3 cheques a month. A month is defined as a 30-day period. The cheque amounts and the collection delay for each cheque are shown below. Given this information, what is the amount of the average daily float?

Accepted Answer

The answer of Your firm generally receives 3 cheques a...

Question 15

Maverick Unlimited receives an average of 120 cheques a day. The average cheque amount is $40. The delay in processing and clearing averages 2 days and the daily applicable interest rate is.02%. What is the highest daily fee the firm should pay to completely eliminate its float?

Accepted Answer

The answer of Maverick Unlimited receives an average of 120...

Question 16

According to your chequebook, you have a $3,000 balance in your account. You write cheques totaling $4,500 and make a deposit of $3,500. What is your net float?

Accepted Answer

The net float is calculated by adding the deposit to the initial balance and then subtracting the total of the cheques written: $3,000 + $3,500 - $4,500 = $2,000. However, the net float refers to the difference between the available balance and the ledger balance, which is $1,000.

Question 17

Burke Corporation is investigating a lockbox system to reduce its collection time. It has determined that on average, there are 900 payments with an average value of $425 each. If a lockbox system is implemented, the lockbox fee per transaction will be $0.15. If the collection time can be reduced by 4 days, and the daily interest on money market securities is.02%, then determine the net cash flow per cheque from adopting the system.

Accepted Answer

The net cash flow per check from adopting the system is $0.19. This is calculated as follows:Interest earned per check = (Average value of payment * Daily interest rate * Reduction in collection time) = ($425 * 0.02% * 4) = $0.034Lockbox fee per check = $0.15Net cash flow per check = Interest earned per check - Lockbox fee per check = $0.034 - $0.15 = $0.19

Question 18

Your firm deals strictly with four customers. The average amount that 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.

Accepted Answer

The answer of Your firm deals strictly with four customers....

Question 19

Your firm generally receives only 2 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 that a month has 30 days.

Accepted Answer

The answer of Your firm generally receives only 2 checks...

Question 20

Roze Corporation is investigating a lockbox system to reduce its collection time. It has determined that on average, there are 405 payments with an average value of $1,200 each. If a lockbox system is implemented, the lockbox fee per transaction will be $0.65. If the collection time can be reduced by 4 days, and the daily interest on money market securities is.03%, then determine the net cash flow per cheque from adopting the system.

Accepted Answer

The answer of Roze Corporation is investigating a lockbox system...

Quiz 19: Cash and Liquidity Management

Your firm generally receives 4 cheques a month. The cheque amounts and the collection delay for each cheque are shown below. Given this information, what is the amount of the average daily float? Assume that a month has 30 days.

Your firm generally receives 4 cheques a month. The cheque amounts and the collection delay for each cheque are shown below. Given this information, what is the amount of the average daily float? Assume that a month has 30 days.

Your firm deals strictly with three customers. The average amount that 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.

Back Woods Lodges has a book balance of $1,680, $1,470 in uncollected deposits, and $2,130 in outstanding cheques. What is the amount of the disbursement float?

JKL Tools receives an average of $3,300 a day in cheques. The delay in processing averages 4 days. The current interest rate is.02% per day. What is the highest daily fee JKL should pay to eliminate the float entirely?

Your firm generally receives 3 cheques a month. A month is defined as a 30-day period. The cheque amounts and the collection delay for each cheque are shown below. Given this information, what is the amount of the average daily float?

Maverick Unlimited receives an average of 120 cheques a day. The average cheque amount is $40. The delay in processing and clearing averages 2 days and the daily applicable interest rate is.02%. What is the highest daily fee the firm should pay to completely eliminate its float?

According to your chequebook, you have a $3,000 balance in your account. You write cheques totaling $4,500 and make a deposit of $3,500. What is your net float?

Your firm deals strictly with four customers. The average amount that 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.

Your firm generally receives only 2 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 that a month has 30 days.