Question 1

The difference between bank cash and book cash is called:

Accepted Answer

The difference between bank cash and book cash is referred to as "float." It represents the time difference between when a check is written and when it is actually cleared and funds are deducted from the bank account.

Question 2

Most large ﬁrms hold a cash balance greater than most models imply because:

Accepted Answer

Banks are compensated by account balances for payment of services, which is a reason why large firms maintain higher cash balances. This allows firms to offset transaction fees or receive more favorable terms on banking services.

Question 3

Which of the following statements concerning zero balance accounts is not correct?

Accepted Answer

Zero balance accounts have a zero balance at all times, hence the name. There is no minimum amount required in the account.

Question 4

Even though the dividend rate on an Adjustable-Rate Preferred Stock (ARPS) is ﬂoating to keep in line with interest rates, the instrument still suffers from risk such as:

Accepted Answer

ARPS may suffer from principal risk and liquidity concerns in a thin market, and the narrow range of issuers increases the risk of downgrades. Additionally, tax law changes can impact the after-tax value of ARPS. Therefore, all of the above options represent risks associated with ARPS.

Question 5

When a ﬁrm writes a cheque, there is an immediate decrease in _____ cash, but no immediate change in _____ cash.

Accepted Answer

The answer of When a ﬁrm writes a cheque, there...

Question 6

The major difference between a cheque and a draft is that:

Accepted Answer

The major difference between a cheque and a draft lies in the process and entities involved. A draft is not drawn on a bank but on the issuer, requiring the bank to present the draft to the firm for acceptance. After acceptance, the firm must deposit funds to make payment, and the cash need not be deposited until the drafts are accepted. These points collectively distinguish drafts from cheques, making all the given options correct.

Question 7

If the total long term ﬁnancing of the ﬁrm is greater than the total ﬁnancing needs for part of the year and less than the needs for some of the year due to seasonal ﬂuctuations the company will
Most likely:

Accepted Answer

If a company's long-term financing exceeds its financing needs for part of the year but falls short during seasonal fluctuations, the best option is to invest in marketable securities and borrow short-term funds. By investing excess funds in marketable securities, the company can earn interest income and improve its liquidity position. Borrowing short-term funds when needed will help the company bridge any financing gaps during periods of high demand. Holding excess cash or reducing business activities are not very effective as holding excess cash would result in lower returns and reducing business activities may harm the company's long-term growth prospects.

Question 8

Which of the following is not true of ﬂoat management?

Accepted Answer

Float management aims to lower the float both in collections and disbursements. Collecting late and paying early cannot be a sustainable approach, as it will damage the relationship with suppliers and customers. Therefore, option D is not true of float management.

Question 9

Auction-Rate Preferred Stock has less risk factors than Adjustable-Rate Preferred Stock (ARPS) because:

Accepted Answer

Auction-Rate Preferred Stock has a shorter reset period of 49 days compared to 90 days for ARPS, reducing interest rate volatility for investors. Additionally, the market sets the dividend level for Auction-Rate Preferred Stock, reducing principle volatility. Finally, better liquidity allows corporate investors to control their investments individually, reducing the risk of price fluctuations. All of these factors make Auction-Rate Preferred Stock less risky than ARPS.

Question 10

A ﬁrm with low cash balances will need to borrow to cover an unexpected cash outﬂow:

Accepted Answer

Maintaining a zero lower control limit means that the firm does not keep any cash reserves for unexpected events, which will lead to the need for borrowing. Additionally, high cash flow variability means that there could be unpredictable fluctuations in cash inflows and outflows, resulting in sudden cash deficits that require borrowing. COGS decreasing may have an impact on cash balances, but it is not directly related to the need for borrowing.

Question 11

Collection ﬂoat increases:

Accepted Answer

The answer of Collection ﬂoat increases:
...

Question 12

A ﬁnancial manager should be concerned about bank cash and net ﬂoat, which is the sum of:

Accepted Answer

Bank cash and net float include both collection float (the time between when a check is deposited and when it is available for use) and disbursement float (the time between when a check is issued and when the funds are deducted from the account). Book cash refers to the balance in the company's accounting records, which may not necessarily match the actual cash balance in the bank. Disbursement float and bank credit are not components of net float.

Question 13

By getting closer to the source of payment, lockboxes can be used to reduce:

Accepted Answer

Lockboxes reduce mail float by allowing payments to be sent to a nearby location, speeding up the time it takes for the payment to be received and processed.

Question 14

The fastest but most expensive way to transfer surplus funds from the local deposit bank to the concentration bank is:

Accepted Answer

Wire transfer is the fastest way to transfer funds as it happens in real-time and the funds are available immediately in the concentration account. However, it is also the most expensive option compared to other alternatives. The lockbox system, mail float system, in-house processing float system, and availability float system all involve some time delay before the funds are available in the concentration account, and therefore, do not offer the same speed as wire transfers.

Question 15

Cheques written by the ﬁrm are said to generate:

Accepted Answer

Cheques written by the firm are considered as disbursement float. Disbursement float is the time period between when a company writes a cheque to pay a supplier or vendor and when the cheque is actually cashed by the recipient. During this in-between period, the money remains in the company's account, earning interest.

Question 16

Adjustable rate preferred stock (ARPS) offer competitive rates of return with traditional money- market instruments but:

Accepted Answer

ARPS still provide the corporate investor with the tax exclusion on dividend income, which is a unique feature that traditional money-market instruments do not have. Option A is not necessarily true, as some ARPS may be rated by Moody's or Standard & Poor's. Option C is not true, as the rate of dividend income on ARPS is adjustable. Option D is not necessarily true for all ARPS, as the trading market may vary depending on the specific issue.

Question 17

The most common cash management technique used to speed up collections is:

Accepted Answer

Lockboxes allow companies to expedite the collection process by having customers send their payments directly to a designated post office box. The payments are then collected and processed by the bank, which speeds up the time it takes for the company to receive the funds.

Question 18

To be able to use the Miller-Orr model, a manager must not:

Accepted Answer

The Miller-Orr model does not require determining the average number of transactions; it focuses on estimating cash flow variability, interest rates, trading costs, and setting control limits.

Question 19

Auction-Rate Preferred Stock is similar to Adjustable-Rate Preferred Stock (ARPS) in that they:

Accepted Answer

Auction-Rate Preferred Stock and Adjustable-Rate Preferred Stock both feature a floating dividend rate, which adjusts at regular intervals. This similarity allows them to offer a dividend that can change, often based on market conditions, providing a level of flexibility and potential tax advantages associated with the dividend payments.

Question 20

Eﬃcient funds management attempts to reduce mailing and clearing time. Two methods do this by:

Accepted Answer

This is because the methods mentioned in option A directly address the issue of reducing mailing and clearing time. Moving collections and deposits closer together in concentration banks will reduce the time taken for physical movement of funds and wire transfers is also a quick method of moving funds. Options B, C and D do not address the issue of reducing mailing and clearing time.

Quiz 27: Short-Term Capital Management