Question 1

When a corporation designs an investment strategy for investing temporary excess cash balances in marketable securities,it must consider a variety of factors.Which of the following is the least important?

Accepted Answer

Although achieving the highest yield is an important consideration for investing excess cash balances, it is the least important factor compared to liquidity, financial risk, and maintaining the safety of principal. Liquidity is important to ensure that the corporation has access to cash when needed, financial risk needs to be managed to prevent losses and protect the corporation's financial stability, and maintaining the safety of principal is critical to avoid losing the corporation's funds. Therefore, while yield is important, it is not the least important factor a corporation should consider when designing an investment strategy for excess cash balances.

Question 2

John Maynard Keynes segmented a firm's demand for cash into the following motives:

Accepted Answer

John Maynard Keynes identified three motives for a firm's demand for cash: transaction, speculative, and precautionary. These motives explain why individuals and businesses hold cash beyond the immediate need for transactions.

Question 3

Which of the following affects the precautionary motive for holding cash?

Accepted Answer

The precautionary motive for holding cash is affected by both the predictability of cash flows and the firm's access to external funds. If cash flows are less predictable or if the firm has limited access to external funds, it will have a higher precautionary motive for holding cash to cover unexpected expenses or investment opportunities.

Question 4

Money-market mutual funds are diversified portfolios of short-term,high-grade debt instruments.

Accepted Answer

Money-market mutual funds typically invest in high-quality, short-term debt instruments such as commercial paper, certificates of deposit, and government securities in order to provide investors with a low-risk, low-return alternative to traditional savings accounts or certificates of deposit. These funds are designed to maintain a stable net asset value (NAV) of $1 per share and generally offer a higher yield than traditional savings accounts while still providing a high degree of liquidity and safety.

Question 5

Cash inflows come from

Accepted Answer

Cash inflows come from the receipt of cash, and cash sales result in immediate receipt of cash, making it the best choice among the options given. Purchases of marketable securities and fixed assets do not necessarily result in immediate receipt of cash, while credit sales can result in delayed cash inflows due to the time it takes for customers to pay their bills.

Question 6

Which of the following is NOT a motive for a corporation to hold cash balances?

Accepted Answer

Float is a reason for a corporation to reduce cash balances rather than hold them, as it refers to the time lag between the initiation of a transaction and the availability of the funds to the recipient. The other choices (transactions, precautionary, and speculative) are all valid reasons for a corporation to hold cash balances.

Question 7

U.S.Treasury bills are extremely liquid due to excellent secondary markets.

Accepted Answer

U.S. Treasury bills are considered among the most liquid securities because they have an active secondary market where investors can buy or sell them quickly and easily. As a result, investors can generally expect to receive fair prices for Treasury bills, even during times of market volatility.

Question 8

Available yields on financial securities depend on their financial risk,interest rate risk,liquidity,and taxability.

Accepted Answer

This statement is true. The available yield is affected by various factors including financial risk, interest rate risk, liquidity, and taxability.

Question 9

A company that has an unpredictable cash flow,and is holding cash because of things that might happen due to this uncertainty,is holding a larger minimum cash balance due to which type of motive?

Accepted Answer

The company is holding cash as a precautionary measure to deal with unpredictable cash flows. This is a precautionary motive for holding cash, which involves holding cash to deal with unexpected events or uncertainties. A transaction motive involves holding cash to facilitate routine business transactions, while a speculative motive involves holding cash to take advantage of investment opportunities. "Common sense" is not a valid option for a motive for holding cash.

Question 10

A construction firm that accumulates cash in anticipation of a significant drop in lumber costs is an example of the ________ motive for holding cash.

Accepted Answer

The speculative motive for holding cash is when a firm accumulates cash in anticipation of taking advantage of an investment opportunity or a significant change in market conditions. In this case, the firm is anticipating a drop in lumber costs and is holding cash to take advantage of the lower prices. This aligns with the speculative motive for holding cash.

Question 11

Which of the following would be an example of the "precautionary motive" for a firm holding cash balances?

Accepted Answer

The precautionary motive for holding cash balances refers to the desire to have cash on hand to handle unforeseen events or emergencies such as a strike, a sudden economic downturn, or an unexpected expense. Purchasing inventory, fixed assets, or making dividend payments are all intentional cash outflows and do not relate to the precautionary motive.

Question 12

A company is technically insolvent when

Accepted Answer

Technically insolvency occurs when a company is unable to meet its current debt obligations with its current assets. The current ratio may be less than 1.0, but this alone does not render a company insolvent, as it depends on the nature of its operations and how its assets are used. Choices A and B refer to cash flow issues, while insolvency is defined in terms of current debt obligations.

Question 13

Which of the following would be an example of the "speculative motive" for a firm holding cash balances?

Accepted Answer

The speculative motive for holding cash is to take advantage of opportunities that may arise in the future, such as an anticipated decline in the price of raw materials. Options A, B, and C are examples of precautionary, transaction, and precautionary motives, respectively.

Question 14

All of the following elements of a cash management program will likely contribute to an increase in the value of the firm EXCEPT

Accepted Answer

Increasing cash balances for precautionary reasons might not necessarily contribute to an increase in the value of the firm. Holding excess cash can be inefficient as it could be invested in projects that yield a higher return, thus increasing the firm's value. Collecting cash quickly, slowing down disbursements, and accurate cash flow forecasts contribute to better cash management and can enhance the firm's value by optimizing the use of available funds.

Question 15

A company concerned about the liquidity of its near-cash securities should invest in U.S.Treasury bills because the secondary market for U.S.Treasury bills is excellent.

Accepted Answer

U.S. Treasury bills are highly liquid and have an excellent secondary market, making them a good option for companies concerned about the liquidity of their near-cash securities. This means they can easily be bought and sold on the open market, allowing the company to quickly access cash if needed.

Question 16

U.S.Treasury bills,bankers' acceptances and commercial paper are all sold on a discount basis.

Accepted Answer

U.S. Treasury bills, bankers' acceptances, and commercial paper are all sold at a discount from their face value, meaning that they are sold for less than their par value, and the difference represents the interest earned by the buyer.

Question 17

The speed of the collections process is determined by three types of float: mail float,processing float,and transit float.

Accepted Answer

The statement is true. The speed of the collections process is influenced by the mail float, processing float, and transit float.

Question 18

U.S.Treasury bills are exempt from federal,state,and local income taxes.

Accepted Answer

U.S. Treasury bills are exempt from state and local income taxes, but they are subject to federal income taxes.

Question 19

Which of the following would be an example of the "transactions motive" for a firm holding cash balances?

Accepted Answer

The transactions motive for holding cash balances refers to the need for a firm to have cash on hand to conduct regular business transactions, such as purchasing inventory, paying bills, and meeting other expenses. Therefore, purchasing inventory would be an example of the transactions motive. Investing excess cash balances would be an example of the speculative motive, anticipating a downturn in the economy would be an example of the precautionary motive, and taking advantage of an anticipated decline in the price of raw materials would be an example of the speculative motive.

Question 20

Commercial paper is much more liquid than money-market mutual funds because commercial paper is available to only the most creditworthy corporations.

Accepted Answer

Money-market mutual funds are highly liquid because they invest in short-term, highly rated financial instruments, including commercial paper. While commercial paper is usually issued by creditworthy corporations, it is not necessarily more liquid than money-market mutual funds, as it depends on the specific commercial paper and fund.

Quiz 17: Cash,receivables,and Inventory Management