Question 1

A sensible cash management policy would be to:

Accepted Answer

Holding enough cash on hand to meet ordinary business needs is essential for any company, as it ensures that the business can continue to operate without disruptions due to cash flow issues. Additionally, having excess cash to invest in marketable securities provides a measure of safety and liquidity, which can be beneficial in times of economic uncertainty or unexpected business expenses. Having nearly enough cash on hand (option B) or enough cash to meet any potential demand for cash (option C) may not be sufficient in times of unexpected events or periods of financial stress. Option D is not a practical or feasible approach to cash management for most businesses.

Question 2

Which of the following is not true of float management?

Accepted Answer

The statement "Float management will succeed if the firm can collect late and pay early" is not true. Float management aims to reduce the time between receiving and sending out funds, and it does not necessarily involve collecting payments later or paying bills early. In fact, delaying payments could result in negative consequences such as late fees and damaged relationships with suppliers.

Question 3

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

The answer of If the total long term financing of...

Question 4

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

Accepted Answer

All of these statements are true regarding Auction-Rate Preferred Stock, which means that it has less risk factors than Adjustable-Rate Preferred Stock. The shorter 49-day reset period makes it easier for investors to adjust to changes in interest rates, the market sets the dividend level reducing principle volatility, and better liquidity allows corporate investors to control their investments individually.

Question 5

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 have a floating rate and a dividend tax exclusion.

Question 6

The Timberline firm expects a total cash need of $12,500 over the next 3 months. They have a beginning cash balance of $1,500,and cash is replenished when it hits zero. The fixed cost of selling securities to replenish cash balances is $3.50. The interest rate on marketable securities is 8% per annum. There is a constant rate of cash disbursement and no cash receipts during the month. What is the total fixed order cost for the next three months based on the firm's current practice?

Accepted Answer

The total fixed order cost for the next three months is $29.17. This is calculated as follows:Total cash need = $12,500Beginning cash balance = $1,500Cash replenished when it hits zeroFixed cost of selling securities to replenish cash balances = $3.50Interest rate on marketable securities = 8% per annumConstant rate of cash disbursement and no cash receipts during the monthNumber of times cash is replenished = Total cash need / (Beginning cash balance + Fixed cost of selling securities to replenish cash balances)= $12,500 / ($1,500 + $3.50)= 8.33 timesTotal fixed order cost = Number of times cash is replenished * Fixed cost of selling securities to replenish cash balances= 8.33 * $3.50= $29.17

Question 7

The Timberline firm expects a total cash need of $12,500 over the next 3 months. They have a beginning cash balance of $1,500,and cash is replenished when it hits zero. The fixed cost of selling securities to replenish cash balances is $3.50. The interest rate on marketable securities is 8% per annum. There is a constant rate of cash disbursement and no cash receipts during the month. What is the total opportunity cost for a month based on the firm's current practice?

Accepted Answer

The answer of The Timberline firm expects a total cash...

Question 8

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

Accepted Answer

Zero balance accounts are designed to have a zero balance at all times, not a minimum balance. This allows for efficient management of funds as checks are automatically transferred into the account as they are presented for payment, without the need for manual transfers. The purpose of zero balance accounts is to reduce idle balances and provide accurate record-keeping for disbursement activities. The master account and the zero balance account can be located at the same or different banks.

Question 9

Floating rate CDs differ from regular CDs in that:

Accepted Answer

Floating rate CDs have coupons that are frequently reset based on a reference interest rate such as LIBOR. This sets them apart from regular CDs, which typically have a fixed interest rate for their entire term.

Question 10

On an average day,a company writes checks totaling $1,500. These checks take 7 days to clear. The company receives checks totaling $1,800. These checks take 4 days to clear. The cost of debt is 9%. What is the firm's collection float?

Accepted Answer

The collection float is the difference between the amount of checks written and the amount of checks received, multiplied by the number of days it takes for the checks to clear. In this case, the collection float is ($1,500 * 7) - ($1,800 * 4) = -$7,200.

Question 11

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 still carries risks despite its floating dividend rate. Its limited market could lead to volatility and reduced liquidity, which may affect the principal value of the instrument. Additionally, ARPSs are issued by a narrow range of issuers, hence the chance of downgrade is high. Finally, any changes in tax laws may result in lower after-tax returns for the holder of the ARPS. Therefore, all of the options given are the potential risks associated with ARPS.

Question 12

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

Accepted Answer

Lockboxes are the most common cash management technique used to speed up collections by having customer payments sent directly to a special post office box. The bank picks up the payments, processes them quickly, deposits them to the company's account, and provides remittance information to the company. This reduces the processing time and improves cash flow. Concentration banking, wire transfers, and in-house processing are other cash management techniques, but they are not specifically focused on speeding up collections.

Question 13

The Timberline firm expects a total cash need of $12,500 over the next 3 months. They have a beginning cash balance of $1,500,and cash is replenished when it hits zero. The fixed cost of selling securities to replenish cash balances is $3.50. The interest rate on marketable securities is 8% per annum. There is a constant rate of cash disbursement and no cash receipts during the month. Based on the firm's current practice,how many times during the next 3 months will the cash balance be replenished?

Accepted Answer

The firm needs $12,500 over 3 months and starts with $1,500, so it needs to replenish $11,000. If the cash is replenished when it hits zero, the number of times it needs to be replenished is $11,000 / $1,500 = 7.33 times. However, since the firm can only replenish whole times, it will need to do so 8 times.

Question 14

The Timberline firm expects a total cash need of $12,500 over the next 3 months. They have a beginning cash balance of $1,500,and cash is replenished when it hits zero. The fixed cost of selling securities to replenish cash balances is $3.50. The interest rate on marketable securities is 8% per annum. There is a constant rate of cash disbursement and no cash receipts during the month. Based on the firm's current practice,what is the average daily cash balance (a month has 30 days)?

Accepted Answer

The average daily cash balance can be calculated using the Baumol model. The formula is: Average Cash Balance = (1/2) * (2 * Total Cash Need * Fixed Cost / Interest Rate)^(1/2). Here, Total Cash Need = $12,500, Fixed Cost = $3.50, and Interest Rate = 8% per annum or 0.08/12 per month. The average cash balance is approximately $94.44.

Question 15

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

Accepted Answer

Moving collections and deposits closer together in concentration banks and moving surplus funds quickly by wire transfers are efficient methods to reduce mailing and clearing time in funds management. Option B involves cross country mailing, which increases the time and cost of fund transfers. Option C involves drawing checks against zero balance accounts, which may lead to overdraft fees and insufficient funds. Option D involves wiring funds to zero balance accounts and using lockboxes in many cities, which may increase the cost and complexity of funds management. Therefore, option A is the best choice for efficient funds management.

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. None of the other options are true.

Question 17

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

Accepted Answer

Lockboxes are used to reduce mail float by allowing customers to send their payments directly to a secure lockbox address instead of mailing them to the company's address, which can take additional time for processing and delivery. Lockboxes increase processing efficiency and speed, reducing the time it takes for payments to be credited to the company's account and reducing mail float.

Question 18

On an average day,a company writes checks totaling $1,500. These checks take 7 days to clear. The company receives checks totaling $1,800. These checks take 4 days to clear. The cost of debt is 9%. What is the firm's disbursement float?

Accepted Answer

Disbursement float is calculated as the amount of checks written multiplied by the number of days it takes for them to clear. Here, $1,500 * 7 = $10,500.

Question 19

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

Accepted Answer

A wire transfer is the fastest way to transfer funds from one bank to another, as it is completed electronically and typically settles within hours. However, wire transfers can be expensive due to the fees charged by banks for this service. Therefore, it is the most expensive option.

Question 20

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

Accepted Answer

The answer of The major difference between a check and...

Quiz 27: Cash Management