Deck 19: Cash and Liquidity Management

Question 1

Collection float is equal to the sum of mail float, processing float, and availability float.

Answer 1

False

Question 2

Net float is the difference between a firm's ledger balance and its available balance.

Answer 2

True

Question 3

With respect to the workings of a lockbox system, The company gathers their mail from the
lockboxes and immediately deposits the cheques.

Answer 3

False

Question 4

Collection float is the time that elapses between when a customer mails a payment and when the
cheque clears the banking system.

Question 5

Processing delay Is a components of collection float.

Question 6

Preauthorized payments help reduce collection float.

Question 7

Disbursement float is virtually eliminated when payments are made electronically.

Question 8

Disbursement float is created by cheques which have been deposited into a firm's bank account
but which have not yet cleared.

Question 9

Net float that is positive is called net collection float.

Question 10

Concentration time Is a components of collection float.

Question 11

Collection float increases book balances but does not immediately change available balances.

Question 12

Net float that is positive is preferred by firms over net float that is negative.

Question 13

Electronic lockboxes help reduce collection float.

Question 14

Disbursement float is sometimes used by firms to fund short-term investments even though such
use is ethically questionable.

Question 15

With respect to the workings of a lockbox system, The payments are recorded on the customer's
account prior to the cheques being deposited.

Question 16

Disbursement float is created by any transaction which decreases a firm's book balance but not its
available cash balance.

Question 17

Availability delay Is a components of collection float.

Question 18

Mailing time Is a components of collection float.

Question 19

Use of remote post office box help reduce collection float.

Question 20

Net float is the sum of the total collection and disbursements float.

Question 21

Establishing preauthorized payment arrangements will decrease the total collection time for a firm.

Question 22

A zero-balance account is required to maintain a safety stock.

Question 23

The use of a lockbox system to collect payments provides one principal benefit: a reduction in
processing time.

Question 24

Peterson Products uses a zero-balance account for cash management purposes. McLeod
Enterprises does not. If the firms are otherwise identical, one would expect McLeod to maintain a
larger total cash safety stock than Peterson.

Question 25

A zero-balance account receives funds from a master account.

Question 26

Accepting debit card transactions will decrease the total collection time for a firm.

Question 27

Billing customers electronically will decrease the total collection time for a firm.

Question 28

Collecting your firm's mail earlier in the morning and delivering it directly to the people who process
these payments should help reduce the total collection time for your firm.

Question 29

One of the objectives of the cash management process is to determine the Best way to invest the
temporary excess cash reserves of the firm.

Question 30

A zero-balance account helps the firm free up surplus cash.

Question 31

Implementing a lockbox system will decrease the total collection time for a firm.

Question 32

Adding additional staff in the mornings for mail and payment processing should help reduce the
total collection time for your firm.

Question 33

Providing a discount for customers who pay electronically should help reduce the total collection
time for your firm.

Question 34

Establishing preauthorized payments for fixed payments from customers should help reduce the
total collection time for your firm.

Question 35

One of the objectives of the cash management process is to determine the Appropriate level of
cash that must be kept on hand.

Question 36

With respect to the workings of a lockbox system, by the time the company starts to record the
payments, the cheques are already in the clearing process.

Question 37

One of the objectives of the cash management process is to determine the Best means by which to
collect cash owed to the firm.

Question 38

A zero-balance account is funded on an as-needed basis only.

Question 39

Over-the-counter collections help reduce collection float.

Question 40

One of the objectives of the cash management process is to determine the best way to pay for
materials, services, etc., provided to the firm.

Question 41

If the lower limit on cash balances rises by one dollar, the upper limit as specified by the Miller-Orr
model also rises one dollar.

Question 42

In regards to the BAT and Miller-Orr cash management models, the lower the uncertainty of cash
flows, the higher the target cash balance.

Question 43

The fixed cost of a securities trade is needed to determine the optimal strategy using the BAT
model.

Question 44

Management's desired lower level of cash is needed to determine the optimal strategy using the
BAT model.

Question 45

In regards to the Miller-Orr Model, The greater the variance of the cash flows, the greater the
distance between the target balance and the minimum balance.

Question 46

A shortcoming of both the BAT and the Miller-Orr models is that the cost of borrowing is likely more
expensive than selling marketable securities.

Question 47

In regards to the Miller-Orr Model, The higher the interest rate, the lower the target cash balance.

Question 48

This model is used to determine the optimal debt-equity ratio for a firm.

Question 49

Under the BAT model, an increase in the interest rate on marketable securities will cause the
optimal initial balance to decline.

Question 50

The amount of cash needed for transactions over a period of time is needed to determine the
optimal strategy using the BAT model.

Question 51

One advantage of the BAT model is that it assumes that a firm has a constant cash outflow every
day.

Question 52

The cost of borrowing and the cost of selling securities affect the target cash balance of a firm.

Question 53

Management's desire to maintain a low cash balance affects their need to borrow money.

Question 54

Under the BAT model, a decrease in the total amount of new cash needed for transactions over the
planning period will cause the optimal initial balance to decline.

Question 55

The target cash balance decreases as the interest rate rises.

Question 56

The BAT model is a complex model designed to estimate the cash flows of a firm.

Question 57

One disadvantage of the BAT model is the fact that it assumes all cash outflows are known with
certainty.

Question 58

The opportunity cost of holding cash is needed to determine the optimal strategy using the BAT
model.

Question 59

In regards to the Miller-Orr Model, The cash balance of the firm is permitted to fluctuate within a
given range.

Question 60

A firm has a greater likelihood of needing an unexpected loan when its cash flows are relatively
constant over time.

Question 61

The BAT model is more useful than the Miller-Orr model because the Miller-Orr model is too
complex for most firms.

Question 62

Float motive is a reason for a firm to maintain liquidity.

Question 63

Low default risk is a characteristic of money market securities.

Question 64

Excessive short-term financing is a primary reason why firms have cash surpluses.

Question 65

With respect to the workings of a lockbox system, The cheque clearing process begins before the
company even knows the payments have been received.

Question 66

Cyclical activities is a primary reason why firms have cash surpluses.

Question 67

Speculative motive is a reason for a firm to maintain liquidity.

Question 68

A firm's marketable securities account has both 270-day corporate commercial paper and three-
month Treasury bills. If the firm chooses to shift its policy and invest 100% in commercial paper, it
would likely increase the default risk of its marketable securities portfolio.

Question 69

Highly marketable is a characteristic of money market securities.

Question 70

A company receives an average of 280 cheques a day with an average value of $160 a cheque. The annual interest rate is 4%. The current delay in processing and clearing is three days. If the
Company implements a lockbox service that has been proposed to them, the clearing time will be
Reduced by two days. What is the maximum fee per cheque that can be charged by the bank and
Still have the lockbox service be acceptable to the company?

A) $.0300
B) $.0351
C) $.0367
D) $.0398
E) $.0400

Question 71

Precautionary motive is a reason for a firm to maintain liquidity.

Question 72

A firm's marketable securities account has both 270-day corporate commercial paper and three-
month Treasury bills. If the firm chooses to shift its policy and invest 100% in commercial paper, it
would likely increase the maturity risk of its marketable securities portfolio.

Question 73

Liquidity is a characteristic of money market securities.

Question 74

Transaction motive is a reason for a firm to maintain liquidity.

Question 75

Desire to invest funds is a primary reason why firms have cash surpluses.

Question 76

Long-term maturities is a characteristic of money market securities.

Question 77

A firm's marketable securities account has both 270-day corporate commercial paper and three-
month Treasury bills. If the firm chooses to shift its policy and invest 100% in commercial paper, it
would likely increase the marketability risk of its marketable securities portfolio.

Question 78

A firm's marketable securities account has both 270-day corporate commercial paper and three-
month Treasury bills. If the firm chooses to shift its policy and invest 100% in commercial paper, it
would likely increase the interest rate risk of its marketable securities portfolio.

Question 79

Financing of planned expenditures Is a primary reason why firms have cash surpluses.

Question 80

The opportunity cost of holding cash is inversely related to the level of market interest rates.