Deck 28: Cash Management

Question 1

Examples of cash disbursements do not include:

A) wages.
B) payment of raw materials.
C) taxes.
D) dividends.
E) sales of assets.

Answer 1

sales of assets.

Question 2

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%. If the average daily float is $3,300, what is the net present value per day?

A) -282.48
B) -79.41
C) -297.00
D) -0.81

Answer 2

-0.81

Question 3

Financial managers broaden their definition of cash to include:

A) currency, bank deposits, stocks and bonds.
B) currency, checking deposits, undeposited checks, and bonds.
C) cash, bonds, bank deposits and short term marketable securities.
D) currency, checking deposits, undeposited checks and short term marketable securities.

Answer 3

currency, checking deposits, undeposited checks and short term marketable securities.

Question 4

A common cash management technique used to speed up collections from a customer's bank account to a retailer's bank account is:

A) a lockbox system.
B) a mail float system.
C) a point-of-sale system using debit cards.
D) an in-house processing float system.
E) an availability float system.

Question 5

A financial manager should be concerned about bank cash and net float; which is:

A) the difference between collection and book cash.
B) the difference between collection float and disbursement float.
C) the difference between disbursement float and book cash.
D) the difference between disbursement float and bank credit.

Question 6

Firms would need to hold zero cash when:

A) transactions related needs are greater than cash inflows.
B) transactions related needs are less than cash inflows.
C) transactions related needs are not perfectly synchronized with cash inflows.
D) transactions related needs are perfectly synchronized with cash inflows.

Question 7

The difference between bank cash and book cash is called:

A) float.
B) disbursement float.
C) net float.
D) collection float.

Question 8

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 net float?

A) $300
B) -$3,300
C) $3,300
D) -$300

Question 9

The BM firm expects a total need of $12,500 over the next 3 months. They have a beginning cash balance of $1500, 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. 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?

A) $10,500
B) -$8,700
C) $1,800
D) -$10,500

Question 10

The target cash balance is reached when:

A) the interest on any marketable security throw-off is maximized.
B) the interest foregone from not investing in an equivalent amount of Treasury bills is minimized.
C) the value of cash liquidity equals interest foregone on an equivalent amount of Treasury bills.
D) the liquidity value is greater than interest foregone on an equivalent amount of Treasury bills.

Question 11

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?

A) $10,500
B) -$7,200
C) $1,800
D) -$1,800

Question 12

Which of the following is not true of float management?

A) Float management involves controlling the collection and disbursement of cash.
B) An objective of float management is to speed up the collection float.
C) An objective of float management is to slow down disbursement float.
D) Float management will succeed if the firm can collect late and pay early.

Question 13

Collection float increases book cash immediately but:

A) decreases disbursement float.
B) decreases bank cash.
C) does not immediately change bank cash.
D) offsets net float.

Question 14

Checks written by the firm are said to generate:

A) collection float.
B) ledger float.
C) disbursement float.
D) book float.

Question 15

If a firm has achieved its target cash balance the net present value is:

A) positive because the cash balance is positive.
B) zero because increasing the cash balance increases the interest cost.
C) negative because the cash balance has a financing cost.
D) positive because decreasing the cash decreases the cost of illiquidity.

Question 16

A sensible cash management policy would be to:

A) have enough cash on hand to meet ordinary course of business and some excess cash to invest in marketable securities as a precautionary measure.
B) have nearly enough cash on hand to meet ordinary course of business.
C) have enough cash on hand to meet any potential demand for cash.
D) have a zero cash balance and charge all expenditures.

Question 17

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

A) it is too difficult to estimate the costs of security transactions.
B) banks are compensated by account balances for payment of services.
C) corporations have few bank accounts and it is difficult to manage their cash.
D) cash is costless and need not be managed closely.

Question 18

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

A) bank; collected
B) ledger; book
C) bank; ledger
D) book; bank

Question 19

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

A) concentration banking.
B) wire transfers.
C) lockbox systems.
D) in-house processing.

Question 20

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

A) availability or clearing float.
B) mail float.
C) in-house processing float.
D) disbursement float.

Question 21

Short-term marketable securities generally have:

A) high maturity risk.
B) little, if any, marketability.
C) significant default risk.
D) a high level of liquidity.
E) maturities between one and two years.

Question 22

Your firm has average daily receipts of $2,500. These receipts are available after 6 days on average. The interest rate that could be earned is .02% (.0002) per day. What is the approximate cost of the float per day?

A) $50
B) $30
C) $2.5
D) $3.0

Question 23

Aesbrook Airlines currently has $2.4 million on deposit with its bank. Aesbrook pays its fuel bill by writing a check for $1.1 million. Calculate the company's book cash and bank cash after it writes the check.

Question 24

The Smythe firm expects a total cash need of $9,000 over the next 4 months. They have a beginning cash balance of $1,000, and cash is replenished when it hits zero. The fixed cost of selling securities to replenish cash balances is $4.00. 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)?

Question 25

The Mesa Bank is offering your company the use of their lockbox services. They estimate that you can reduce your average mail time by 2 days and they can save you a combined clearing and processing time of 1.5 days by putting the checks into the clearing system sooner. The firm receives 320 checks a day on average written for $2500. The current T-Bill rate is 4% or.0107% per day.
If Mesa will charge your firm an annual fee of $35,000 and $.20 per check handled will you accept Mesa's services?

Question 26

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

A) moving collections and deposits closer together in concentration banks; and moving surplus funds quickly by wire transfers.
B) moving mailing points to cross country locations and using depository drafts to transfer funds.
C) drawing checks against zero balance accounts and using cross country mailing.
D) wiring funds to zero balance accounts and using lockboxes in many cities.

Question 27

Your firm receives 10 checks per month. Of these, 6 are for $1,000 and 4 are for $500. The delay for the $1,000 checks is 5 days, and the $500 checks are delayed 8 days.

Question 28

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:

A) hold excess cash.
B) borrow short term and hold excess cash.
C) hold excess cash and reduce business activities.
D) invest in marketable securities and borrow short term.

Question 29

Sigma Plus Corporation has a variance of daily cash flow of $8. The daily interest rate is.021% (.00021). Sigma desires a minimum cash balance of $80. The fixed cost of a security transaction is $2.00. Using the Miller-Orr model, calculate Sigma's target cash balance, the upper limit on cash balances, and the average daily cash balance. Explain how this is used to manage cash.

Question 30

The net float of a firm is made up of disbursement float and collection float. Discuss the three components of collection float and how they would work against the firm.

Question 31

Your firm receives 40 checks per month. Of these, 10 are for $1,200 and 30 are for $500. The delay for the $1,200 checks is 4 days; the $500 checks are delayed 6 days. What is the weighted average delay?

Question 32

Which of the following money-market securities has no active secondary market?

A) Certificates of deposit (CD's)
B) Commercial paper
C) Banker's acceptances
D) Treasury bills

Question 33

The Mesa Bank is offering your company the use of their lockbox services. They estimate that you can reduce your average mail time by 2 days and they can save you a combined clearing and processing time of 1.5 days by putting the checks into the clearing system sooner. The firm receives 320 checks a day on average written for $2500. The current T-Bill rate is 4% or.0107% per day.
What is the savings float and what can you earn if the firm takes Mesa's lockbox service?

Question 34

Marketability risk is synonymous with:

A) maturity risk.
B) default risk.
C) liquidity risk.
D) interest rate risk.

Question 35

During the month you receive 4 checks, one for $100, two for $200, and one for $500. They are delayed for 2 days, 4 days, and 8 days respectively. What is your average daily collection float (a month has 30 days)?