Deck 21: Mergers, Acquisitions, and Corporate Control

Question 1

Which type of float would be least important to the payer of the funds?

A)Processing float
B)Presentation float
C)Mail float
D)Availability float

Answer 1

Availability float

Question 2

A manager estimates that her firm benefits from an average float time of six days.Which of the following is true if the firm averages $15,000 per day in payments?

A)The firm is losing interest on $90,000 per year
B)The firm's ledger balance averages $90,000 more than the bank's ledger balance
C)The firm has $45,000 in net float
D)The available balance at the bank is $90,000 greater than shown on the firm's books

Answer 2

The available balance at the bank is $90,000 greater than shown on the firm's books

Question 3

At the end of each day, the balance in a zero-balance account will be:

A)Zero
B)Just enough for the next day's disbursements
C)Just enough for the current day's disbursement
D)Just the interest earned on today's balance

Answer 3

Zero

Question 4

Remote disbursement is a payment system designed to:

A)Increase availability float
B)Increase payment float
C)Decrease payment float
D)Decrease availability float

Question 5

If the marginal reduction in order costs exceeds the marginal carrying cost of inventory, then:

A)The firm has minimized its total carrying costs
B)The firm should increase its order size
C)The firm should decrease its order size
D)The firm has maximized its order costs

Question 6

Which of the following is correct about wire transfer of funds, given that wire transfer saves three days, the annual interest rate is 6 percent, and the cost of wire transfer is $20?

A)Wire transfers should be preferred for amounts exceeding $2,400
B)Depository transfer cheques should be preferred for amounts under $121,667
C)Wire transfers should be preferred for amounts exceeding $40,576
D)Depository transfers should be preferred for amounts exceeding $121,667 Daily interest rate x number of days saved x size of transfer = $20
)06/365 x 3 x size of transfer = $20

Question 7

What is the benefit for a firm with daily sales of $30,000 to be able to speed up collections by three days, assuming an 8 percent annual opportunity cost of funds?

A)$7,200 daily benefit
B)$7,200 annual benefit
C)$30,000 annual benefit
D)$90,000 annual benefit Daily sales x 3 days x .08
= $30,000 x 3 x .08

Question 8

Which of the following would not be included in inventory carrying cost?

A)Insurance expense for the inventory
B)Opportunity cost of capital for inventory investment
C)Cost of inventory
D)Cost of shelf space

Question 9

What is the average inventory level, based on EOQ, for a firm that has annual sales of 2,500 units, costs per order of $45, and carrying costs of $5 per unit?

A)35
B)75
C)106
D)237 EOQ =
= 212

Question 10

Which of the following conditions would make a lock-box system potentially more attractive to a firm?

A)The interest rate declines
B)Mail time saved is lower
C)Payment size is higher
D)Processing time saved is lower

Question 11

When firms select banks and write cheques in a manner exclusively intended to create float they are:

A)Playing the float
B)Reducing the bank's ledger balance
C)Kiting cheques
D)Reducing the firm's net float

Question 12

What approximate value should a firm put on being able to permanently reduce the length of its collection period by one day if annual sales (all on credit) are $5,000,000 and the appropriate opportunity cost is 10 percent annually?

A)$1,370
B)$15,068
C)$13,700
D)$50,000 annual sales/365 x 1 day $\div$ .10/365
= $\approx$ $3.75 per day in interest,

Question 13

What are the expected annual savings from a lock-box system that collects 150 cheques per day averaging $500 each, and reduces mailing and processing times by 2.5 and 1.5 days respectively, if the annual interest rate is 7 percent?

A)$5,250
B)$13,125
C)$21,000
D)$300,000 Annual savings = average collections x time saved x annual interest rate
= 150 x $500 x (2.5 + 1.5) x .07

Question 14

A system by which firms assign their customers for collection purposes to regional banks that transfer funds to a central bank is known as:

A)A lock-box system
B)A zero-balance account
C)A wire transfer
D)Concentration banking

Question 15

Your corporate financial manager has decided to liquidate securities to provide for cash needs in units of $50,000.Is that amount of cash consistent with annual cash needs of $2,500,000, costs per sale of $30, and annual T-bill rate of 6 percent?

A)Yes, that amount is appropriate
B)No, sales amount should be increased to $60,000
C)No, sales amount should be decreased to $35,000
D)No, sales amount should be decreased to $5,000

Question 16

ABC Corp.shows a ledger balance of $50,000 prior to writing a cheque for $5,000 and depositing $1,000 in cheques.What is the amount of their net float?

A)$1,000
B)$4,000
C)$5,000
D)$6,000

Question 17

Potential savings from a lock-box system will be reduced by:

A)The additional processing time required
B)The additional mailing time required
C)Local bank charges
D)An increase in interest rates

Question 18

What is the economic order quantity for an automobile dealer selling 2,000 cars per year, at a cost of $750 per order, and a carrying cost of $300 per automobile?

A)40 cars
B)71 cars
C)100 cars
D)126 cars EOQ =
=

Question 19

What is the total carrying cost for an inventory of 200 widgets if the per-widget carrying cost is $4, the cost per order is $14, and there are 5 orders per year?

A)$400
B)$470
C)$800
D)$870 Total carrying costs = carrying cost per widget x average widget inventory
= $4 x 200/2

Question 20

Cheques that have been deposited may not be immediately available for use due to:

A)Availability float
B)Payment float
C)Net float
D)Electronic transfer

Question 21

If a firm's availability float exceeds its payment float, then the firm has:

A)More available balance than shown in its ledger
B)Less available balance than shown in its ledger
C)Net float equal to the payment float
D)Net float equal to the availability float

Question 22

FastBucks Inc.has offered to set up a concentration banking system that will save three days of mail float and one day of presentation float.Your receivables average $20,000 per day and the opportunity cost of funds is 6 percent.How much would you be willing to pay FastBucks annually to administer the system perpetually?

A)$2,400
B)$4,800
C)$40,000
D)$80,000 present value of reduced float = 4 days @ $20,000
= $80,000
(see answer to Question 50 for valuation)
Thus, what annuity has a present value of $40,000 when discounted at 6 percent?
$80,000 = annuity/.06

Question 23

Which of the following statements is true regarding repurchase agreements?

A)Their maturity is greater than one year
B)They are an unsecured form of borrowing
C)Treasury bills serve as their collateral
D)They make explicit, rather than implicit, interest payments

Question 24

In the Baumol model, increases in the T-bill rate suggest that:

A)Average cash balances should be increased
B)Average cash balances should be decreased
C)The cost per sale of securities will increase
D)Fewer sales should be conducted each year

Question 25

The bank's ledger balance for a firm is equal to the:

A)Firm's ledger balance less payment float
B)Available balance plus availability float
C)Firm's ledger balance less availability float
D)Available balance plus payment float

Question 26

Which of the following strategies could permanently increase your firm's net float?

A)Increase payment float; increase availability float
B)Decrease payment float; decrease availability float
C)Increase payment float; decrease availability float
D)Decrease payment float; increase availability float

Question 27

Which of the following is not an accepted method of attempting to increase a firm's net float?

A)Remote bank locations
B)Lock-box systems
C)Cheque kiting
D)Concentration banking

Question 28

The rationale behind a zero-balance account is that:

A)Float increases when suppliers wait for their funds
B)Creditors will not be informed of cash balances
C)No unnecessary funds are tied up
D)Budgeting is easier to conduct

Question 29

Which of the following is true regarding the cash management model in Figure 20.5?

A)The return point is in the middle of the spread
B)The model minimizes the number of transactions
C)The model assumes cash flows to be predictable
D)The return point minimizes the sum of interest costs and transaction costs

Question 30

Which of the following would not be considered a money market instrument?

A)Canadian Treasury bill with 91 days until maturity
B)Commercial paper with 180 days until maturity
C)Certificate of deposit with 15 months until maturity
D)A repurchase agreement, backed by U.S.government securities, with less than one week until maturity

Question 31

Your cash manager is currently using wire transfer to obtain collections from distant locations each time that the cash accumulates to $50,000.Evaluate the financial logic of this policy if the wire transfer costs $20, saves three days of mail time, and interest rates average 7 percent annually.

A)Stop the policy; $8.77 is lost with each transfer
B)Stop the policy unless the transfer amount is increased to approximately $65,200
C)Continue the policy at the current transfer amount
D)Improve policy by reducing transfer amount to $34,800 break-even wire transfer = 3 days x (7%/365) x $50,000 = $28.77
$28)77 > $20

Question 32

Assuming that the firm can either hold cash paying no interest or invest in marketable securities, which of the following might induce the manager to hold higher cash balances?

A)The cost of borrowing is high relative to interest rates on marketable securities
B)Future cash flows are relatively predictable
C)The cost of cash balances is relatively high
D)Bank interest rates are expected to increase

Question 33

What are the minimum total costs of carrying and ordering inventory for a firm that sells 1,500 units with a carrying cost of $2 per unit and places orders in lots of 100?

A)$100
B)$200
C)$400
D)$430 Total carrying costs:
= carrying cost per unit x average inventory
= $2 x (100/2)
= $100

Question 34

How much money can be saved annually by setting up a lock-box system that will process 500 cheques per day at a cost of $0.20 per cheque if each cheque averages $220, collection float is reduced by three days, and the annual interest rate is 8 percent?

A)($27,700)
B)($10,100)
C)$10,000
D)$16,400 reduced collection float:
= 500 cheques daily x $220 per cheque x 3 days
= $330,000
Daily return = $330,000 x .08/365 = $72.33
Daily bank charges = 500 x $0.20 = $100,000

Question 35

How much value would be added to a firm that could permanently reduce its collection period by two days if daily collections average $10,000 and the opportunity cost is 5 percent annually?

A)$1,000
B)$1,200
C)$10,000
D)$20,000
daily interest = $10,000 x 2 x .05 $\div$ 365
= $2.7397
Present value of daily interest =

Question 36

The Canine Kennel uses 600 cases of dog food annually and orders 40 cases in each shipment.If the annual carrying cost per case (due to opportunity costs and extremely large dogs) is $5, what is the total annual carrying cost for dog food?

A)$100
B)$196
C)$200
D)$250 Total carrying costs:
= carrying cost per case x average inventory of cases
= $5 x (40/2)

Question 37

How much time must be saved to justify a lock-box system that processes 350 cheques per day at an average amount of $400 per cheque if the system will cost $20,000 annually and interest rates average 8 percent?

A)0.56 days
B)1.79 days
C)2.14 days
D)7.00 days break-even point for system = $20,000/.08 = $250,000
Thus, the system must reduce collection float by $250,000.
300 cheques x $400 per cheque x days saved = $250,000

Question 38

How many cases of microwave popcorn are sold annually by a firm which has total annual order costs of $32,000, orders in units of 100 cases, and is charged $90 per order in addition to the $72 per case product cost?

A)20,250 cases
B)35,556 cases
C)44,444 cases
D)49,383 cases total order costs = x cost per order
$32,000 = x $90

Question 39

Your firm's ledger shows a balance of $1 million which reflects today's $75,000 deposit and a cheque for $50,000 that went out in yesterday's mail.What is the bank's ledger balance for your account?

A)$875,000
B)$975,000
C)$1,025,000
D)$1,125,000 available balance = company's balance - availability float + payment float
= $1,000,000 - $75,000 + $50,000

Question 40

Paying a supplier in Toronto with a cheque drawn on a bank in New Brunswick is an example of:

A)Cheque kiting
B)Remote wire transfer
C)Concentration banking
D)Remote disbursement

Question 41

A firm is involved in "cheque kiting" if it:

A)Writes cheques to customers, but doesn't mail them
B)Does not pay creditors on time
C)Writes cheques from a remote banking center
D)Writes cheques on its own account for creating float

Question 42

Short-term securities are safe to keep idle cash balance.Choose from the following, one appropriate reason for this.

A)Low interest-rate risk
B)High returns
C)High net present value
D)Ease of receiving interest payments

Question 43

A firm with unpredictable cash flows is trying to set upper and lower limits for cash balances.Which of the following factors will result in upper and lower limits being closer to each other?

A)Variance of the cash flows is low
B)Cost of trading securities is high
C)Interest rate is low
D)Current cash balance is low

Question 44

Which of the following statements is correct for a firm that currently has total costs of carrying and ordering inventory that are 50 percent higher than total carrying costs?

A)Current order size is greater than optimal
B)Current order size is less than optimal
C)Per unit carrying costs are too high
D)The optimal order size is currently being used

Question 45

A firm issued three cheques for $25,000, $15,000, and $13,000 on January 31, and deposited a $30,000 cheque into the bank account.None of the cheques were cleared by February 1.What is the net float from these transactions?

A)-$23,000
B)+$23,000
C)-$83,000
D)+$83,000 Payment float = 25,000 + 15,000 + 13,000 = 53,000
Availability float = 30,000
Net float = Payment float - availability float

Question 46

A primary purpose of restricting the investment of idle cash balances to money market instruments is to:

A)Obtain government guarantees on the investment
B)Minimize transaction costs
C)Carry a minimal amount of interest-rate risk
D)Have a continual market for selling the investment

Question 47

The economic order quantity for a product is 500 units.However, new orders require five working-days lead time during which time 60 units will be used.Given this information, the correct economic order quantity is:

A)440 units
B)500 units
C)507 units
D)560 units

Question 48

What is the opportunity cost of keeping a cash balance of $2.5 million, if the daily interest rate is 0.025 percent and the average transaction cost of investing money overnight is $50?

A)$121
B)$171
C)$575
D)$675 Daily interest = 2.5 million x .00025 = 625

Question 49

Baumol's model is not suitable for a firm that experiences:

A)High cost of selling securities
B)Low level of annual cash disbursements
C)Increased variability of cash flow
D)High average cash balance

Question 50

Recent interest rate increases have increased the cost of carrying the inventory.What will be the effect of this on EOQ, if the sales and order costs remain the same?

A)EOQ will not change
B)EOQ will increase
C)EOQ will decrease
D)EOQ will increase slightly

Question 51

Money market securities usually have a maturity of:

A)More than one year
B)Less than one year
C)One to three years
D)Less than 91 days

Question 52

What is the economic order quantity for firm that sells 30,000 units annually, each unit has a $6 carrying cost, and the fixed cost of placing an order is $100?

A)100 units
B)122 units
C)707 units
D)1,000 units

Question 53

Average daily collection of cheques for a firm is $50,000.The firm also writes on the average $35,000 of cheques daily.If the collection period for cheques is 5 days, calculate the net float.

A)-$75,000
B)$75,000
C)($425,000)
D)$425,000 Payment float = 35,000 x 5 = 175,000
Availability float = 50,000 x 5 = 250,000

Question 54

Which of the following is correct for a firm that places orders for an item in amounts greater than the economic order quantity?

A)The marginal reduction in order cost exceeds the marginal carrying cost per item
B)The marginal carrying cost per item exceeds the marginal reduction in order cost
C)Total order costs exceed total carrying costs
D)Total cost of ordering and carrying has been maximized

Question 55

ABC Corp.disburses $4 million annually and keeps idle funds in Treasury bills which earn an average of 5 percent and incur a fixed cost of $35 each time a cash conversion is made.What is the average amount of cash that ABC Corp.should have on hand?

A)$16,733
B)$33,466
C)$37,417
D)$74,833 optimal cash sale
=
=
= $74,833

Question 56

Which of the following represents a serious concern for those firms employing the Baumol model of cash management?

A)Market illiquidity when selling bills
B)High interest-rate risk
C)Low rates of return on Treasury bills
D)A volatile rate of cash disbursements

Question 57

A firm's safety stock represents the:

A)Inventory having passed quality-control inspection
B)Largest order size that retains minimum order costs
C)Inventory of most frequently ordered items
D)Reorder point that considers lags and uncertainties

Question 58

Find the break-even size of wire transfer if the cost of wire transfer is $20, the daily interest rate is 0.02 percent and the reduction in float is three days.

A)$1,000
B)$25,000
C)$33,333
D)$100,000 Interest savings = 0.0002 x 3 days x amount
Break-even level is obtained by solving
0)0006 x transfer = $25

Question 59

In the Baumol model, the optimal sale amount is _____ with higher interest rates and ______ with a higher cost of selling securities.

A)Increased; increased
B)Decreased; increased
C)Decreased; decreased
D)Increased; decreased

Question 60

Preauthorized payments allow customers to do one of the following.

A)Pay the bills using a credit card
B)Arrange with their bank to have the account debited directly
C)Allow creditors to charge their credit card directly
D)Agree to pay the loan in fixed installments, with interest

Question 61

Shamba Corporation writes cheques that average $90,000 and take on average 5 days to clear.Cheques are received with an average value of $45,000 and take 9 days to clear.Determine the net float.

A)$45,000
B)$60,000
C)$855,000
D)$135,000

Question 62

The annual cash requirement for a firm is $1,000,000.The cost for each security transaction is $20 and current short-term return is 5 percent.Using Baumol's model estimate the initial cash balance.

A)$21,285.16
B)$28,284.27
C)$11,152.16
D)$16,814.28 Initial cash balance =

Question 63

Attempting to legally maximize the firm's available cash balance is referred to as kiting cheques.

Question 64

A lock-box service will benefit the following firm the most.

A)Firm has a large number of suppliers
B)Firm writes a large number of cheques daily
C)Firm has geographically dispersed customer base
D)Firm sells goods to a very few customers

Question 65

A firm's net float is equal to its payment float minus its availability float.

Question 66

If the volatility of the daily cash flows decreases, a firm will:

A)Increase the cash balance
B)Decrease the cash balance
C)Not change the cash balance
D)Increase the return point

Question 67

When the company's ledger balance exceeds the bank's ledger balance, the difference is often availability float.

Question 68

An East Coast firm should establish a lock-box service on the West Coast:

A)If the firm has a large number of customers
B)If it has banking facilities in West Coast
C)If West Coast customers are currently mailing their cheques to an East Coast address
D)If West Coast banks are more efficient

Question 69

Calculate the EOQ given the following information:

A)50,000 units
B)40,000 units
C)30,000 units
D)20,000 units

Question 70

Calculate the payment float given the following information:

A)$110,000
B)$70,000
C)$90,000
D)$80,000

Question 71

Which of the following is true for a "repurchase agreement"?

A)Non-collateralized loan
B)Long-term borrowing agreement
C)Uses Bills as collateral for loan
D)Borrows money from government

Question 72

Calculate EOQ given the following information:

A)30,000 units
B)40,000 units
C)50,000 units
D)60,000 units

Question 73

A firm using Baumol's model will do one of the following if the interest rate on short-term securities went up.

A)Increase the average cash balance
B)Increase the collection period
C)Decrease the collection period
D)Decrease the average cash balance

Question 74

The reason for firms to use remote disbursements is:

A)To decrease the payment float
B)To speed up the payments to the creditors
C)To decrease the collection time
D)To increase the payment float

Question 75

A firm that is located in Toronto receives on the average 2,000 cheques a day from its customers in the Vancouver area.Average payment per cheque is $1,500.A bank in Vancouver is offering a lock-box arrangement for collection and processing of these cheques at a cost of $0.50 per cheque.This arrangement will reduce the float by two days.The daily interest rate for the firm is 0.02 percent.What is the net saving from the lock-box arrangement?

A)$200
B)$400
C)$1,000
D)$1,200 Reduction in availability float = 2,000 x 1,500 x 2 days
= 6,000,000
Interest savings = 6,000,000 x 0.0002 = 1,200
Cost of processing = 0.5 x 2,000 = 1,000

Question 76

Which of the following statements is correct concerning the Figure 20.5's depiction of cash management?

A)The model minimizes the combined cost of the transaction and interest rate
B)The number of transactions is minimized
C)There are no lower and upper bounds for cash balances
D)The return point is halfway between upper and lower bounds

Question 77

A firm has estimated that it will need $3,000,000 net cash during the year.Current interest rate on money market securities is 6 percent per year and the cost of buying and selling securities cost $50 per transaction.What is the optimal transaction size of securities?

A)$70,710.68
B)$25,100.00
C)$65,285.21
D)$92,511.11 With Baumol's model

Question 78

Which of the following statements is not true?

A)Optimal inventory levels involve a trade-off between carrying costs and order costs
B)Carrying costs include the cost of storing goods as well as the cost of capital tied up in inventory
C)Inventory levels will be lower when storage or interest costs are high and will be higher when restocking costs are high
D)Inventory level does not rise in direct proportion to sales.As sales increase, the optimal inventory level rises, but more than proportionately

Question 79

Calculate the company's availability float given the following information:

A)$275,000
B)$50,000
C)$675,000
D)$900,000

Question 80

The economic order quantity:

A)Is the order size that minimizes the costs of orders
B)Is independent of forecast sales
C)Is a simplified, and even simplistic, version of the real process
D)Increases as cost per order decreases