Deck 27: Cash Management

Question 1

Collection float increases:

A)disbursement float.
B)bank cash.
C)book cash.
D)gross float times net float.
E)None of the above.

Answer 1

book cash.

Question 2

A firm with low cash balances will need to borrow to cover an unexpected cash outflow:

A)if it has high cash flow variability.
B)if COGS decrease.
C)if the firm maintains a zero lower control limit.
D)Both A and B.
E)Both A and C.

Answer 2

Both A and C.

Question 3

A financial manager should be concerned about bank cash and net float, which is the sum of:

A)collection and book cash.
B)collection float and disbursement float.
C)disbursement float and book cash.
D)disbursement float and bank credit.
E)None of the above.

Answer 3

collection float and disbursement float.

Question 4

The cost of holding cash:

A)is the opportunity cost of lost return.
B)is zero because it is the most liquid and desirable asset.
C)increases as cash holdings increase.
D)Both A and B.
E)Both A and C.

Question 5

Examples of cash disbursements do not include:

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

Question 6

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.
E)None of the above.

Question 7

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
E)None of the above

Question 8

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.
E)None of the above.

Question 9

Marketability risk is synonymous with:

A)maturity risk.
B)default risk.
C)liquidity risk.
D)interest rate risk.
E)None of the above.

Question 10

The difference between bank cash and book cash is called:

A)float.
B)disbursement float.
C)net float.
D)collection float.
E)None of the above.

Question 11

Which of the following is not an important characteristic of short-term marketable securities?

A)Maturity risk
B)Marketability
C)Taxability
D)Default risk
E)All of the above are important.

Question 12

Checks written by the firm are said to generate:

A)collection float.
B)ledger float.
C)disbursement float.
D)book float.
E)None of the above.

Question 13

Firms would need to hold zero cash when transactions related needs are:

A)greater than cash inflows.
B)less than cash inflows.
C)not perfectly synchronized with cash inflows.
D)perfectly synchronized with cash inflows.
E)None of the above.

Question 14

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
E)All money-market securities have active secondary markets.

Question 15

In determining the firm's target cash balance, trading costs: 12.In determining the firm's target cash balance, trading costs:

A)tend to fall when cash balances are large.
B)tend to rise when cash balances are large.
C)tend to rise when cash balances are low.
D)Both A and B.
E)Both A and C.

Question 16

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.
E)None of the above.

Question 17

Firms hold cash to satisfy the transaction motive.This means that cash is held:

A)to meet disbursements for normal operations.
B)to balance the flow between cash inflows and outflows.
C)to make unexpected payments such as special price discounts.
D)Both A and B.
E)None of the above.

Question 18

Firms hold cash, in part, to satisfy compensating balances.Compensating balances are:

A)cash balances held at the firm in excess of its transactions needs.
B)cash balances held at the firm that are below that of its transactions needs.
C)cash balances held at the firm in excess of its cash inflows.
D)cash balances held at commercial banks to pay implicitly for bank services.
E)None of the above.

Question 19

Determining the appropriate target cash balance involves assessing the trade-off between:

A)income and diversification.
B)the benefit and cost of liquidity.
C)balance sheet strength and transaction needs.
D)All of the above.
E)None of the above.

Question 20

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.
E)None of the above.

Question 21

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

A)concentration banking.
B)wire transfers.
C)lockboxes.
D)in-house processing.
E)None of the above.

Question 22

Auction-Rate Preferred Stock is similar to Adjustable-Rate Preferred Stock (ARPS) in that they:

A)are both issued for 90 days.
B)have a dividend rate set by the issuer.
C)both have a floating rate and a dividend tax exclusion.
D)are equally accessible to the corporate investor directly.
E)are not similar in any manner.

Question 23

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.
E)All of the above are true of float management.

Question 24

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

A)They are set up to handle disbursement activity.
B)The account has a minimum amount at all times.
C)Checks are automatically transferred into the account as checks are presented for payment.
D)The transfer is automatic and involves an accounting entry only.
E)The master and the zero balance accounts are located at the same bank.

Question 25

What is the firm's disbursement float?

A)$-10,500
B)$-8,700
C)$1,800
D)$10,500
E)None of the above.

Question 26

Floating rate CDs differ from regular CDs in that:

A)they have longer maturity.
B)they differ substantially in default risk.
C)they are not taxed.
D)they have coupons that are frequently reset.
E)All of the above describe differences.

Question 27

Adjustable rate preferred stock (ARPS) offer competitive rates of return with traditional money-market instruments but:

A)are not rated by Moody's or Standard & Poor's.
B)still provide the corporate investor with the tax exclusion on dividend income.
C)have a fixed rate of dividend income.
D)offers a highly competitive trading market.
E)None of the above.

Question 28

What is the total opportunity cost for a month based on the firm's current practice?

A)$5.00
B)$18.98
C)$27.92
D)$60.00
E)None of the above.

Question 29

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.
E)None of the above.

Question 30

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.
E)None of the above.

Question 31

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

A)the draft is not drawn on the bank but on the issuer.
B)the bank must present the draft to the firm for acceptance.
C)after acceptance of the draft the firm must deposit the funds to make payment.
D)All of the above.
E)None of the above.

Question 32

Based on the firm's current practice, how many times during the next 3 months will the cash balance be replenished?

A)3.33 times
B)4.42 times
C)8.33 times
D)13.35 times
E)None of the above.

Question 33

What is the firm's collection float?

A)$-7,200
B)$-1,800
C)$1,800
D)$10,500
E)None of the above.

Question 34

Based on the firm's current practice, what is the average daily cash balance (a month has 30 days)?

A)$50.00
B)$69.44
C)$94.44
D)$138.89
E)None of the above.

Question 35

What is the total fixed order cost for the next three months based on the firm's current practice?

A)$29.17
B)$37.80
C)$55.60
D)$75.60
E)None of the above.

Question 36

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.
E)None of the above.

Question 37

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

A)a lockbox system.
B)a mail float system.
C)a wire transfer.
D)an in-house processing float system.
E)an availability float system.

Question 38

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

A)the reset period is 49 days instead of 90.
B)the market sets the dividend level reducing principle volatility.
C)better liquidity allows corporate investors to control their investments individually.
D)All of the above.
E)None of the above.

Question 39

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:

A)a thin market causing potential principal risk and liquidity concerns.
B)the risk of downgrades from the narrow range of issuers.
C)the impact of tax law changes, which may reduce the after-tax value of the instrument.
D)All of the above.
E)None of the above.

Question 40

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.
E)None of the above.

Question 41

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?

A)4 days
B)4.5 days
C)5 days
D)5.5 days
E)6 days

Question 42

The Mesa Bank is offering your company the use of their loclbox services. they estimate that you can reduce your average mail time by 2 days and they can sava ypu a combined clearing and processing time of 1.5 days by butting the checks into the clearing system sooner. the firm recives 320 checks a day on average written for $2,500. 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 43

What is the firm's disbursement float?

A)$-6,000
B)$-4,500
C)$4,500
D)$6,000
E)None of the above.

Question 44

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)?

Question 45

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)$2.50
B)$3.00
C)$30.00
D)$50.00
E)None of the above.

Question 46

What is the firm's net float?

A)$-3,300
B)$-300
C)$300
D)$3,300
E)None of the above.

Question 47

What is the firm's net float?

A)$-2,500
B)$-2,400
C)$2,400
D)$2,500
E)None of the above.

Question 48

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 49

Discuss the Check Clearing Act for the 21^st Century, known as Check 21 and how it will impact floats.

Question 50

The Mesa Bank is offering your company the use of their loclbox services. they estimate that you can reduce your average mail time by 2 days and they can sava ypu a combined clearing and processing time of 1.5 days by butting the checks into the clearing system sooner. the firm recives 320 checks a day on average written for $2,500. 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 51

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

A)$-0.81
B)$-79.41
C)$-282.48
D)$-297.00
E)None of the above.

Question 52

If the average daily float is $2,500, what is the net present value per day?

A)$-0.55
B)$-5.55
C)$-252.66
D)$-197.00
E)None of the above.

Question 53

Fly-By-Night Airlines currently has $2.4 million on deposit with its bank.Fly-By-Night 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 54

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.Calculate the average daily float.

A)$1,533.33
B)$1,486.87
C)$1,500.00
D)$1,530.35
E)$1,590.04

Question 55

What is the firm's collection float?

A)$-4,500
B)$-3,600
C)$3,600
D)$4,500
E)None of the above.