Deck 27: Short-Term Capital Management

Question 1

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.

Answer 1

Commercial paper

Question 2

The lower limit, L, and the upper limit, H, are:

A) just outside points but no transaction are made.
B) the points at which Z – L securities are sold and H – Z securities are bought.
C) the points are which Z – L securities are bought and H – Z securities are sold.
D) the points at which Z –L is transacted but any value above Z is held.
E) None of the above.

Answer 2

the points at which Z – L securities are sold and H – Z securities are bought.

Question 3

In determining the firms 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.

Answer 3

Both A and C.

Question 4

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 5

In contrast to the Baumol model, the Miller-Orr model:

A)includes both cash inflows and outflows.
B)assumes that the distribution of daily cash flows is normally distributed.
C)allows the cash inflows and outflows to fluctuate randomly from day to day.
D)on each day the net cash flow could be the expected value or some higher or lower value.
E)All of the above.

Question 6

Concerning the Baumol model, which of the following is not correct (all other things equal)?

A)The optimum cash balance is higher the higher are interest rates.
B)The optimum cash balance is higher the higher are fixed order costs.
C)The optimum cash balance is higher the higher is the firm's total cash requirement.
D)The optimum cash balance is lower the higher are interest rates.
E)All of the above are correct.

Question 7

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

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

Question 8

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 9

The Baumol model determines the optimal cash balance by:

A)balancing total costs against opportunity costs.
B)minimizing total costs of holding cash against trading securities costs.
C)balancing trading securities costs against total costs.
D)minimizing total costs less trading costs.
E)None of the above.

Question 10

Financial managers broaden their definition of cash to include:

A)currency, bank deposits, equities and bonds.
B)currency, saving account deposits, undeposited cheques, and bonds.
C)cash, bonds, bank deposits and short-term marketable securities.
D)currency, saving account deposits, undeposited cheques and short-term marketable
Securities.
E)None of the above.

Question 11

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 12

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 13

The Baumol cash balance model is limited by:

A)Assuming the cash flows are variable across the period.
B)A smooth disbursement rate and no cash inflows over the period.
C)Having a safety stock set to zero.
D)Both A and C.
E)Both B and C.

Question 14

Examples of cash disbursements do not include:

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

Question 15

The lower cash limit, L, and the upper limit, H, are:

A)set by the firm and solved in the Miller-Orr model respectively.
B)both are solved for in the Miller-Orr model.
C)both set by the firm and only the target cash balance is solved for in the Miller-Orr model .
D)two random variables and need not be solved for.
E)None of the above.

Question 16

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 17

The cost of holding cash:

A)Is the opportunity cost of lost return.
B)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 18

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 19

Marketability risk is synonymous with:

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

Question 20

The Baumol model determines the optimal cash balance by:

A)balancing total costs against opportunity costs.
B)minimizing total costs of holding cash against trading securities costs.
C)balancing trading securities costs against total costs.
D)minimizing total costs less trading costs.
E)None of the above.

Question 21

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 22

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 23

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)Cheques are automatically transferred into the account as cheques presented for
Payment.
D)The transfer is automatic and involves an accounting entry only.
E)The master and the zero balance account locate at the same bank.

Question 24

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 25

When a firm writes a cheque, 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 26

The major difference between a cheque 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 accepting the draft, the firm must deposit the funds to make payment.
D)The cash need not be deposited until the drafts are accepted.
E)All of the above.

Question 27

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 funds and hold excess cash.
C)hold excess cash and reduce business activities.
D)invest in marketable securities and borrow short term funds.
E)None of the above.

Question 28

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 29

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 30

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.

Question 31

Collection float increases:

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

Question 32

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.

Question 33

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 34

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 35

Cheques 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 36

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 37

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 38

To be able to use the Miller-Orr model, a manager must not:

A)estimate the standard deviation of daily cash flows and the interest rate.
B)determine the average number of transactions.
C)estimate the trading costs of security transactions.
D)determine a lower control limit for cash.
E)None of the above.

Question 39

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 40

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 cheques 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 41

The Timberline firm expects a total 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?

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

Question 42

Fly-By-Night Airlines currently has €2.4 million on deposit with its bank.Fly-By-Night pays its fuel bill by writing a cheque for €1.1 million.Calculate the company's book cash and bank cash after it writes the cheque.

Question 43

Floating rate CD's differ from regular CD's 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 44

Harmony Corporation has a variance of daily cash flow of €8.The daily interest rate is .021%
(.00021).Harmony desires a minimum cash balance of €80.The fixed cost of a security transaction
is €2.00.Using the Miller-Orr model, calculate Harmony'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 45

During the month you receive 4 cheques, 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 46

Your firm receives 40 cheques per month.Of these, 10 are for €1,200 and 30 are for €500.The delay for the €1,200 cheques is 4 days; the €500 cheques 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 47

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 48

On an average day, a company writes cheques totaling €1,500.These cheques take 7 days to clear. The company receives cheques totaling €1,800.These cheques take 4 days to clear.The cost of
Debt is 9%.
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 49

On an average day, a company writes cheques totaling €1,500.These cheques take 7 days to clear. The company receives cheques totaling €1,800.These cheques 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
E)None of the above.

Question 50

The Timberline firm expects a total 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)?

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

Question 51

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

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

Question 52

The Timberline firm expects a total 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?

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

Question 53

Your firm receives 10 cheques per month.Of these, 6 are for €1,000 and 4 are for €500.The delay for the €1,000 cheques is 5 days, and the €500 cheques 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 54

The Timberline firm expects a total 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 saving to the firm if it switches from its current practice to the optimum practice (as
Given by the Baumol model)?

A)€10.01
B)€34.20
C)€64.96
D)€122.46
E)None of the above.

Question 55

The Timberline firm expects a total 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.
If interest rates were to rise to 12.00% per annum, what would be the firm's optimum cash balance
Using the Baumol model?

A)€295.81
B)€853.91
C)€1,024.70
D)€2,958.04
E)None of the above.

Question 56

The Timberline firm expects a total 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.
If interest rates were to rise to 1.00% per month, what would the firm's total savings be if it switches
From its current practice to the optimum practice (as given by the Baumol model)?

A)€4.62
B)€7.09
C)€26.42
D)€28.13
E)None of the above.

Question 57

The Timberline firm expects a total 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.
Using the Baumol model, what is the optimum cash holding?

A)€362.28
B)€1,045.83
C)€1,251.86
D)€3,622.84
E)None of the above.

Question 58

The Timberline firm expects a total 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?

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

Question 59

A firm uses the Miller-Orr model with a minimum balance of €10, a maximum of €80, and a target balance of €40.If the cash balance was to hit €10, what would the firm do?

A)Buy €10 in marketable securities.
B)Buy €30 in marketable securities.
C)Sell €30 in marketable securities.
D)Sell €60 in marketable securities.
E)None of the above.

Question 60

On an average day, a company writes cheques totaling €1,500.These cheques take 7 days to clear. The company receives cheques totaling €1,800.These cheques 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)€-0.81
B)€-79.41
C)€-282.48
D)€-297.00
E)None of the above.

Question 61

Selling goods and services on credit is:

A)an investment in a customer.
B)never necessary unless customers cannot pay for the goods.
C)a decision independent of customers.
D)permissible if your bank lends the money.
E)None of the above.

Question 62

The average collection period measures:

A)the average time necessary to collect a credit sale.
B)how long the companies money is invested in their customers.
C)the days sales outstanding.
D)the days in receivables.
E)All of the above.

Question 63

The credit period offered is influenced by:

A)the size of the account to receive credit.
B)the collateral value of the goods sold.
C)the probability that the customer will not pay.
D)the extent to which the goods are perishable.
E)All of the above.

Question 64

Seasonal dating of trade receivables:

A)is used by all firms that grant credit.
B)brings the receivable immediately due during the season of the product.
C)makes the effective date of the invoice on a specific date in or around the relevant season
Of the product.
D)modifies the due date at the discretion of the buyer.
E)All of the above.

Question 65

Which of the following is not true concerning considerations in setting a credit policy?

A)A firm that supplies a perishable product will tend to offer restrictive credit terms.
B)A firm whose customers are in a high-risk business will tend to offer restrictive credit
Terms.
C)Lengthening the credit period effectively reduces the price paid by the customer.
D)Small accounts, associated with firms that find it difficult to acquire a line of credit, tend to
Receive longer credit periods.
E)None of the above.

Question 66

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 cheques into the clearing system sooner.The firm
receives 320 cheques 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 67

When analyzing the NPV of a decision to change cash discounts, the firm would probably not consider:

A)the size of the discount.
B)the expected change in the order size.
C)the firm's cost of debt.
D)the expected change in sales due to the cash discount policy change.
E)All of the above would probably be considered.

Question 68

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 cheques into the clearing system sooner.The firm
receives 320 cheques 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 cheque handled will
you accept Mesa's services?

Question 69

Cash discounts:

A)conveniently separate the pricing of credit and cash customers.
B)lower profit margins on sales.
C)speed the collection of receivables.
D)are often part of the terms of sale.
E)All of the above.

Question 70

On September 1, a firm grants credit with terms of 2/10 net 45.The creditor:

A)must pay a penalty of 2% when payment is made later than September 1st.
B)must pay a penalty of 10% when payment is made later than 2 days after September 1st.
C)receives a discount of 2% when payment is made at least 10 days before September 1st.
D)receives a discount of 2% when payment is made before September 1st and pays a penalty
Of 10% if payment is made after September 1st.
E)receives a discount of 2% when payment is made within 10 days after the effective invoice
Date of September 1st.

Question 71

When a firm sells its trade receivables to a financial institution, it is called:

A)captive financing.
B)collateralization.
C)securitization.
D)legalization.
E)None of the above.

Question 72

Which of the following is not one of the "five C's of Credit" for credit scoring?

A)Capability
B)Capacity
C)Capital
D)Character
E)Conditions

Question 73

Captive finance companies are:

A)Parent companies to the subsidiary.
B)Subsidiaries to the parent company.
C)Used by firms with good credit ratings.
D)Both A and B.
E)Both B and C.

Question 74

When credit is offered with only the invoice as a formal instrument of credit, the credit procedure is called:

A)invoice account.
B)open account.
C)unsecured account.
D)unsecured note.
E)None of the above.

Question 75

Factoring refers to:

A)determining the aging schedule of the firm's trade receivables.
B)the sale of a firm's trade receivables to a financial institution.
C)the determination of the average collection period.
D)scoring a customer based on the 5 C's of credit.
E)All of the above.

Question 76

When analyzing the decision to change the cash discount policy, the firm should:

A)choose the policy with the highest order size.
B)choose the policy with the lowest variable cost.
C)choose the policy with the lowest NPV.
D)choose the policy with the highest NPV.
E)choose the policy offering the lowest cash discount.

Question 77

The three components of credit policy are:

A)collection policy, credit analysis, and interest rate determination.
B)collection policy, credit analysis, and terms of the sale.
C)collection policy, interest rate determination, and repayment analysis.
D)credit analysis, repayment analysis, and terms of the sale.
E)interest rate determination, repayment analysis and terms of sale.

Question 78

Lengthening the credit period _____ the price paid by the customer.Generally, this acts to _____ sales.

A)increases; increase
B)increases; decrease
C)decreases; decrease
D)decreases; increase
E)increases; have no effect on

Question 79

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 80

When credit is granted to another firm this gives rise to a:

A)trade receivables and is called a consumer credit.
B)credit due and is called an installment note.
C)trade receivables and is called trade credit.
D)trade receivable and is called an installment note.
E)None of the above.