Deck 27: Cash Management

Question 1

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.

Answer 1

All of the above are important.

Question 2

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.

Answer 2

perfectly synchronized with cash inflows.

Question 3

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.

Answer 3

cash balances held at commercial banks to pay implicitly for bank services.

Question 4

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)All of the above.
E)None of the above.

Question 5

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.

Question 6

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 7

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 8

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 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

Marketability risk is synonymous with:

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

Question 11

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)All of the above.
E)None of the above.

Question 12

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 13

Examples of cash disbursements do not include:

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

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

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 16

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 17

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 18

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 19

Financial managers broaden their definition of cash to include:

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

Question 20

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)Two of the above are not correct.
E)All of the above are correct.

Question 21

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 22

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 23

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 24

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 25

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 26

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 27

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 28

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 29

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 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 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 31

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 acceptance the firm must deposit the funds to make payment.
D)All of the above.
E)None of the above.

Question 32

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 33

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 34

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 35

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 36

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 37

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 38

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 39

Collection float increases:

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

Question 40

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 41

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 42

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 43

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 44

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 45

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)€9.99
B)€34.20
C)€64.96
D)€122.46
E)None of the above.

Question 46

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 47

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 48

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 49

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 50

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 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 collection float?

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

Question 52

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 53

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 54

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 55

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 56

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 57

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 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. Using the Baumol model,what is the optimum cash holding?

A)€362.28
B)€1,045.83
C)€1,251.86
D)€3,613.82
E)None of the above.