Question 1

On an average day, Finley, Inc. receives $3,000 in checks from customers. These checks clear the bank in an average of 2.5 days. The applicable daily interest rate is.05 %. What is the present value of the float? Assume each month has 30 days.

Accepted Answer

The present value of the float is calculated as the average daily receipts multiplied by the average clearing time and the daily interest rate: $3,000 * 2.5 * 0.05% = $3,750. However, the question asks for the present value of the float over a month, so we multiply by 30 days: $3,750 * 30 = $7,500.

Question 2

Your firm receives 30 cheques from customers on an average day. These cheques, on average, are worth $45 each, and are processed and clear the bank in 5 days. In addition, your firm mails out 20 cheques a day with an average amount of $42. These cheques clear your bank in 4 days. What is the average amount of the collection float?

Accepted Answer

The average amount of the collection float is calculated by multiplying the average number of cheques received per day by the average value of each cheque and then by the number of days it takes for the cheques to clear. So, for 30 cheques at $45 each, taking 5 days to clear, the calculation is 30 * $45 * 5 = $6,750.

Question 3

Your chequebook shows you have a $10,000 balance in your account. You write cheques totaling $4,000 and make a deposit of $6,000. What is your disbursement float?

Accepted Answer

The disbursement float is the amount of money you have written checks for but has not yet been deducted from your bank account. In this case, you have written checks totaling $4,000, which is the disbursement float.

Question 4

Your chequebook shows you have a $10,000 balance in your account. You write cheques totaling $4,000 and make a deposit of $6,000. What is your collection float?

Accepted Answer

The answer of Your chequebook shows you have a $10,000...

Question 5

When you reconciled your chequebook, you had an adjusted bank balance of $2,650. You had 6 cheques outstanding with a total value of $4,100 and 2 outstanding deposits worth $1,200 each. What is the amount of your collection float?

Accepted Answer

The collection float is the amount of the outstanding deposits, which are 2 deposits worth $1,200 each, totaling $2,400.

Question 6

Cabin Plans Here generally receives four cheques a month. The cheque amounts and the related delay times are shown in the table below. What is the amount of the total float?

Accepted Answer

The answer of Cabin Plans Here generally receives four cheques...

Question 7

North Woods Auto Supply is considering implementing a lockbox system. The system is expected to reduce the collection time by 2.5 days. On an average day, North Woods receives 1,045 cheques with an average value of $1,180 each. The daily interest rate on Treasury bills is.011 %. The bank charge per cheque would be $.25. What is the net present value of this lockbox arrangement?

Accepted Answer

The net present value (NPV) of the lockbox system is calculated by determining the benefit from reduced collection time and subtracting the cost of the bank charges. The benefit is the product of the number of cheques, average value per cheque, reduction in collection time, and the daily interest rate. The cost is the product of the number of cheques and the bank charge per cheque. The NPV is the difference between the benefit and the cost.

Question 8

On an average day, your firm receives $21,800 in cheques from customers. These cheques are processed and clear the bank in an average of 1.8 days. The applicable daily interest rate is.0185 %. What is the highest daily fee your firm should pay to completely eliminate the collection float? Assume each month has 30 days.

Accepted Answer

The answer of On an average day, your firm receives...

Question 9

Your firm generally receives 5 cheques a month. The cheque amounts and the collection delay for each cheque is shown below. Given this information what is the amount of the average daily float? Assume a 30-day month.

Accepted Answer

The answer of Your firm generally receives 5 cheques a...

Question 10

MD Groceries currently sets its initial cash balance at $5,000, which is depleted every four days. The current market rate of return is 4.5% per year. The firm pays $2.50 each time it replenishes its cash account. Use a 360-day year.

What is the optimal initial cash balance for MD using the BAT model?

Accepted Answer

The optimal initial cash balance can be calculated using the Baumol Model (also known as the BAT model), which is given by the formula: $C^* = \sqrt{\frac{2bT}{i}}$, where $C^*$ is the optimal cash balance, $b$ is the transaction cost per replenishment, $T$ is the total cash needed for the period, and $i$ is the interest rate per period.Given:- Initial cash balance depletes every 4 days, implying the firm needs to replenish its cash every 4 days in a 360-day year. This means the firm replenishes 360/4 = 90 times a year.- If the initial balance is $5,000, the total cash needed for the period (T) is 90 * $5,000 = $450,000.- The transaction cost ($b$) is $2.50.- The annual interest rate ($i$) is 4.5%, or 0.045 when expressed as a decimal. For the Baumol model, we need the interest rate per period, which in this case is per year, so we use 0.045.Plugging these values into the Baumol formula gives:$$C^* = \sqrt{\frac{2 * 2.50 * 450,000}{0.045}} = \sqrt{\frac{2,250,000}{0.045}} = \sqrt{50,000,000} = 7,071$$Therefore, the optimal initial cash balance for MD Groceries, according to the BAT model, is $7,071.

Question 11

Your firm receives 85 cheques from customers on an average day. These cheques, on average, are worth $132 each, and are processed and clear the bank in 3 days. In addition, your firm disburses 10 cheques a day with an average amount of $10,400. These cheques clear your bank in 2 days. What is the average amount of the collection float?

Accepted Answer

The average amount of the collection float is calculated by multiplying the average number of cheques received per day by the average value of each cheque and then by the number of days it takes for these cheques to clear. So, it's 85 cheques * $132 each * 3 days = $33,660.

Question 12

The Eliot Co. needs $210,000 a week to pay bills. The standard deviation of the weekly disbursements is $24,000. The firm has established a lower cash balance limit of $90,000. The applicable interest rate is 4 % and the fixed cost of transferring funds is $60. Based on the BAT model, what is the optimal initial cash balance?

Accepted Answer

The answer of The Eliot Co. needs $210,000 a week...

Question 13

The Can-Do Company operates 365 days a year. The average cash outflow is $250 a day. The fixed cost of replenishing the cash account is $12 a transaction. The interest rate is 4%. What is the optimal initial cash balance?

Accepted Answer

The answer of The Can-Do Company operates 365 days a...

Question 14

On an average day, Cory, Inc. writes 30 checks with an average amount of $215. These checks clear the bank in an average of 3 days. What is the average amount of the disbursement float for Cory, Inc.?

Accepted Answer

The answer of On an average day, Cory, Inc. writes...

Question 15

Your firm deals strictly with three customers. The average amount that each customer pays per month along with the collection delay associated with each payment is shown below. Given this information, what is the amount of the average daily receipts? Assume that every month has 30 days.

Accepted Answer

The answer of Your firm deals strictly with three customers....

Question 16

The Eliot Co. needs $210,000 a week to pay bills. The standard deviation of the weekly disbursements is $24,000. The firm has established a lower cash balance limit of $90,000. The applicable interest rate is 4 % and the fixed cost of transferring funds is $60. Based on the BAT model, what is the optimal average cash balance?

Accepted Answer

The answer of The Eliot Co. needs $210,000 a week...

Question 17

Your firm spends $82,000 a week to pay bills and maintain a lower cash balance limit of $40,000. The standard deviation of the disbursements is $8,000. The applicable weekly interest rate is.07 % and the fixed cost of transferring funds is $55. What is your optimal average cash balance based on the Miller-Orr model?

Accepted Answer

The answer of Your firm spends $82,000 a week to...

Question 18

BullsNBears, a purveyor of financial databases, estimates it they disburses $440,000 monthly in order to pay bills. The firm's opportunity rate is 5%. The fixed cost of transferring money is $25 per transfer. Based on historical data, the standard deviation of monthly cash flows is $15,000 and the lower cash balance limit is $20,000. For Miller-Orr model questions, assume the interest rate is 0.5% per month.

Using the BAT model, what is the optimum initial cash balance?

Accepted Answer

The optimum initial cash balance using the Baumol Model (BAT model) is calculated using the formula: $C^* = \sqrt{\frac{2bT}{i}}$, where $C^*$ is the optimum cash balance, $b$ is the fixed cost per transaction, $T$ is the total cash needed for the period, and $i$ is the opportunity cost of holding cash. Plugging in the given values: $C^* = \sqrt{\frac{2 \times 25 \times 440,000}{0.05}} = \sqrt{\frac{2 \times 25 \times 440,000}{0.05}} = \sqrt{440,000} = \sqrt{17,600,000} = \$72,664$.

Question 19

Donaldson, Inc. spends $79,000 a week to pay bills and maintains a lower cash balance limit of $20,000. The standard deviation of the disbursements is $10,000. The applicable weekly interest rate is.05 % and the fixed cost of transferring funds is $45. What is your optimal upper cash limit based on the Miller-Orr model?

Accepted Answer

The answer of Donaldson, Inc. spends $79,000 a week to...

Question 20

Your firm deals strictly with three customers. The average amount that each customer pays per month along with the collection delay associated with each payment is shown below. Given this information, what is the amount of the average daily receipts? Assume that every month has 30 days.

Accepted Answer

The answer of Your firm deals strictly with three customers....

Quiz 19: Cash and Liquidity Management

On an average day, Finley, Inc. receives $3,000 in checks from customers. These checks clear the bank in an average of 2.5 days. The applicable daily interest rate is.05 %. What is the present value of the float? Assume each month has 30 days.

Your chequebook shows you have a $10,000 balance in your account. You write cheques totaling $4,000 and make a deposit of $6,000. What is your disbursement float?

Your chequebook shows you have a $10,000 balance in your account. You write cheques totaling $4,000 and make a deposit of $6,000. What is your collection float?

When you reconciled your chequebook, you had an adjusted bank balance of $2,650. You had 6 cheques outstanding with a total value of $4,100 and 2 outstanding deposits worth $1,200 each. What is the amount of your collection float?

Cabin Plans Here generally receives four cheques a month. The cheque amounts and the related delay times are shown in the table below. What is the amount of the total float?

Your firm generally receives 5 cheques a month. The cheque amounts and the collection delay for each cheque is shown below. Given this information what is the amount of the average daily float? Assume a 30-day month.

The Can-Do Company operates 365 days a year. The average cash outflow is $250 a day. The fixed cost of replenishing the cash account is $12 a transaction. The interest rate is 4%. What is the optimal initial cash balance?

On an average day, Cory, Inc. writes 30 checks with an average amount of $215. These checks clear the bank in an average of 3 days. What is the average amount of the disbursement float for Cory, Inc.?

Your firm deals strictly with three customers. The average amount that each customer pays per month along with the collection delay associated with each payment is shown below. Given this information, what is the amount of the average daily receipts? Assume that every month has 30 days.

Your firm deals strictly with three customers. The average amount that each customer pays per month along with the collection delay associated with each payment is shown below. Given this information, what is the amount of the average daily receipts? Assume that every month has 30 days.