Question 1

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

Accepted Answer

The answer of If a firm's availability float exceeds its...

Question 2

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?

Accepted Answer

The reduction in float is 4 days, saving $80,000 in receivables. The annual cost you would be willing to pay is the opportunity cost of this amount, which is $80,000 * 0.06 = $4,800.

Question 3

Which of the following statements is true regarding repurchase agreements?

Accepted Answer

Repurchase agreements, also known as repo agreements, are short-term loans in which one party sells securities to another party and promises to repurchase them at a higher price at a later date. The securities used as collateral in repo agreements are typically Treasury bills or other highly liquid government securities. Therefore, statement C is true. The maturity of repo agreements is typically short-term, usually ranging from overnight to several weeks, so statement A is false. Repo agreements are secured forms of borrowing, as they are backed by the collateral provided, so statement B is false. Finally, repo agreements generally involve implicit interest payments, as the difference between the sale price and the repurchase price represents the interest rate on the loan, so statement D is false.

Question 4

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

Accepted Answer

In the Baumol model, increases in the T-bill rate imply that the opportunity cost of holding cash has increased. Thus, firms should reduce their average cash balances as it becomes more expensive to hold cash.

Question 5

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

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The answer of The bank's ledger balance for a firm...

Question 6

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

Accepted Answer

Increasing payment float (delaying payment to suppliers) would increase net float by retaining cash for a longer period of time. Decreasing availability float (reducing the time until funds are made available after deposit) would also increase net float by reducing the amount of cash leaving the firm.

Question 7

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

Accepted Answer

Cheque kiting, also known as check floating, is a fraudulent practice of intentionally writing a check from a bank account without sufficient funds to cover that check. It is illegal, and no firm should attempt to increase their net float through fraudulent means. The other options (remote bank locations, lock-box systems, and concentration banking) are accepted methods of managing net float.

Question 8

The rationale behind a zero-balance account is that:

Accepted Answer

The rationale behind a zero-balance account is to ensure that no unnecessary funds are tied up. This means that only the exact amount needed for a transaction is transferred into the account, and no additional funds remain in the account after the transaction is completed. This can help companies optimize their cash flow and reduce the amount of idle cash on hand.

Question 9

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

Accepted Answer

The cash management model in Figure 20.5 is based on finding the optimal point where the sum of interest costs and transaction costs is minimized. This point is called the return point and it is located where the marginal transaction cost equals the marginal interest cost. The model assumes that cash flows are unpredictable and the goal is to find a balance between holding too much or too little cash. The model does not focus on minimizing the number of transactions but rather on finding the point where the costs are minimized. Therefore, option D is the correct choice.

Question 10

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

Accepted Answer

A certificate of deposit with 15 months until maturity would not be considered a money market instrument because it has a longer term than the typical money market instrument, which usually has a maturity of less than one year. The other choices listed - a Canadian Treasury bill with 91 days until maturity, commercial paper with 180 days until maturity, and a repurchase agreement backed by U.S. government securities with less than one week until maturity - are all commonly considered money market instruments.

Question 11

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.

Accepted Answer

The cost of the wire transfer is $20, and it saves three days of mail time, which means the company can earn more interest during those three days. Assuming the interest rates average 7% annually, the interest earned during those three days is 3 days x (7%/365) x $50,000 = $28.77. Therefore, the current policy should be improved by reducing the transfer amount to $34,800, which is the break-even wire transfer point. At this transfer amount, the company will not lose money on the wire transfer cost. Therefore, option D is the best choice.

Question 12

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?

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The answer of Assuming that the firm can either hold...

Question 13

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?

Accepted Answer

To find the minimum total cost, we need to calculate the ordering cost and add it to the carrying cost.

Ordering cost = (Number of orders placed) x (Fixed cost per order) = (1500/100) x ($200) = $300

Total carrying cost = $100

Total cost = Ordering cost + Carrying cost = $300 + $100 = $400

Since orders are placed in lots of 100, we cannot reduce the ordering cost further. However, we can reduce the carrying cost by reducing the average inventory. This can be achieved by ordering more frequently in smaller lots, but that will increase the ordering cost. Therefore, the given order size of 100 units is the best choice with the minimum total cost of $400.

Question 14

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?

Accepted Answer

The answer of How much money can be saved annually...

Question 15

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?

Accepted Answer

The answer of How much value would be added to...

Question 16

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?

Accepted Answer

The answer of The Canine Kennel uses 600 cases of...

Question 17

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?

Accepted Answer

To find how many days need to be saved to justify the lock-box system, we need to use the equation:
(days saved) x (number of cheques) x (average amount) = (float reduction)
where,
number of cheques = 350
average amount = $400
float reduction = $250,000 (break-even point)
Substituting the given values, we get:
(days saved) x 350 x 400 = 250,000
(days saved) = 250,000 / (350 x 400)
(days saved) = 1.79
Therefore, the lock-box system must save at least 1.79 days of float to justify the cost of $20,000 annually. Thus, the answer is B.

Question 18

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?

Accepted Answer

First, we need to calculate the ordering cost per case:
Order cost per case = Ordering cost / Number of cases per order
Order cost per case = $90 / 100 = $0.90
Next, we need to calculate the total cost per case:
Total cost per case = Product cost + Order cost per case
Total cost per case = $72 + $0.90 = $72.90
Now, we can calculate the number of cases sold annually:
Number of cases sold annually = Total ordering cost / Order cost per case
Number of cases sold annually = $32,000 / $0.90 = 35,556. 
Therefore, the answer is B) 35,556 cases.

Question 19

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?

Accepted Answer

The bank's ledger balance for the account would be the company's balance minus the availability float (the $75,000 deposit which has not yet cleared) plus the payment float (the $50,000 cheque which has not yet been deducted from the account). Therefore, the bank's ledger balance for the account would be $1,000,000 - $75,000 + $50,000 = $975,000. The correct choice is B.

Question 20

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

Accepted Answer

The scenario described is an example of remote disbursement, which involves making payments to suppliers or affiliates located in other regions or countries. The cheque drawn on a bank in New Brunswick is being used to make a payment to a supplier in Toronto, which is a form of remote disbursement.

Quiz 21: Mergers, Acquisitions, and Corporate Control