Question 1

If the marginal reduction in order costs exceeds the marginal carrying cost of inventory,then:

Accepted Answer

If the marginal reduction in order costs exceeds the marginal carrying cost of inventory, it means that the firm will save more by placing larger orders and carrying more inventory. Therefore, the firm should increase its order size to minimize its total costs.

Question 2

How much value would be added to a firm that could permanently reduce its collection period by 2 days if daily collections average $10,000 and the opportunity cost is 5% annually?

Accepted Answer

PV of daily interest = [$10,000 × 2 × (0.05/365)]/(0.05/365) = $20,000

Question 3

Your firm's ledger shows a balance of $1 million which reflects today's $75,000 deposit and a check 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 would not yet reflect today's deposit of $75,000, so it would be $1,000,000 - $50,000 = $950,000. However, since the check for $50,000 has not yet cleared, the balance remains $975,000.

Question 4

A system by which firms assign their customers for collection purposes to regional banks that transfer funds to a central bank is known as:

Accepted Answer

Concentration banking is a system where firms assign their customers for collection purposes to regional banks that transfer funds to a central bank. This allows for efficient collection and monitoring of funds from different locations. A lock-box system refers to a method of collecting and processing payments at a bank's post office box rather than at the customer's location. A zero-balance account is a checking account that automatically transfers funds from a master account to cover any checks that are written. Wire transfer is a method of electronically transferring funds from one person or institution to another.

Question 5

What effective interest rate is charged to a purchaser receiving terms of 5/10,net 90 if the purchaser avoids the discount and pays in 90 days?

Accepted Answer

EAR = [1 + (0.05/(1 - 0.05))]^{365/(90 - 10)} - 1 = 0.2637, or 26.37%

Question 6

Potential savings from a lock-box system will be reduced by:

Accepted Answer

Local bank charges are a direct cost that will reduce the potential savings from a lock-box system. The additional processing and mailing time may cause some inconvenience, but they are not additional costs. An increase in interest rates may actually result in increased savings.

Question 7

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 8

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

Accepted Answer

The bank's ledger balance for a firm is equal to the available balance plus net float. The available balance is the balance that is actually available for the firm to use, and net float is the difference between the total float (the sum of availability and payment float) and any outstanding checks or deposits. Therefore, B is the correct answer.

Question 9

How much money can be saved annually by setting up a lock-box system that will process 500 checks per day at a cost of $0.20 per check if each check averages $220,collection float is reduced by 3 days,and the annual interest rate is 8%?

Accepted Answer

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

Question 10

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

Accepted Answer

Check kiting is not an accepted method of attempting to increase a firm's net float, as it involves writing bad checks to artificially inflate account balances and is considered fraudulent. Remote bank locations, lock-box systems, and concentration banking are all legitimate methods of managing cash flow and reducing float.

Question 11

Which of the following conditions would make a lock-box system potentially more attractive to a firm?

Accepted Answer

A lock-box system is a cash management technique in which a company's customers send payments to a designated post office box that is monitored by a bank. The bank processes the payments and deposits the funds directly into the company's bank account, which can help to accelerate the availability of funds. Therefore, a firm would find a lock-box system more attractive if the payment size is higher, as this would result in larger deposits and potentially faster access to funds. Choices A, B, and D would not necessarily have an impact on the attractiveness of a lock-box system.

Question 12

What approximate value should a firm put on being able to permanently reduce the length of its collection period by 1 day if annual sales (all on credit)are $5,000,000 and the appropriate opportunity cost is 10% annually?

Accepted Answer

We can calculate the value of a one-day reduction in the collection period as follows:

Value = (1/365) * Annual Sales * (Opportunity Cost Rate)
Value = (1/365) * $5,000,000 * 0.10
Value = $1,369.86

Therefore, the approximate value that the firm should put on being able to permanently reduce the length of its collection period by 1 day is $1,370. The closest option is C.

Question 13

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 3 days of mail time,and interest rates average 7% annually.

Accepted Answer

The answer of Your cash manager is currently using wire...

Question 14

Ignoring the time value of money,how much does a firm lose on a $2,000 sale that has a 30% profit margin if the 20% probability of default occurs?

Accepted Answer

Loss = $2,000 - (0.30 × $2,000) = $1,400

Question 15

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

Accepted Answer

A certificate of deposit with 15 months until maturity is not considered a money market instrument because it has a longer maturity rate than the typical money market instruments which generally mature within a year.

Question 16

Which of the following would not be included in inventory carrying cost?

Accepted Answer

The cost of inventory itself is not considered a carrying cost since it is the item being tracked and accounted for within inventory management. The other options, insurance expense, opportunity cost of capital, and cost of shelf space, are all common inventory carrying costs.

Question 17

How much time must be saved to justify a lock-box system that processes 350 checks per day at an average amount of $400 per check if the system will cost $20,000 annually and interest rates average 8%?

Accepted Answer

$20,000 = 350 × $400 × Number of days × 0.08; Number of days = 1.79 days

Question 18

What is the break-even probability of collection for a firm that has a 40% profit margin (ignore present value)?

Accepted Answer

The break-even probability of collection is the probability at which a firm can cover all its costs and achieve zero profit. Since the firm has a 40% profit margin, it means that 60% of the revenue generated is required to cover all its costs. Therefore, the break-even probability of collection for this firm is 60%.

Question 19

Which of the following statements is true regarding repurchase agreements?

Accepted Answer

Repurchase agreements are short-term (usually overnight) transactions in which one party sells securities (usually U.S. Treasury securities) to another party with an agreement to repurchase them at a later date at a slightly higher price. Therefore, U.S. Treasury securities serve as their collateral. Options A, B, and D are incorrect because repurchase agreements have short-term maturity, are secured borrowing, and usually involve implicit interest payments (i.e., the difference between the sale and repurchase price).

Question 20

What are the expected annual savings from a lock-box system that collects 150 checks per day averaging $500 each,and reduces mailing and processing times by 2.5 and 1.5 days,respectively,if the annual interest rate is 7%?

Accepted Answer

First, we need to calculate the amount of time saved in processing checks. Since there are 150 checks per day, and each check takes 1.5 days less to process, we save 150 x 1.5 = 225 days in processing time.

Next, we need to calculate the amount of time saved in mailing checks. Again, since there are 150 checks per day, and each check takes 2.5 days less to mail, we save 150 x 2.5 = 375 days in mailing time.

Since we are assuming an annual interest rate of 7%, we can calculate the annual savings using the following formula:

Annual savings = (time saved / 365) x (check amount x number of checks per day) x interest rate

Plugging in the numbers, we get:

Annual savings = [(225+375)/365] x (150 x 500) x 0.07
Annual savings = 600 x 0.07 x 75,000
Annual savings = $21,000

Therefore, the best choice is C, which is $21,000.

Quiz 12: Risk, Return, and Capital Budgeting