Chap 019

Chapter 19 - Cash and Liquidity Management

Chapter 19 Cash and Liquidity Management Multiple Choice Questions

1. Yesterday, the president of RB Enterprises receied a phone ca!! from "L#, a competitor. "L# is a so!e proprietorship. $n une%pected fami!y situation has caused the o&ner to sudden!y &ant to retire and re!ocate c!oser to his fami!y. 'hus, the assets of "L# are (eing offered to RB Enterprises at a (argain (asement price. )hi!e RB Enterprises had not anticipated purchasing these assets, it &as decided that the opportunity &as too good to pass up. 'his i!!ustrates &hich of the fo!!o&ing needs to ho!d cash* $. precautionary B. transaction C. specu!atie ". compensation E. f!oat

+. ' Motors regu!ar!y issues short-term de(t to finance its dai!y operations. udden!y, the credit marets fro/e and no funds &ere aai!a(!e for (orro&ing. 0ortunate!y, the firm had some cash reseres saed that it &as a(!e to use to fund its operations unti! additiona! credit &as aai!a(!e. 'he need to retain cash for situations such as this is referred to as &hich one of the fo!!o&ing moties for ho!ding cash* $. specu!atie B. f!oat C. compensating ". precautionary E. transaction

. 'he cash found in a cash dra&er that a chec-out c!er uses to mae change is an e%amp!e of &hich of the fo!!o&ing moties for ho!ding cash* $. specu!atie B. dai!y f!oat C. compensating (a!ance ". precautionary E. transaction

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2. 0!oat is defined as the3 $. amount of cash a firm can immediate!y &ithdra& from its (an account. B. difference (et&een (oo cash and (an cash. C. change in a firm4s cash (a!ance from one accounting period to the ne%t. ". amount of cash a firm has on hand. E. cash (a!ance according to a firm4s records.

5. $ !oc(o% is a3 $. specia! safe used (y a firm for oernight storage of any cash or undeposited checs. B. specia! safe used (y a firm that can on!y (e opened at prespecified times of the day. C. (o% !ocated in a (an4s au!t that is rented (y a firm and used to ho!d unprocessed checs. ". specia! post office (o% &hich can on!y (e opened (y prespecified posta! inspectors for direct de!iery to the addressee. E. post office (o% strategica!!y !ocated so that a firm4s receia(!es can (e co!!ected faster.

6. 'he 7resque 8s!e Center has (ranch operations in three states. Each (ranch dea!s &ith a !oca! (an. o&eer, a!! e%cess funds in these (ranch (an accounts are transferred on a dai!y (asis to the firm4s primary (an !ocated near the firm4s firm4s home office. 'his routine of transferring cash to the primary (an on a regu!ar (asis is referred to as3 $. cash concentration. B. strategic cash dis(ursement. C. transfer f!otation. ". paya(!es management. E. f!oat management.

:. $n account into &hich funds are deposited on!y in an amount equa! to the a!ue of the checs presented for payment that day is ca!!ed a ;;;;; account. $. !oc(o% B. concentration C. /ero-(a!ance ". compensating (a!ance E. reo!ing

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<. $n account into &hich a firm transfers funds, usua!!y from a master account, in an amount sufficient to coer the checs presented for payment that day is ca!!ed a ;;;;; account. $. !oc(o% B. c!eanup C. compensating (a!ance ". reo!ing E. contro!!ed dis(ursement

9. 'he no& ut has ana!y/ed the carrying and shortage costs associated &ith its cash ho!dings and determined that the firm shou!d idea!!y maintain a cash (a!ance of =,6>>. = ,6>>. 'his =,6>> represents &hich one of the fo!!o&ing to the firm* $. target cash (a!ance B. concentration (a!ance C. aai!a(!e (a!ance ". se!ected cash amount E. compensating (a!ance

1>. $d?ustment costs is another name for &hich one on e of the fo!!o&ing* $. (orro&ing costs B. shortage costs C. cash transfer costs ". cash &ire costs E. e%cess cash costs

11. )hy do firms need !iquidity* 8. to meet compensating (a!ance requirements 88. to tae adantage of an opportunity that sudden!y arises 888. to conduct dai!y (usiness actiities 8@. to (e prepared for a financia! emergency $. 8 and 88 on!y B. 888 and 8@ on!y C. 8, 888, and 8@ on!y ". 88, 888, and 8@ on!y E. 8, 88, 888, and 8@

19-


1+. Cash management primari!y ino!es3 $. optimi/ing a firm4s co!!ections and dis(ursements of cash. B. ma%imi/ing the income a firm earns on its cash reseres. C. reconci!ing a firm4s (oo (a!ance &ith its (an (a!ance. ". determining the optima! !ee! of !iquidity a firm shou!d maintain. E. determining the (est method of raising capita!. cap ita!.

1. "is(ursements f!oat3 $. occurs &hen a deposit depo sit is recorded (ut the funds are unaai!a(!e. una ai!a(!e. B. causes the (oo (a!ance to e%ceed the (an (a!ance. C. has tended to increase since the enactment of the Chec C!earing $ct for the +1st Century. ". is a recommended source of funds for short-term inestments. E. is e!iminated &hen payments are made e!ectronica!!y.

12. Co!!ection f!oat3 $. is more desira(!e to firms than dis(ursement f!oat. B. is tota!!y e!iminated (y the insta!!ation of a !oc(o% system. C. e%ists &hen a firm4s aai!a(!e (a!ance e%ceeds e% ceeds its (oo (a!ance. ". can (e aoided (y co!!ecting payments e!ectronica!!y at the time of sa!e. E. is e!iminated (y imp!ementing a concentration concen tration (aning system.

15. )hich one of the fo!!o&ing statements is correct* $. Aet f!oat decreases eery time a firm issues a chec to pay one of its supp!iers. B. $ positie net f!oat indicates that co!!ection f!oat e%ceeds dis(ursements f!oat. C. 0irms prefer a /ero net f!oat oer a positie net f!oat. ". Aet f!oat is equa! to co!!ection f!oat minus dis(ursement f!oat. E. Aet f!oat is equa! to a firm4s aai!a(!e (a!ance minus its (oo (a!ance.

16. Chec iting is3 $. used (y most firms as an ethica! means of hand!ing its cash reseres. B. the process of &ithdra&ing a!! funds from a (an (a n account as soon as the funds are aai!a(!e. C. the centra! core of a good cash management system. ". using unco!!ected cash to inest in short-term, !iquid assets. E. increasing!y popu!ar due to recent (aning !a& changes.

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1:. )hich of the fo!!o&ing &i!! reduce co!!ection time* 8. (i!!ing customers e!ectronica!!y rather than (y mai! 88. accepting de(it cards (ut not checs as payment for a sa!e 888. offering cash discounts for ear!y payment 8@. reducing the processing de!ay (y one day $. 8 and 88 on!y B. 8 and 888 on!y C. 8, 88, and 888 on!y ". 88, 888, and 8@ on!y E. 8, 88, 888, and 8@

1<. )hich of the fo!!o&ing shou!d he!p reduce the tota! co!!ection time for a firm* 8. opening a post office (o% so mai! can (e receied ear!ier in the morning 88. assigning additiona! staff in the morning to process incoming payments 888. proiding a discount for customers &ho pay e!ectronica!!y 8@. esta(!ishing preauthori/ed payments from customers $. 8 and 88 on!y B. 888 and 8@ on!y C. 88, 888, and 8@ on!y ". 8, 88, and 8@ on!y E. 8, 88, 888, and 8@

19. )hich one of the fo!!o&ing co!!ection times is correct!y descri(ed* $. 'he processing de!ay starts &hen a firm mai!s out a (i!!ing statement and ends &hen the payment is receied from a customer. B. Mai!ing time (egins &hen a firm mai!s out a (i!!ing statement and ends &hen the payment is receied. C. Co!!ection time (egins &hen a firm mai!s out a (i!!ing statement and ends &hen the cash payment for that (i!!ing is aai!a(!e to the firm. ". $ai!a(i!ity de!ay (egins &hen a firm deposits a customer4s chec into its (an account and ends &hen the cash from that payment is aai!a(!e to the firm. E. 7rocessing de!ay (egins &hen a firm mai!s out (i!!ing statements and ends &hen the firm deposits the payment for that statement into its (an account.

19-5


+>. $ !oc(o% system3 $. entai!s the use of a (an &hich is centra!!y !ocated to co!!ect payments on a nation&ide (asis. B. is designed to deposit a customer4s chec into the firm4s (an account prior to recording the receipt of that chec to a customer4s account. C. is used to reduce the dis(ursement f!oat of a firm. ". is efficient regard!ess of the !ocations se!ected for !oc(o% destinations. E. automatica!!y records payments to a customer4s account &hen the customer4s chec is receied at the !oc(o% !ocation.

+1. Loc(o%es3 $. shou!d (e geographica!!y !ocated c!ose to a firm4s primary customers. B. shou!d (e !ocated in remote !ocations to increase the net dis(ursement f!oat. C. offer no additiona! (enefit to a firm no& that the Chec C!earing $ct for the +1st Century has (een enacted. ". tend to (e negatie net present a!ue pro?ects for firms &ith a !arge num(er of si/ea(!e transactions. E. tend to a!so (e used as concentration accounts.

++. Cash concentration accounts3 $. tend to increase the funds aai!a(!e for short-term inesting. B. tend to increase the comp!e%ity of a firm4s cash management system. C. that uti!i/e &ire transfers rather than automated c!earing house transfers are !ess e%pensie to maintain. ". receie checs direct!y from a!! of a firm4s customers. E. are a!! /ero-(a!ance accounts.

+. )hich one of the fo!!o&ing statements is correct* $. 0unds receied ia automated c!earinghouse transfers are aai!a(!e that day. B. $ depository transfer chec is the most cost!y means of transferring funds into a cash concentration account. C. 'he means se!ected to transfer funds into a concentration account depends primari!y upon the si/e of the transfers. ". Concentration accounts are used to transfer funds to !oc(o% !ocations as needed. E. 'he most e%pedient means of transferring funds into a concentration account is a &ire transfer.

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+2. $ cash concentration account3 $. is frequent!y used as a source of funds for short-term inestments. B. cannot (e used to coer a compensating (a!ance requirement. C. cannot (e used to transfer funds into /ero-(a!ance accounts. ". is genera!!y the on!y (an account a firm needs to efficient!y manage its cash. E. is another name for a contro!!ed dis(ursement account.

+5. 'he main purpose of a cash concentration account is to3 $. decrease co!!ection f!oat. B. decrease dis(ursement f!oat. C. conso!idate funds. ". rep!ace a !oc(o% system. E. coer compensating (a!ance requirements.

+6. )hich one of the fo!!o&ing statements is correct concerning a cash management system that emp!oys (oth !oc(o%es and a concentration (an account* $. $!! customer payments must (e su(mitted to a !oc(o%. B. 'he party &hich co!!ects the checs from the !oc(o% is responsi(!e for recording the payment on the customer4s account. C. 7ayments receied in a !oc(o% are transferred immediate!y to the concentration account. ". 'he firm4s cash manager determines ho& the funds in the concentration account are dis(ursed. E. 'he concentration account must (e /eroed out on a dai!y (asis.

+:. $ /ero-(a!ance account3 $. is used to coer the compensating (a!ance requirement of a !ine of credit agreement. B. is on!y used to deposit funds receied at !oca! !oc(o%es. C. is funded on an as-needed (asis on!y. ". is !imited to hand!ing payro!! dis(ursements. E. requires a compensating (a!ance.

19-:


+<. )hich one of the fo!!o&ing statements is correct concerning /ero-(a!ance accounts* $. Each /ero-(a!ance account is offset (y a compensating (a!ance account. B. ero-(a!ance accounts are used for depositing incoming funds. C. $ master account must (e used in con?unction &ith a /ero-(a!ance account. ". ero-(a!ance accounts are used so!e!y in con?unction &ith a !oc(o% system. E. ero-(a!ance accounts are sti!! required to maintain a minima! (a!ance.

+9. )hich one of the fo!!o&ing statements is correct* $. 'he money maret refers to securities that mature in t&o years or !ess. B. Bans are prohi(ited from inesting cash surp!uses on (eha!f of their customers on a shortterm (asis. C. hort-term securities tend to hae a high degree of interest rate ris. ". $ cyc!ica! firm may purchase mareta(!e securities as part o f its short-term financing p!an. E. Corporations are not permitted to inest in money maret mutua! funds (ut can inest in (an money maret accounts.

>. )hich t&o of the fo!!o&ing are the primary reasons &hy firms temporari!y accumu!ate !arge cash surp!uses* 8. cyc!ica! actiities 88. desire to inest funds 888. dai!y operations 8@. fi%ed asset purchases $. 8 and 888 on!y B. 88 and 8@ on!y C. 8 and 88 on!y ". 888 and 8@ on!y E. 8 and 8@ on!y

1. )hich one of the fo!!o&ing statements is correct* $. Money maret accounts are !o&-ris, high-return inestments. B. 'he rate of return earned on short-term securities tends to e%ceed that earned on !ong-term securities. C. .. 'reasury (i!!s are &e!! suited for short-term inestments. ". 'he income earned on .. 'reasury (i!!s is e%empt from a!! ta%ation. E. hort-term inestments tend to hae high !ee!s of defau!t ris.

19-<


+. Municipa! (onds3 $. are !ess !iquid than .. 'reasury (i!!s. B. produce income that is su(?ect to federa! income ta%ation. C. genera!!y pay a higher coupon than corporate (onds. ". are a!so referred to as commercia! paper. E. are issued (y the federa! goernment.

. Money maret securities hae &hich of the fo!!o&ing characteristics* 8. !ong maturities 88. !o& defau!t ris 888. high degree of !iquidity 8@. !o& rates of return $. 8 and 888 on!y B. 88 and 888 on!y C. 8 and 8@ on!y ". 88, 888, and 8@ on!y E. 8, 88, 888, and 8@

2. $ ?um(o C"3 $. is issued (y the federa! goernment. B. genera!!y matures (et&een + and 5 years. C. is a !oan of =1>>,>>> or more to a municipa!ity. ". is a !oan of =1 mi!!ion or more on a short-term (asis. E. is a short-term !oan of =1>>,>>> or more to a commercia! (an.

5. Bro&n 'rucing is (uying a .. 'reasury (i!! today &ith the understanding that the se!!er &i!! (uy it (ac tomorro& at a s!ight!y higher price. 'his inestment is no&n as a3 $. commercia! paper transaction. B. repurchase agreement. C. priate certificate of deposit. ". reenue anticipation note. E. (i!! anticipation note.

19-9


6. $ repurchase agreement genera!!y has a ma%imum !ife of3 $. 1 day. B. a fe& days. C. one month. ". one to three months. E. three to si% months.

:. $ money maret preferred stoc3 $. has a f!oating diidend. B. is so!d on!y under a repurchase agreement. C. is a specia! form of commercia! paper. ". has more price o!ati!ity than an ordinary preferred. E. has its interest rate reset dai!y.

<. )hich of the fo!!o&ing costs re!ated to ho!ding cash are minimi/ed &hen the !ee! of cash a firm ho!ds is optimi/ed* $. opportunity costs B. trading costs C. tota! costs ". (oth trading and opportunity costs E. trading costs, opportunity costs, and tota! costs

9. )hich of the fo!!o&ing statements re!ated to the B$' mode! is correct* 8. 'he B$' mode! is used to determine the target cash (a!ance for a firm. 88. 'he B$' mode! is rare!y used in (usiness due to its comp!e% nature. 888. 'he B$' mode! is a mode! that he!ps e!iminate a firm4s co!!ection f!oat. 8@. Dne disadantage of the B$' mode! is the fact that it assumes a!! cash outf!o&s are no&n &ith certainty. $. 8 and 88 on!y B. 888 and 8@ on!y C. 88 and 888 on!y ". 8 and 888 on!y E. 8 and 8@ on!y

19-1>


2>. )hich of the fo!!o&ing aria(!es are inc!uded in the B$' mode!* 8. upper cash !imit 88. interest rate on mareta(!e securities 888. opportunity cost of ho!ding cash 8@. fi%ed cost of each securities trade $. 88 on!y B. 8 and 888 on!y C. 88 and 8@ on!y ". 88, 888, and 8@ on!y E. 8, 888, and 8@ on!y

21. 'he B$' mode! is used to3 $. ma%imi/e the (enefits of !eerage. B. determine the optima! cash position of a firm. C. e!iminate a!! dai!y cash surp!uses. ". ana!y/e the cash (a!ance gien f!uctuating cash inf!o&s and outf!o&s. E. ma%imi/e the opportunity costs of ho!ding cash.

2+. 'he Mi!!er-Drr mode! assumes that3 $. the cash (a!ance is dep!eted at regu!ar intera!s. B. a!! cash f!o&s are no&n &ith certainty. C. the aerage change in the dai!y cash f!o&s is positie. ". management &i!! set (oth the !o&er and the upper desired !ee!s of cash. E. the cash (a!ance f!uctuates in a random manner.

2. 'he Mi!!er-Drr mode!3 $. recommends se!!ing securities in an amount equa! to F - CG &hen the cash (a!ance reaches L. B. requires that mareta(!e securities (e so!d &heneer the cash (a!ance fa!!s (e!o& the target !ee!. C. (ases the optima! !ee! of cash so!e!y on the opportunity costs of ho!ding cash. ". supports the argument that the target cash (a!ance dec!ines as order costs increase. E. adocates inesting an amount descri(ed as F - CG in mareta(!e securities &hen the cash (a!ance reaches F.

19-11


22. )hich of the fo!!o&ing statements is correct* $. $ firm has a greater !ie!ihood of needing an une%pected !oan &hen its cash f!o&s are re!atie!y constant oer time. B. 'he cost of (orro&ing affects the target cash (a!ance of a firm. C. Management4s desire to maintain a !o& cash (a!ance has no effect on the (orro&ing needs of a firm. ". 'he target cash (a!ance increases as the interest rate rises. E. 'he target cash (a!ance decreases as the order costs increase.

25. 'he o((y hop has a checing account &ith a !edger (a!ance of =69+. 'he firm has =1,>6 in unco!!ected deposits and =<26 in outstanding checs. )hat is the amount of the dis(ursement f!oat on this account* $. => B. =+1: C. =<26 ". =9>9 E. =1,>6

26. Dn an aerage day, 7!astics Enterprises &rites 2+ checs &ith an aerage amount of =5<:. 'hese checs c!ear the (an in an aerage of + days. )hat is the aerage amount of the dis(ursement f!oat* $. =1,1:2 B. =5,<>5 C. =+2,652 ". =29,>< E. =:,96+

2:. Dn aerage, your firm receies 6+ checs a day from customers. 'hese checs, on aerage, are &orth =9.9> each and c!ear the (an in 1.5 days. 8n addition, your firm dis(urses < checs a day &ith an aerage amount of =<9.5>. 'hese checs c!ear your (an in + days. )hat is the aerage amount of the co!!ection f!oat* $. =+,2:.<> B. =,2>1.>> C. =,:1>.:> ". =5,1>1.5> E. =6,<>+.>>

19-1+


2<. )hen Chris (a!anced her (usiness chec(oo, she had an ad?usted (an (a!ance of =11,21<. he had + outstanding deposits &orth =<:9 each and 11 checs outstanding &ith a tota! a!ue of =,62<. )hat is the amount of the co!!ection f!oat on this account* $. -=1,<9> B. =1,:5< C. =,62< ". =5,2>6 E. =6,>1+

29. Your company has an aai!a(!e (a!ance of =:,911. $ deposit of =+,2<> that &as made this morning is not yet inc!uded in the (an4s (a!ance. 'here are a!so 2 checs outstanding &ith a a!ue of =+5 each. )hat is the net f!oat* $. net co!!ection f!oat of =1,1<> B. net co!!ection f!oat of =+,2<> C. net f!oat of =6,:1 ". net dis(ursement f!oat of =1,>> E. net dis(ursement f!oat of =+,2<>

5>. $ firm has =16,:1< in outstanding checs that hae not c!eared the (an. 'he firm a!so has =1,25> in deposits that hae (een recorded (y the firm (ut not (y the (an. 'he current aai!a(!e (a!ance is =11,2>:. )hat is the status of the net f!oat* $. net co!!ection f!oat of =<,1< B. net co!!ection f!oat of =+,>2 C. net co!!ection f!oat of =1,25> ". net dis(ursement f!oat of =,+6< E. net dis(ursement f!oat of =5,11

19-1


51. Your firm genera!!y receies 2 checs a month. 'he chec amounts and the co!!ection de!ay for each chec is sho&n (e!o&. ien this information &hat is the amount of the aerage dai!y f!oat* $ssume a > day month.

$. =1,>:> B. =+, C. =+,62> ". =+,9>> E. =,216

5+. oyes Lum(er genera!!y receies  checs a month. 'he chec amounts and the co!!ection de!ay for each chec are sho&n (e!o&. ien this information, &hat is the amount of the aerage dai!y f!oat* $ssume each month has > days.

$. =1,<6.6: B. =1,2>:.19 C. =2,:5>.>> ". =6,<. E. =6,9.

19-12


5. 'he B!ue tar genera!!y receies on!y  checs a month. 'he chec amounts and the co!!ection de!ay for each chec are sho&n (e!o&. ien this information, &hat is the amount of the aerage dai!y f!oat* $ssume eery month has > days.

$. =9:1.2 B. =1,256.6: C. =,51. ". =5,666.6: E. =6,<>>.>>

52. 'he 0ood )ho!esa!er genera!!y receies 2 checs a month. 'he chec amounts and the co!!ection de!ay for each chec are sho&n (e!o&. ien this information, &hat is the amount of the aerage dai!y f!oat* $ssume eery month has > days.

$. =,96.<9 B. =+1,:5>.>> C. =++,+6.6: ". =+<,1. E. =5,6:5.>>

19-15


55. ot 'u( Bui!ders se!!s to three retai! out!ets. Each retai!er pays once a month in the amounts sho&n (e!o&. 'he co!!ection de!ay associated &ith each payment is a!so gien (e!o&. )hat is the amount of the aerage dai!y receipts if you assume each month has > days*

$. =+,<9.:> B. =<,19>.>> C. =12,6><.1 ". =+,<96.9: E. =<1,9>>.>>

56. $t!as Bui!ders dea!s strict!y &ith fie customers. 'he aerage amount e ach customer pays per month a!ong &ith the co!!ection de!ay associated &ith each payment is sho&n (e!o&. ien this information, &hat is the amount of the aerage dai!y receipts* $ssume eery month has > days.

$. =1,12. B. =+,526.6: C. =+,9<. ". =6,166.6: E. =6,<6>.>>

19-16


5:. Aationa! E%porters dea!s strict!y &ith t&o customers. 'he aerage amount each customer pays per month a!ong &ith the co!!ection de!ay associated &ith each payment is sho&n (e!o&. ien this information, &hat is the amount of the aerage dai!y receipts* $ssume that eery month has > days.

$. =+,65. B. =,>>6. C. =5,>6.6: ". =:,<11.6: E. =<,6>>.>>

5<. Cross Country 'rucing proides transportation serices e%c!usie!y for four customers. 'he aerage amount each customer pays per month a!ong &ith the co!!ection de!ay associated &ith each payment is sho&n (e!o&. ien this information, &hat is the &eighted aerage de!ay* $ssume each month has > days.

$. +.11 days B. +.+: days C. +.26 days ". +.5> days E. +.:< days

19-1:


59. igh Bro& E%press dea!s strict!y &ith t&o customers. 'he aerage amount each customer pays per month a!ong &ith the co!!ection de!ay associated &ith each payment is sho&n (e!o&. ien this information, &hat is the &eighted aerage de!ay* $ssume that eery month has > days.

$. 1.:9 days B. 1.<2 days C. +.>> days ". +.>: days E. +.16 days

6>. 'he Meta!!urgica! pecia!ty Co. dea!s strict!y &ith four customers. 'he aerage amount each customer pays per month a!ong &ith the co!!ection de!ay associated &ith each payment is sho&n (e!o&. ien this information, &hat is the &eighted aerage de!ay* $ssume each month has > days.

$. 1.9< days B. +.>2 days C. +.>9 days ". +.16 days E. +.+ days

19-1<


61. Dn an aerage day, oose "o&n 0eathers receies =+,2>> in checs from customers. 'hese checs c!ear the (an in an aerage of 1.: days. 'he app!ica(!e dai!y interest rate is >.>2 percent. )hat is the present a!ue of the f!oat* $ssume each month has > days. $. =115.+> B. =61<.2> C. =+,2>>.>> ". =2,><>.>> E. =2,+56.5>

6+. Dn an aerage day, 'o&n Center ard&are receies =+,2+> in checs from customers. 'hese checs c!ear the (an in an aerage of +.1 days. 'he app!ica(!e dai!y interest rate is >.>+5 percent. )hat is the ma%imum amount this store shou!d pay to comp!ete!y e!iminate its co!!ection f!oat* $ssume each month has > days. $. =1,15+.< B. =1,+<<.15 C. =+,1>9.16 ". =2,6:. E. =5,><+.>>

6. Dn an aerage day, your firm receies =11,<>> in checs from customers. 'hese checs c!ear the (an in an aerage of +.1 days. 'he app!ica(!e dai!y interest rate is >.>15 percent. )hat is the highest dai!y fee your firm shou!d pay to comp!ete!y e!iminate the co!!ection f!oat* $ssume each month has > days. $. =.2+ B. =.:+ C. =1:.:< ". =2.1< E. =:.+>

19-19


62. Dn an aerage day, )i!son H )i!son receies =:,<>> in checs from customers. 'hese checs c!ear the (an in an aerage of 1.: days. 'he app!ica(!e dai!y interest rate is >.>++ percent. )hat is the highest dai!y fee this firm shou!d pay to comp!ete!y e!iminate its co!!ection f!oat* $ssume each month has > days. $. =1.:+ B. =+.9+ C. =1:.+> ". =+2.> E. =+9.1:

65. Your aerage customer is !ocated 2. mai!ing days a&ay from your firm. You hae determined that, on aerage, it is taing your staff 1.5 days to process payments receied from customers. 8n addition, it taes an aerage of +.+ days for your funds to (e aai!a(!e for use once you hae made your (an deposit. )hat is your firm4s co!!ection time* $. +.+ days B. .: days C. 2. days ". 5.< days E. <.> days

66. 8t taes your firm 2.5 days to prepare and mai! out a!! the month!y statements to your customers. Dn aerage, the mai! time (et&een your firm and your customers is +.6 days. Customer checs tae an aerage of 1.< days to c!ear the (an. You hae determined that your tota! aerage co!!ection time is 6.1 days. o& !ong, on aerage, does it tae your firm to process the payments from customers* $. 1.: days B. +.6 days C. 2.2 days ". 2.< days E. 6.+ days

19-+>


6:. Current!y, your firm requires + days to process the checs &hich customers mai! in to pay for their credit purchases. 'he aerage mai! time associated &ith these payments is +. days and the chec c!earing time is +.1 days. 8f your firm adopts a !oc(o% system, the mai! time &i!! (e cut in ha!f. 8n addition, if emp!oyees are reassigned, checs cou!d (e processed the same day they are receied. o& !ong &i!! your co!!ection time (e if (oth the !oc(o% system and the ?o( reassignments are imp!emented* $. .<5 days B. 2.1> days C. 2.+5 days ". 2.2> days E. 2.55 days

6<. You are considering imp!ementing a !oc(o% system for your firm. 'he system is e%pected to reduce the aerage co!!ection time (y 1.+ days. Dn an aerage day, your firm receies +> checs &ith an aerage a!ue of =99 each. 'he dai!y interest rate on 'reasury (i!!s is >.>12 percent. )hat is the anticipated amount of the dai!y saings if this system is imp!emented* $. =+.61 B. =.+9 C. =2.25 ". =5.+ E. =5.:<

69. Roger4s "istri(utors receies an aerage of +16 checs a day. 'he aerage amount per chec is =6+9. 'he firm is considering a !oc(o% system &hich it anticipates &i!! reduce the aerage co!!ection time (y 1.5 days. 'he dai!y interest rate on 'reasury (i!!s is >.>11 percent. )hat is the amount of the e%pected dai!y saings of the !oc(o% system* $. =+.>2 B. =6.9+ C. =12.95 ". =1<.1> E. =++.2+

19-+1


:>. and 'oo!s, 8nc. receies an aerage of 611 checs a day. 'he aerage amount per chec is =2+5. 'he firm is considering a !oc(o% system &hich it anticipates &i!! reduce the aerage co!!ection time (y 1 day. 'he (an charges =>.+:5 a chec for this serice. 'he dai!y interest rate on 'reasury (i!!s is >.>1 percent. )hat is the aerage dai!y cost of the !oc(o% system* $. =1.16 B. =52.19 C. =16<.> ". =1<>.11 E. =199.19

:1. You are considering imp!ementing a !oc(o% system for your firm. 'he system is e%pected to reduce the aerage co!!ection time (y 1. days. Dn an aerage day, your firm receies 16 checs &ith an aerage a!ue of =+19 each. 'he dai!y interest rate on 'reasury (i!!s is >.>+1 percent. 'he (an charge per chec is =>.++. )hat is the anticipated dai!y cost of the !oc(o% system* $. =.2< B. =6.+5 C. =1+.6> ". =+9.9+ E. =6.1:

:+. You are considering imp!ementing a !oc(o% system for your firm. 'he system is e%pected to reduce the aerage co!!ection time (y +.< days. Dn an aerage day, your firm receies +,219 checs &ith an aerage a!ue of =1,+<: each. 'he dai!y interest rate on 'reasury (i!!s is >.>16 percent. 'he (an charge per chec is =>.>. )hat is the net present a!ue of this !oc(o% arrangement* $. -=2,55,6+5 B. -=+,611,5:5 C. =1<:,219 ". =2,1<1,2< E. =1,+5+,:

19-++


:. Rose&e!! 8nternationa! receies an aerage of +6< checs a day &ith an aerage amount per chec of =<+>. 'he firm is considering a !oc(o% system &hich it anticipates &i!! reduce the aerage co!!ection time (y 1.2 days. 'he (an charges =>.+1 a chec for this serice. 'he dai!y interest rate on 'reasury (i!!s is >.>+ percent. )hat is the net present a!ue of this !oc(o% arrangement* $. -=61,62> B. -=+6,+62, C. =+6,+62 ". =>,<+> E. =61,62>

:2. 'he E!iot Co. needs =1<5,>>> a &ee to pay (i!!s. 'he standard deiation of the &ee!y dis(ursements is =1:,6>>. 'he firm has esta(!ished a !o&er cash (a!ance !imit of =:5,>>>. 'he app!ica(!e interest rate is 5.5 percent and the fi%ed cost of transferring funds is =2:. Based on the B$' mode!, &hat is the optima! initia! cash (a!ance* $. =9>,66< B. =9:,515 C. =1>2,121 ". =1+<,++2 E. =16,5>9

:5. 'heo4s Bar H ri!! needs =12:,>>> a &ee to pay (i!!s. 'he standard deiation of the &ee!y dis(ursements is =9,6>>. 'he firm has esta(!ished a !o&er cash (a!ance !imit of =2>,>>>. 'he app!ica(!e interest rate is .5 percent and the fi%ed cost of transferring funds is =25. Based on the B$' mode!, &hat is the optima! aerage cash (a!ance* $. =6,199 B. =29,56< C. =:>,1>> ". =99,16 E. =11+,2>>

19-+


:6. 7ar&ay E%press needs =1<,>>> a &ee to pay (i!!s. 'he standard deiation of the &ee!y dis(ursements is =1,>>>. 'he firm has esta(!ished a !o&er cash (a!ance !imit of =6>,>>>. 'he app!ica(!e interest rate is 2.5 percent and the fi%ed cost of transferring funds is =65. Based on the B$' mode!, &hat is the opportunity cost of ho!ding cash* $. =,<: B. =2,91< C. =5,+>: ". =1>9,+< E. =11>,22>

::. 7enco upp!y spends =2+<,>>> a &ee to pay (i!!s and maintains a !o&er cash (a!ance !imit of =:5,>>>. 'he standard deiation of its dis(ursements is =1<,9>>. 'he app!ica(!e interest rate is 5 percent and the fi%ed cost of transferring funds is =65. )hat is the firm4s optima! initia! cash (a!ance (ased on the B$' mode!* $. =15>,6>> B. =15<,9+9 C. =1:>,>96 ". =++1,5>6 E. =+2>,55

:<. Your firm spends =52,>>> a &ee to pay (i!!s and maintains a !o&er cash (a!ance !imit of =25,>>>. 'he standard deiation of your dis(ursements is =1+,1>>. 'he app!ica(!e interest rate is 2.5 percent and the fi%ed cost of transferring funds is =55. )hat is your opportunity cost of ho!ding cash (ased on the B$' mode!* $. =1,1< B. =1,<62 C. =+,+>2 ". =+,11 E. =,:>9

19-+2


:9. Rosie D4rady4s spends =9<,>>> a &ee to pay (i!!s and maintains a !o&er cash (a!ance !imit of =95,>>>. 'he standard deiation of the dis(ursements is =12,6>>. 'he app!ica(!e interest rate is 2.< percent and the fi%ed cost of transferring funds is =5>. )hat is this firm4s tota! cost of ho!ding cash (ased on the B$' mode!* $. =1,21 B. =+,<6+ C. =,>2 ". =2,91+ E. =2,926

<>. Your firm spends =26,>>> a &ee to pay (i!!s and maintains a !o&er cash (a!ance !imit of =15>,>>>. 'he standard deiation of your dis(ursements is =+<,:>>. 'he app!ica(!e interest rate is 5 percent and the fi%ed cost of transferring funds is =6>. )hat is your optima! aerage cash (a!ance (ased on the B$' mode!* $. =1>,9>> B. =126,5>> C. =1<+,+>> ". =+>:,<>> E. =+29,9>>

<1. 'he Co& 7ie preader Co. spends =+12,>>> a &ee to pay (i!!s and maintains a !o&er cash (a!ance !imit of =1:5,>>>. 'he standard deiation of the dis(ursements is =16,>>>. 'he app!ica(!e &ee!y interest rate is >.>+5 percent and the fi%ed cost of transferring funds is =29. )hat is the firm4s cash (a!ance target (ased on the Mi!!er-Drr mode!* $. =+><,511 B. =+2:,56> C. =+51,>>6 ". =+52,525 E. =+5<,<:<

19-+5


<+. 'he B!ue Moon ote! and pa spends =59,>>> a &ee to pay (i!!s and maintains a !o&er cash (a!ance !imit of =+5>,>>>. 'he standard deiation of the dis(ursements is =26,<>>. 'he app!ica(!e &ee!y interest rate is >.>25 percent and the fi%ed cost of transferring funds is =6>. )hat is the hote!4s optima! upper cash !imit (ased on the Mi!!er-Drr mode!* $. =2>,<6 B. =22:,9>5 C. =5+<,:>> ". =:9,259 E. =<61,6:+

<. "ona!dson, 8nc. spends =92,>>> a &ee to pay (i!!s and maintains a !o&er cash (a!ance !imit of =5>,>>>. 'he standard deiation of the dis(ursements is =1,>>>. 'he app!ica(!e &ee!y interest rate is >.>25 percent and the fi%ed cost of transferring funds is =5+. )hat is your optima! aerage cash (a!ance (ased on the Mi!!er-Drr mode!* $. =:<,::< B. =<+,6+ C. =+1,969 ". =+6,2 E. =+2:,<6<

<2. 'he Burger top spends =5+,>>> a &ee to pay (i!!s and maintains a !o&er cash (a!ance !imit of =6>,>>>. 'he standard deiation of the dis(ursements is =:,5>>. 'he app!ica(!e &ee!y interest rate is >.>2 percent and the fi%ed cost of transferring funds is =5>. )hat is your optima! aerage cash (a!ance (ased on the Mi!!er-Drr mode!* $. =:9,116 B. =<,+>< C. =11>,15 ". =+:,2< E. =+29,6+2

19-+6


<5. Your firm spends =2<,>>> a &ee to pay (i!!s and maintains a !o&er cash (a!ance !imit of =5>,>>>. 'he standard deiation of the dis(ursements is =<,6>>. 'he app!ica(!e &ee!y interest rate is >.>52 percent and the fi%ed cost of transferring funds is =65. )hat is your cash (a!ance target (ased on the Mi!!er-Drr mode!* $. =2<,156 B. =29,99> C. =52,<<2 ". =6<,<> E. =:5,:+6

<6. 'rae! 8nn E%press spends =1>9,>>> a &ee to pay (i!!s and maintains a !o&er cash (a!ance !imit of =1+5,>>>. 'he standard deiation of the dis(ursements is =12,2>>. 'he app!ica(!e &ee!y interest rate is >.>9 percent and the fi%ed cost of transferring funds is =5<. )hat is the inn4s cash (a!ance target (ased on the Mi!!er-Drr mode!* $. =+<,29+ B. =1,59 C. =15,29+ ". =156,59 E. =++5,21:

Essay Questions

<:. E%p!ain ho& a !oc(o% system operates and &hy a firm might consider imp!ementing such a system.

19-+:


<<. E%p!ain ho& the Chec C!earing $ct for the +1st Century affects (oth co!!ection and dis(ursement f!oat.

<9. E%p!ain ho& the unethica! use of unco!!ected funds has (een impacted (y the gro&th of on-!ine retai!ing and (aning.

9>. 0!oat management systems may proide on!y minima! (enefits to a firm. ien that most firms hae other pro?ects &ith higher positie net present a!ues, &hy shou!d a firm4s managers spend time imp!ementing a f!oat management system*

91. E%p!ain &hat a /ero-(a!ance account is, ho& it is used, and ho& it affects cash management.

19-+<


Multiple Choice Questions

9+. Each (usiness day, on aerage, a company &rites checs tota!ing =+6,>>> to pay its supp!iers. 'he usua! c!earing time for the checs is 5 days. Mean&hi!e, the company is receiing payments from its customers each day, in the form of checs, tota!ing =2>,>>>. 'he cash from the payments is aai!a(!e to the firm after + days. )hat is the amount of the firm4s aerage net f!oat* $. =>,>> B. =5>,>>> C. =<>,>>> ". =11>,>>> E. =1>,>>>

9. 7urp!e 0eet )ine, 8nc. receies an aerage of =6,>>> in checs per day. 'he de!ay in c!earing is typica!!y  days. 'he current interest rate is >.>+5 percent per day. $ssume > days per month. )hat is the highest dai!y fee the company shou!d (e &i!!ing to pay to e!iminate its f!oat entire!y* $. =1.5> B. =.>> C. =.:5 ". =2.5> E. =6.>>

92. Your neigh(or goes to the post office once a month and pics up t&o checs, one for =1<,>>> and one for =2,>>>. 'he !arger chec taes 2 days to c!ear after it is depositedI the sma!!er one taes 6 days. $ssume > days per month. )hat is the &eighted aerage de!ay* $. 2.+1 days B. 2.6 days C. 2.:< days ". 5.>> days E. 6.>> days

19-+9


95. Your firm has an aerage receipt si/e of =6>. $ (an has approached you concerning a !oc(o% serice that &i!! decrease your tota! co!!ection time (y 1 day. You typica!!y receie +<,>>> checs per day. 'he dai!y interest rate is >.>16 percent. )hat is the A7@ of the !oc(o% pro?ect if the (an charges a fee of =+1> per day* $. =6:,5>> B. =2+:,5>> C. =9>,5> ". =1,21+,5>> E. =1,6<>,>>>

96. $ mai!-order firm processes 5,>>> checs per month. Df these, 55 percent are for =55 and 25 percent are for =65. 'he =55 checs are de!ayed + days on aerageI the =65 checs are de!ayed 5 days on aerage. $ssume each month has > days. 'he interest rate is 6 percent per year. o& much shou!d the firm (e &i!!ing to pay to reduce the &eighted aerage f!oat (y 1.2 days* $. =2,165 B. =1,<< C. =21,65> ". =1<,<< E. =216,5>>

9:. 7aper u(marine Manufacturing is inestigating a !oc(o% system to reduce its co!!ection time. 8t has determined the fo!!o&ing3

'he tota! co!!ection time &i!! (e reduced (y + days if the !oc(o% system is adopted. )hat is the A7@ of adopting the !oc(o% system* $. =6>>,>>> B. =::5,>>> C. =9:5,>>> ". =1,+>>,>>> E. =1,2+5,>>>

19->


9<. ome Roasted 'ureys dis(urses checs eery 2 &ees that aerage =:>,>>> and tae 5 days to c!ear. o& much interest can the company earn if it de!ays transfer of funds from an interest-(earing account that pays >.>+ percent per day for these 5 days* 8gnore the effects of compound interest. $ssume 5+ &ees in a year. $. =6 B. =91 C. =1<+ ". =62 E. =91>

99. Aeer $gain Enterprises has an agreement &ith 'he )orth Ban &here(y the (an hand!es =.1+ mi!!ion in co!!ections a day and requires a =1,>>>,>>> compensating (a!ance. Aeer $gain is contemp!ating cance!ing the agreement and diiding its eastern region so that t&o other (ans &i!! hand!e its (usiness. Bans $ and B &i!! each hand!e =1.56 mi!!ion of co!!ections a day, and each requires a compensating (a!ance of =1,55>,>>>. Aeer $gain4s financia! management e%pects that co!!ections &i!! (e acce!erated (y one day if the eastern region is diided. 'he '-(i!! rate is 5 percent annua!!y. )hat is the amount of the annua! net saings if this p!an is adopted* $. =1>,+>> B. =51,>>> C. =:6,5>> ". =1>+,>>> E. =1+5,>>>

19-1


1>>. Mountaintop 8nns, a #entucy company, has determined that a ma?ority of its customers are !ocated in the 7ennsy!ania area. 8t therefore is considering using a !oc(o% system offered (y a (an !ocated in 7itts(urgh, 7ennsy!ania. 'he (an has estimated that use of the system &i!! reduce co!!ection time (y one day. 8n addition to the aria(!e charge sho&n (e!o&, there is a!so a fi%ed charge of =2,+> per year for the !oc(o% system. $ssume a year has 65 days. )hat is the A7@ of the !oc(o% system gien the fo!!o&ing information*

$. -=156,:+: B. -=11,>1 C. -=:2,+>< ". =11,5>: E. =+6,2

1>1. Co& Chips, 8nc., a !arge ferti!i/er distri(utor (ased in Ca!ifornia, is p!anning to use a !oc(o% system to speed up co!!ections from its customers !ocated on the East Coast. $ 7hi!ade!phia-area (an &i!! proide this serice for an annua! fee of =+5,>>> p!us 1> cents per transaction. 'he estimated reduction in co!!ection and processing time is one day. 'he aerage customer payment in this region is =<,+>>. 'reasury (i!!s are current!y yie!ding 5 percent per year. $ssume a year has 65 days. $ppro%imate!y ho& many customers each day, on aerage, are needed to mae the system profita(!e for Co& Chips, 8nc.* $. 56 B. 6: C. :2 ". < E. <9

19-+


Chapter 19 Cash and Liquidity Management $ns&er #ey

Multiple Choice Questions

1. Yesterday, the president of RB Enterprises receied a phone ca!! from "L#, a competitor. "L# is a so!e proprietorship. $n une%pected fami!y situation has caused the o&ner to sudden!y &ant to retire and re!ocate c!oser to his fami!y. 'hus, the assets of "L# are (eing offered to RB Enterprises at a (argain (asement price. )hi!e RB Enterprises had not anticipated purchasing these assets, it &as decided that the opportunity &as too good to pass up. 'his i!!ustrates &hich of the fo!!o&ing needs to ho!d cash* $. precautionary B. transaction C. specu!atie ". compensation E. f!oat Refer to section 19.1

AACSB: N/A Bloom's: Comprehension Difficulty: Basic Learning Objectie: !"#! Section: !"$! %opic: Speculatie motie

19-


+. ' Motors regu!ar!y issues short-term de(t to finance its dai!y operations. udden!y, the credit marets fro/e and no funds &ere aai!a(!e for (orro&ing. 0ortunate!y, the firm had some cash reseres saed that it &as a(!e to use to fund its operations unti! additiona! credit &as aai!a(!e. 'he need to retain cash for situations such as this is referred to as &hich one of the fo!!o&ing moties for ho!ding cash* $. specu!atie B. f!oat C. compensating D. precautionary E. transaction Refer to section 19.1

AACSB: N/A Bloom's: &nole(ge Difficulty: Basic Learning Objectie: !"#! Section: !"$! %opic: )recautionary motie

. 'he cash found in a cash dra&er that a chec-out c!er uses to mae change is an e%amp!e of &hich of the fo!!o&ing moties for ho!ding cash* $. specu!atie B. dai!y f!oat C. compensating (a!ance ". precautionary E. transaction Refer to section 19.1

AACSB: N/A Bloom's: &nole(ge Difficulty: Basic Learning Objectie: !"#! Section: !"$! %opic: %ransaction motie

19-2


2. 0!oat is defined as the3 $. amount of cash a firm can immediate!y &ithdra& from its (an account. B. difference (et&een (oo cash and (an cash. C. change in a firm4s cash (a!ance from one accounting period to the ne%t. ". amount of cash a firm has on hand. E. cash (a!ance according to a firm4s records. Refer to section 19.+

AACSB: N/A Bloom's: &nole(ge Difficulty: Basic Learning Objectie: !"#! Section: !"$* %opic: +loat

5. $ !oc(o% is a3 $. specia! safe used (y a firm for oernight storage of any cash or undeposited checs. B. specia! safe used (y a firm that can on!y (e opened at prespecified times of the day. C. (o% !ocated in a (an4s au!t that is rented (y a firm and used to ho!d unprocessed checs. ". specia! post office (o% &hich can on!y (e opened (y prespecified posta! inspectors for direct de!iery to the addressee. E. post office (o% strategica!!y !ocated so that a firm4s receia(!es can (e co!!ected faster. Refer to section 19.

AACSB: N/A Bloom's: &nole(ge Difficulty: Basic Learning Objectie: !"#* Section: !"$, %opic: Loc-bo.

19-5


6. 'he 7resque 8s!e Center has (ranch operations in three states. Each (ranch dea!s &ith a !oca! (an. o&eer, a!! e%cess funds in these (ranch (an accounts are transferred on a dai!y (asis to the firm4s primary (an !ocated near the firm4s home office. 'his routine of transferring cash to the primary (an on a regu!ar (asis is referred to as3 A. cash concentration. B. strategic cash dis(ursement. C. transfer f!otation. ". paya(!es management. E. f!oat management. Refer to section 19.

AACSB: N/A Bloom's: &nole(ge Difficulty: Basic Learning Objectie: !"#* Section: !"$, %opic: Cash concentration

:. $n account into &hich funds are deposited on!y in an amount equa! to the a!ue of the checs presented for payment that day is ca!!ed a ;;;;; account. $. !oc(o% B. concentration C. /ero-(a!ance ". compensating (a!ance E. reo!ing Refer to section 19.2

AACSB: N/A Bloom's: &nole(ge Difficulty: Basic Learning Objectie: !"#* Section: !"$ %opic: 0ero#balance accounts

19-6


<. $n account into &hich a firm transfers funds, usua!!y from a master account, in an amount sufficient to coer the checs presented for payment that day is ca!!ed a ;;;;; account. $. !oc(o% B. c!eanup C. compensating (a!ance ". reo!ing E. contro!!ed dis(ursement Refer to section 19.2

AACSB: N/A Bloom's: &nole(ge Difficulty: Basic Learning Objectie: !"#* Section: !"$ %opic: Controlle( (isbursement account

9. 'he no& ut has ana!y/ed the carrying and shortage costs associated &ith its cash ho!dings and determined that the firm shou!d idea!!y maintain a cash (a!ance of =,6>>. 'his =,6>> represents &hich one of the fo!!o&ing to the firm* A. target cash (a!ance B. concentration (a!ance C. aai!a(!e (a!ance ". se!ected cash amount E. compensating (a!ance Refer to section 19.$

AACSB: N/A Bloom's: &nole(ge Difficulty: Basic Learning Objectie: !"#, Section: !"$A %opic: %arget cash balance

19-:


1>. $d?ustment costs is another name for &hich one of the fo!!o&ing* $. (orro&ing costs B. shortage costs C. cash transfer costs ". cash &ire costs E. e%cess cash costs Refer to section 19.$

AACSB: N/A Bloom's: &nole(ge Difficulty: Basic Learning Objectie: !"#, Section: !"$A %opic: A(justment costs

11. )hy do firms need !iquidity* 8. to meet compensating (a!ance requirements 88. to tae adantage of an opportunity that sudden!y arises 888. to conduct dai!y (usiness actiities 8@. to (e prepared for a financia! emergency $. 8 and 88 on!y B. 888 and 8@ on!y C. 8, 888, and 8@ on!y ". 88, 888, and 8@ on!y E. 8, 88, 888, and 8@ Refer to section 19.1

AACSB: N/A Bloom's: &nole(ge Difficulty: Basic Learning Objectie: !"#! Section: !"$! %opic: 1oties for li2ui(ity

19-<


1+. Cash management primari!y ino!es3 A. optimi/ing a firm4s co!!ections and dis(ursements of cash. B. ma%imi/ing the income a firm earns on its cash reseres. C. reconci!ing a firm4s (oo (a!ance &ith its (an (a!ance. ". determining the optima! !ee! of !iquidity a firm shou!d maintain. E. determining the (est method of raising capita!. Refer to section 19.1

AACSB: N/A Bloom's: &nole(ge Difficulty: Basic Learning Objectie: !"#! Section: !"$! %opic: Cash management

1. "is(ursements f!oat3 $. occurs &hen a deposit is recorded (ut the funds are unaai!a(!e. B. causes the (oo (a!ance to e%ceed the (an (a!ance. C. has tended to increase since the enactment of the Chec C!earing $ct for the +1st Century. ". is a recommended source of funds for short-term inestments. E. is e!iminated &hen payments are made e!ectronica!!y. Refer to section 19.+

AACSB: N/A Bloom's: Comprehension Difficulty: Basic Learning Objectie: !"#! Section: !"$* %opic: Disbursement float

19-9


12. Co!!ection f!oat3 $. is more desira(!e to firms than dis(ursement f!oat. B. is tota!!y e!iminated (y the insta!!ation of a !oc(o% system. C. e%ists &hen a firm4s aai!a(!e (a!ance e%ceeds its (oo (a!ance. D. can (e aoided (y co!!ecting payments e!ectronica!!y at the time of sa!e. E. is e!iminated (y imp!ementing a concentration (aning system. Refer to section 19.+

AACSB: N/A Bloom's: Comprehension Difficulty: Basic Learning Objectie: !"#! Section: !"$* %opic: Collection float

15. )hich one of the fo!!o&ing statements is correct* $. Aet f!oat decreases eery time a firm issues a chec to pay one of its supp!iers. B. $ positie net f!oat indicates that co!!ection f!oat e%ceeds dis(ursements f!oat. C. 0irms prefer a /ero net f!oat oer a positie net f!oat. ". Aet f!oat is equa! to co!!ection f!oat minus dis(ursement f!oat. E. Aet f!oat is equa! to a firm4s aai!a(!e (a!ance minus its (oo (a!ance. Refer to section 19.+

AACSB: N/A Bloom's: &nole(ge Difficulty: Basic Learning Objectie: !"#! Section: !"$* %opic: Net float

19-2>


16. Chec iting is3 $. used (y most firms as an ethica! means of hand!ing its cash reseres. B. the process of &ithdra&ing a!! funds from a (an account as soon as the funds are aai!a(!e. C. the centra! core of a good cash management system. D. using unco!!ected cash to inest in short-term, !iquid assets. E. increasing!y popu!ar due to recent (aning !a& changes. Refer to section 19.+

AACSB: 3thics Bloom's: &nole(ge Difficulty: Basic Learning Objectie: !"#! Section: !"$* %opic: 3thical issue

1:. )hich of the fo!!o&ing &i!! reduce co!!ection time* 8. (i!!ing customers e!ectronica!!y rather than (y mai! 88. accepting de(it cards (ut not checs as payment for a sa!e 888. offering cash discounts for ear!y payment 8@. reducing the processing de!ay (y one day $. 8 and 88 on!y B. 8 and 888 on!y C. 8, 88, and 888 on!y ". 88, 888, and 8@ on!y E. 8, 88, 888, and 8@ Refer to section 19.

AACSB: N/A Bloom's: Comprehension Difficulty: Basic Learning Objectie: !"#* Section: !"$, %opic: Collection time

19-21


1<. )hich of the fo!!o&ing shou!d he!p reduce the tota! co!!ection time for a firm* 8. opening a post office (o% so mai! can (e receied ear!ier in the morning 88. assigning additiona! staff in the morning to process incoming payments 888. proiding a discount for customers &ho pay e!ectronica!!y 8@. esta(!ishing preauthori/ed payments from customers $. 8 and 88 on!y B. 888 and 8@ on!y C. 88, 888, and 8@ on!y ". 8, 88, and 8@ on!y E. 8, 88, 888, and 8@ Refer to section 19.

AACSB: N/A Bloom's: Comprehension Difficulty: Basic Learning Objectie: !"#* Section: !"$, %opic: Collection time

19. )hich one of the fo!!o&ing co!!ection times is correct!y descri(ed* $. 'he processing de!ay starts &hen a firm mai!s out a (i!!ing statement and ends &hen the payment is receied from a customer. B. Mai!ing time (egins &hen a firm mai!s out a (i!!ing statement and ends &hen the payment is receied. C. Co!!ection time (egins &hen a firm mai!s out a (i!!ing statement and ends &hen the cash payment for that (i!!ing is aai!a(!e to the firm. D. $ai!a(i!ity de!ay (egins &hen a firm deposits a customer4s chec into its (an account and ends &hen the cash from that payment is aai!a(!e to the firm. E. 7rocessing de!ay (egins &hen a firm mai!s out (i!!ing statements and ends &hen the firm deposits the payment for that statement into its (an account. Refer to section 19.

AACSB: N/A Bloom's: &nole(ge Difficulty: Basic Learning Objectie: !"#* Section: !"$, %opic: Collection time

19-2+


+>. $ !oc(o% system3 $. entai!s the use of a (an &hich is centra!!y !ocated to co!!ect payments on a nation&ide (asis. B. is designed to deposit a customer4s chec into the firm4s (an account prior to recording the receipt of that chec to a customer4s account. C. is used to reduce the dis(ursement f!oat of a firm. ". is efficient regard!ess of the !ocations se!ected for !oc(o% destinations. E. automatica!!y records payments to a customer4s account &hen the customer4s chec is receied at the !oc(o% !ocation. Refer to section 19.

AACSB: N/A Bloom's: Comprehension Difficulty: Basic Learning Objectie: !"#* Section: !"$, %opic: Loc-bo.

+1. Loc(o%es3 A. shou!d (e geographica!!y !ocated c!ose to a firm4s primary customers. B. shou!d (e !ocated in remote !ocations to increase the net dis(ursement f!oat. C. offer no additiona! (enefit to a firm no& that the Chec C!earing $ct for the +1st Century has (een enacted. ". tend to (e negatie net present a!ue pro?ects for firms &ith a !arge num(er of si/ea(!e transactions. E. tend to a!so (e used as concentration accounts. Refer to section 19.

AACSB: N/A Bloom's: &nole(ge Difficulty: Basic Learning Objectie: !"#* Section: !"$, %opic: Loc-bo.

19-2


++. Cash concentration accounts3 A. tend to increase the funds aai!a(!e for short-term inesting. B. tend to increase the comp!e%ity of a firm4s cash management system. C. that uti!i/e &ire transfers rather than automated c!earing house transfers are !ess e%pensie to maintain. ". receie checs direct!y from a!! of a firm4s customers. E. are a!! /ero-(a!ance accounts. Refer to section 19.

AACSB: N/A Bloom's: Comprehension Difficulty: Basic Learning Objectie: !"#* Section: !"$, %opic: Cash concentration

+. )hich one of the fo!!o&ing statements is correct* $. 0unds receied ia automated c!earinghouse transfers are aai!a(!e that day. B. $ depository transfer chec is the most cost!y means of transferring funds into a cash concentration account. C. 'he means se!ected to transfer funds into a concentration account depends primari!y upon the si/e of the transfers. ". Concentration accounts are used to transfer funds to !oc(o% !ocations as needed. E. 'he most e%pedient means of transferring funds into a concentration account is a &ire transfer. Refer to section 19.


19-22


+2. $ cash concentration account3 A. is frequent!y used as a source of funds for short-term inestments. B. cannot (e used to coer a compensating (a!ance requirement. C. cannot (e used to transfer funds into /ero-(a!ance accounts. ". is genera!!y the on!y (an account a firm needs to efficient!y manage its cash. E. is another name for a contro!!ed dis(ursement account. Refer to section 19.


+5. 'he main purpose of a cash concentration account is to3 $. decrease co!!ection f!oat. B. decrease dis(ursement f!oat. C. conso!idate funds. ". rep!ace a !oc(o% system. E. coer compensating (a!ance requirements. Refer to section 19.


19-25


+6. )hich one of the fo!!o&ing statements is correct concerning a cash management system that emp!oys (oth !oc(o%es and a concentration (an account* $. $!! customer payments must (e su(mitted to a !oc(o%. B. 'he party &hich co!!ects the checs from the !oc(o% is responsi(!e for recording the payment on the customer4s account. C. 7ayments receied in a !oc(o% are transferred immediate!y to the concentration account. D. 'he firm4s cash manager determines ho& the funds in the concentration account are dis(ursed. E. 'he concentration account must (e /eroed out on a dai!y (asis. Refer to section 19.


+:. $ /ero-(a!ance account3 $. is used to coer the compensating (a!ance requirement of a !ine of credit agreement. B. is on!y used to deposit funds receied at !oca! !oc(o%es. C. is funded on an as-needed (asis on!y. ". is !imited to hand!ing payro!! dis(ursements. E. requires a compensating (a!ance. Refer to section 19.2


19-26


+<. )hich one of the fo!!o&ing statements is correct concerning /ero-(a!ance accounts* $. Each /ero-(a!ance account is offset (y a compensating (a!ance account. B. ero-(a!ance accounts are used for depositing incoming funds. C. $ master account must (e used in con?unction &ith a /ero-(a!ance account. ". ero-(a!ance accounts are used so!e!y in con?unction &ith a !oc(o% system. E. ero-(a!ance accounts are sti!! required to maintain a minima! (a!ance. Refer to section 19.2


+9. )hich one of the fo!!o&ing statements is correct* $. 'he money maret refers to securities that mature in t&o years or !ess. B. Bans are prohi(ited from inesting cash surp!uses on (eha!f of their customers on a shortterm (asis. C. hort-term securities tend to hae a high degree of interest rate ris. D. $ cyc!ica! firm may purchase mareta(!e securities as part o f its short-term financing p!an. E. Corporations are not permitted to inest in money maret mutua! funds (ut can inest in (an money maret accounts. Refer to section 19.5

AACSB: N/A Bloom's: &nole(ge Difficulty: Basic Learning Objectie: !"#, Section: !"$4 %opic: 1anagement of cash surplus

19-2:


>. )hich t&o of the fo!!o&ing are the primary reasons &hy firms temporari!y accumu!ate !arge cash surp!uses* 8. cyc!ica! actiities 88. desire to inest funds 888. dai!y operations 8@. fi%ed asset purchases $. 8 and 888 on!y B. 88 and 8@ on!y C. 8 and 88 on!y ". 888 and 8@ on!y E. 8 and 8@ on!y Refer to section 19.5

AACSB: N/A Bloom's: &nole(ge Difficulty: Basic Learning Objectie: !"#, Section: !"$4 %opic: 1anagement of cash surplus

1. )hich one of the fo!!o&ing statements is correct* $. Money maret accounts are !o&-ris, high-return inestments. B. 'he rate of return earned on short-term securities tends to e%ceed that earned on !ong-term securities. C. .. 'reasury (i!!s are &e!! suited for short-term inestments. ". 'he income earned on .. 'reasury (i!!s is e%empt from a!! ta%ation. E. hort-term inestments tend to hae high !ee!s of defau!t ris. Refer to section 19.5

AACSB: N/A Bloom's: &nole(ge Difficulty: Basic Learning Objectie: !"#, Section: !"$4 %opic: Short#term securities

19-2<


+. Municipa! (onds3 A. are !ess !iquid than .. 'reasury (i!!s. B. produce income that is su(?ect to federa! income ta%ation. C. genera!!y pay a higher coupon than corporate (onds. ". are a!so referred to as commercia! paper. E. are issued (y the federa! goernment. Refer to section 19.5


. Money maret securities hae &hich of the fo!!o&ing characteristics* 8. !ong maturities 88. !o& defau!t ris 888. high degree of !iquidity 8@. !o& rates of return $. 8 and 888 on!y B. 88 and 888 on!y C. 8 and 8@ on!y D. 88, 888, and 8@ on!y E. 8, 88, 888, and 8@ Refer to section 19.5


19-29


2. $ ?um(o C"3 $. is issued (y the federa! goernment. B. genera!!y matures (et&een + and 5 years. C. is a !oan of =1>>,>>> or more to a municipa!ity. ". is a !oan of =1 mi!!ion or more on a short-term (asis. E. is a short-term !oan of =1>>,>>> or more to a commercia! (an. Refer to section 19.5


5. Bro&n 'rucing is (uying a .. 'reasury (i!! today &ith the understanding that the se!!er &i!! (uy it (ac tomorro& at a s!ight!y higher price. 'his inestment is no&n as a3 $. commercia! paper transaction. B. repurchase agreement. C. priate certificate of deposit. ". reenue anticipation note. E. (i!! anticipation note. Refer to section 19.5


19-5>


6. $ repurchase agreement genera!!y has a ma%imum !ife of3 $. 1 day. B. a fe& days. C. one month. ". one to three months. E. three to si% months. Refer to section 19.5


:. $ money maret preferred stoc3 A. has a f!oating diidend. B. is so!d on!y under a repurchase agreement. C. is a specia! form of commercia! paper. ". has more price o!ati!ity than an ordinary preferred. E. has its interest rate reset dai!y. Refer to section 19.5


19-51


<. )hich of the fo!!o&ing costs re!ated to ho!ding cash are minimi/ed &hen the !ee! of cash a firm ho!ds is optimi/ed* $. opportunity costs B. trading costs C. tota! costs ". (oth trading and opportunity costs E. trading costs, opportunity costs, and tota! costs Refer to section 19.$

AACSB: N/A Bloom's: &nole(ge Difficulty: Basic Learning Objectie: !"#, Section: !"$A %opic: Cash balance

9. )hich of the fo!!o&ing statements re!ated to the B$' mode! is correct* 8. 'he B$' mode! is used to determine the target cash (a!ance for a firm. 88. 'he B$' mode! is rare!y used in (usiness due to its comp!e% nature. 888. 'he B$' mode! is a mode! that he!ps e!iminate a firm4s co!!ection f!oat. 8@. Dne disadantage of the B$' mode! is the fact that it assumes a!! cash outf!o&s are no&n &ith certainty. $. 8 and 88 on!y B. 888 and 8@ on!y C. 88 and 888 on!y ". 8 and 888 on!y E. 8 and 8@ on!y Refer to section 19.$

AACSB: N/A Bloom's: &nole(ge Difficulty: Basic Learning Objectie: !"#, Section: !"$A %opic: BA% mo(el

19-5+


2>. )hich of the fo!!o&ing aria(!es are inc!uded in the B$' mode!* 8. upper cash !imit 88. interest rate on mareta(!e securities 888. opportunity cost of ho!ding cash 8@. fi%ed cost of each securities trade $. 88 on!y B. 8 and 888 on!y C. 88 and 8@ on!y D. 88, 888, and 8@ on!y E. 8, 888, and 8@ on!y Refer to section 19.$


21. 'he B$' mode! is used to3 $. ma%imi/e the (enefits of !eerage. B. determine the optima! cash position of a firm. C. e!iminate a!! dai!y cash surp!uses. ". ana!y/e the cash (a!ance gien f!uctuating cash inf!o&s and outf!o&s. E. ma%imi/e the opportunity costs of ho!ding cash. Refer to section 19.$


19-5


2+. 'he Mi!!er-Drr mode! assumes that3 $. the cash (a!ance is dep!eted at regu!ar intera!s. B. a!! cash f!o&s are no&n &ith certainty. C. the aerage change in the dai!y cash f!o&s is positie. ". management &i!! set (oth the !o&er and the upper desired !ee!s of cash. E. the cash (a!ance f!uctuates in a random manner. Refer to section 19.$

AACSB: N/A Bloom's: &nole(ge Difficulty: Basic Learning Objectie: !"#, Section: !"$A %opic: 1iller#Orr mo(el

2. 'he Mi!!er-Drr mode!3 $. recommends se!!ing securities in an amount equa! to F - CG &hen the cash (a!ance reaches L. B. requires that mareta(!e securities (e so!d &heneer the cash (a!ance fa!!s (e!o& the target !ee!. C. (ases the optima! !ee! of cash so!e!y on the opportunity costs of ho!ding cash. ". supports the argument that the target cash (a!ance dec!ines as order costs increase. E. adocates inesting an amount descri(ed as F - CG in mareta(!e securities &hen the cash (a!ance reaches F. Refer to section 19.$

AACSB: N/A Bloom's: &nole(ge Difficulty: Basic Learning Objectie: !"#, Section: !"$A %opic: 1iller#Orr mo(el

19-52


22. )hich of the fo!!o&ing statements is correct* $. $ firm has a greater !ie!ihood of needing an une%pected !oan &hen its cash f!o&s are re!atie!y constant oer time. B. 'he cost of (orro&ing affects the target cash (a!ance of a firm. C. Management4s desire to maintain a !o& cash (a!ance has no effect on the (orro&ing needs of a firm. ". 'he target cash (a!ance increases as the interest rate rises. E. 'he target cash (a!ance decreases as the order costs increase. Refer to section 19.$

AACSB: N/A Bloom's: &nole(ge Difficulty: Basic Learning Objectie: !"#, Section: !"$A %opic: %arget cash balance

25. 'he o((y hop has a checing account &ith a !edger (a!ance of =69+. 'he firm has =1,>6 in unco!!ected deposits and =<26 in outstanding checs. )hat is the amount of the dis(ursement f!oat on this account* $. => B. =+1: C. =<26 ". =9>9 E. =1,>6 "is(ursement f!oat J =<26

AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objectie: !"#! Section: !"$* %opic: Disbursement float

19-55


26. Dn an aerage day, 7!astics Enterprises &rites 2+ checs &ith an aerage amount of =5<:. 'hese checs c!ear the (an in an aerage of + days. )hat is the aerage amount of the dis(ursement f!oat* $. =1,1:2 B. =5,<>5 C. =+2,652 D. =29,>< E. =:,96+ "is(ursement f!oat J 2+ × =5<: × + J =29,><

AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objectie: !"#! Section: !"$* %opic: Disbursement float

2:. Dn aerage, your firm receies 6+ checs a day from customers. 'hese checs, on aerage, are &orth =9.9> each and c!ear the (an in 1.5 days. 8n addition, your firm dis(urses < checs a day &ith an aerage amount of =<9.5>. 'hese checs c!ear your (an in + days. )hat is the aerage amount of the co!!ection f!oat* $. =+,2:.<> B. =,2>1.>> C. =,:1>.:> ". =5,1>1.5> E. =6,<>+.>> Co!!ection f!oat J 6+ × =9.9> × 1.5 J =,:1>.:>

AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objectie: !"#! Section: !"$* %opic: Collection float

19-56


2<. )hen Chris (a!anced her (usiness chec(oo, she had an ad?usted (an (a!ance of =11,21<. he had + outstanding deposits &orth =<:9 each and 11 checs outstanding &ith a tota! a!ue of =,62<. )hat is the amount of the co!!ection f!oat on this account* $. -=1,<9> B. =1,:5< C. =,62< ". =5,2>6 E. =6,>1+ Co!!ection f!oat J =<:9 × + J =1,:5<

AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objectie: !"#! Section: !"$* %opic: Collection float

29. Your company has an aai!a(!e (a!ance of =:,911. $ deposit of =+,2<> that &as made this morning is not yet inc!uded in the (an4s (a!ance. 'here are a!so 2 checs outstanding &ith a a!ue of =+5 each. )hat is the net f!oat* A. net co!!ection f!oat of =1,1<> B. net co!!ection f!oat of =+,2<> C. net f!oat of =6,:1 ". net dis(ursement f!oat of =1,>> E. net dis(ursement f!oat of =+,2<> Aet co!!ection f!oat J =+,2<> - 2 × =+5G J =1,1<>

AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objectie: !"#! Section: !"$* %opic: Net float

19-5:


5>. $ firm has =16,:1< in outstanding checs that hae not c!eared the (an. 'he firm a!so has =1,25> in deposits that hae (een recorded (y the firm (ut not (y the (an. 'he current aai!a(!e (a!ance is =11,2>:. )hat is the status of the net f!oat* $. net co!!ection f!oat of =<,1< B. net co!!ection f!oat of =+,>2 C. net co!!ection f!oat of =1,25> D. net dis(ursement f!oat of =,+6< E. net dis(ursement f!oat of =5,11 Aet dis(ursement f!oat J =16,:1< - =1,25> J =,+6<

AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objectie: !"#! Section: !"$* %opic: Net float

51. Your firm genera!!y receies 2 checs a month. 'he chec amounts and the co!!ection de!ay for each chec is sho&n (e!o&. ien this information &hat is the amount of the aerage dai!y f!oat* $ssume a > day month.

A. =1,>:> B. =+, C. =+,62> ". =+,9>> E. =,216

$erage dai!y f!oat J K=1,+>> × +G  =,9>> × 1G  =5,<>> × G  =2,+>> × +G> J =1,>:>

AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objectie: !"#! Section: !"$* %opic: Aerage (aily float

19-5<


5+. oyes Lum(er genera!!y receies  checs a month. 'he chec amounts and the co!!ection de!ay for each chec are sho&n (e!o&. ien this information, &hat is the amount of the aerage dai!y f!oat* $ssume each month has > days.

A. =1,<6.6: B. =1,2>:.19 C. =2,:5>.>> ". =6,<. E. =6,9.

$erage dai!y f!oat J K=6,1>> × G  =5,5>> × 1G  =<,9>> × +GN> J =1,<6.6:


19-59


5. 'he B!ue tar genera!!y receies on!y  checs a month. 'he chec amounts and the co!!ection de!ay for each chec are sho&n (e!o&. ien this information, &hat is the amount of the aerage dai!y f!oat* $ssume eery month has > days.

$. =9:1.2 B. =1,256.6: C. =,51. ". =5,666.6: E. =6,<>>.>> $erage dai!y f!oat J K=9,1>> × +G  =+,9>> × G  =<,2>> × +N> J =1,256.6:

AACSB: Analytic Bloom's: &nole(ge Difficulty: Basic Learning Objectie: !"#, Section: !"$* %opic: Aerage (aily float

19-6>


52. 'he 0ood )ho!esa!er genera!!y receies 2 checs a month. 'he chec amounts and the co!!ection de!ay for each chec are sho&n (e!o&. ien this information, &hat is the amount of the aerage dai!y f!oat* $ssume eery month has > days.

$. =,96.<9 B. =+1,:5>.>> C. =++,+6.6: ". =+<,1. E. =5,6:5.>> $erage dai!y f!oat J K=6:,+>> × G  =91,6>> × 1G  =52,+>> × +G  =<<,5>> × GN> J =++,+6.6:


19-61


55. ot 'u( Bui!ders se!!s to three retai! out!ets. Each retai!er pays once a month in the amounts sho&n (e!o&. 'he co!!ection de!ay associated &ith each payment is a!so gien (e!o&. )hat is the amount of the aerage dai!y receipts if you assume each month has > days*

$. =+,<9.:> B. =<,19>.>> C. =12,6><.1 ". =+,<96.9: E. =<1,9>>.>> =<,:>>  =129,<>>  =5:,+>>G> J =<,19>

AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objectie: !"#! Section: !"$* %opic: Aerage (aily receipts

19-6+


56. $t!as Bui!ders dea!s strict!y &ith fie customers. 'he aerage amount e ach customer pays per month a!ong &ith the co!!ection de!ay associated &ith each payment is sho&n (e!o&. ien this information, &hat is the amount of the aerage dai!y receipts* $ssume eery month has > days.

A. =1,12. B. =+,526.6: C. =+,9<. ". =6,166.6: E. =6,<6>.>>

$erage dai!y receipts J =6,<>>  =<,5>>  =+,>>>  =9,5>>  =:,5>>G> J =1,12.


19-6


5:. Aationa! E%porters dea!s strict!y &ith t&o customers. 'he aerage amount each customer pays per month a!ong &ith the co!!ection de!ay associated &ith each payment is sho&n (e!o&. ien this information, &hat is the amount of the aerage dai!y receipts* $ssume that eery month has > days.

$. =+,65. B. =,>>6. C. =5,>6.6: ". =:,<11.6: E. =<,6>>.>> $erage dai!y receipts J =<6,2>>  =:+,<>>G> J =5,>6.6:


19-62


5<. Cross Country 'rucing proides transportation serices e%c!usie!y for four customers. 'he aerage amount each customer pays per month a!ong &ith the co!!ection de!ay associated &ith each payment is sho&n (e!o&. ien this information, &hat is the &eighted aerage de!ay* $ssume each month has > days.

$. +.11 days B. +.+: days C. +.26 days ". +.5> days E. +.:< days 'ota! month!y co!!ections J =62,>>>  =<<,+>>  =96,5>>  =2:,9>> J =+96,6>> )eighted aerage de!ay J K=62,>>>=+96,6>>G × +N  K=<<,+>>=+96,6>>G × N  K=96,5>>=+96,6>>G × +N  K=2:,9>>=+96,6>>G × N J +.26 days

AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objectie: !"#! Section: !"$* %opic: 5eighte( aerage (elay

19-65


59. igh Bro& E%press dea!s strict!y &ith t&o customers. 'he aerage amount each customer pays per month a!ong &ith the co!!ection de!ay associated &ith each payment is sho&n (e!o&. ien this information, &hat is the &eighted aerage de!ay* $ssume that eery month has > days.

$. 1.:9 days B. 1.<2 days C. +.>> days ". +.>: days E. +.16 days 'ota! month!y co!!ections J =219,>>>  =5:5,>>> J =992,>>> )eighted aerage de!ay J K=219,>>>=992,>>>G × 1N  K=5:5,>>>=992,>>>G × N J +.16 days


19-66


6>. 'he Meta!!urgica! pecia!ty Co. dea!s strict!y &ith four customers. 'he aerage amount each customer pays per month a!ong &ith the co!!ection de!ay associated &ith each payment is sho&n (e!o&. ien this information, &hat is the &eighted aerage de!ay* $ssume each month has > days.

$. 1.9< days B. +.>2 days C. +.>9 days ". +.16 days E. +.+ days 'ota! month!y co!!ections J =+<:,>>>  =216,>>>  =19,>>>  =+,>>> J =1,>:5,>>> )eighted aerage de!ay J K=+<:,>>>=1,>:5,>>>G × 2N  K=216,>>>=1,>:5,>>>G × 1N  K=19,>>>=1,>:5,>>>G × 1N  K=+,>>>=1,>:5,>>>G × N J +.+ days


19-6:


61. Dn an aerage day, oose "o&n 0eathers receies =+,2>> in checs from customers. 'hese checs c!ear the (an in an aerage of 1.: days. 'he app!ica(!e dai!y interest rate is >.>2 percent. )hat is the present a!ue of the f!oat* $ssume each month has > days. $. =115.+> B. =61<.2> C. =+,2>>.>> D. =2,><>.>> E. =2,+56.5> 7resent a!ue of the f!oat J =+,2>> × 1.: J =2,><>

AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objectie: !"#! Section: !"$* %opic: Cost of float

6+. Dn an aerage day, 'o&n Center ard&are receies =+,2+> in checs from customers. 'hese checs c!ear the (an in an aerage of +.1 days. 'he app!ica(!e dai!y interest rate is >.>+5 percent. )hat is the ma%imum amount this store shou!d pay to comp!ete!y e!iminate its co!!ection f!oat* $ssume each month has > days. $. =1,15+.< B. =1,+<<.15 C. =+,1>9.16 ". =2,6:. E. =5,><+.>> Ma%imum cost J 7resent a!ue of the f!oat J =+,2+> × +.1 J =5,><+.>>

AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objectie: !"#! Section: !"$* %opic: Cost of float

19-6<


6. Dn an aerage day, your firm receies =11,<>> in checs from customers. 'hese checs c!ear the (an in an aerage of +.1 days. 'he app!ica(!e dai!y interest rate is >.>15 percent. )hat is the highest dai!y fee your firm shou!d pay to comp!ete!y e!iminate the co!!ection f!oat* $ssume each month has > days. $. =.2+ B. =.:+ C. =1:.:< ". =2.1< E. =:.+> Ma%imum dai!y fee J =11,<>> × +.1 × >.>>>15 J =.:+

AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objectie: !"#! Section: !"$* %opic: 1a.imum (aily fee

62. Dn an aerage day, )i!son H )i!son receies =:,<>> in checs from customers. 'hese checs c!ear the (an in an aerage of 1.: days. 'he app!ica(!e dai!y interest rate is >.>++ percent. )hat is the highest dai!y fee this firm shou!d pay to comp!ete!y e!iminate its co!!ection f!oat* $ssume each month has > days. $. =1.:+ B. =+.9+ C. =1:.+> ". =+2.> E. =+9.1: Ma%imum dai!y fee J =:,<>> × 1.: × >.>>>++ J =+.9+

AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objectie: !"#! Section: !"$* %opic: 1a.imum (aily fee

19-69


65. Your aerage customer is !ocated 2. mai!ing days a&ay from your firm. You hae determined that, on aerage, it is taing your staff 1.5 days to process payments receied from customers. 8n addition, it taes an aerage of +.+ days for your funds to (e aai!a(!e for use once you hae made your (an deposit. )hat is your firm4s co!!ection time* $. +.+ days B. .: days C. 2. days ". 5.< days E. <.> days Co!!ection time J 2.  1.5  +.+ J < days

AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objectie: !"#* Section: !"$, %opic: Collection time

66. 8t taes your firm 2.5 days to prepare and mai! out a!! the month!y statements to your customers. Dn aerage, the mai! time (et&een your firm and your customers is +.6 days. Customer checs tae an aerage of 1.< days to c!ear the (an. You hae determined that your tota! aerage co!!ection time is 6.1 days. o& !ong, on aerage, does it tae your firm to process the payments from customers* A. 1.: days B. +.6 days C. 2.2 days ". 2.< days E. 6.+ days 7rocessing time J 6.1 - +.6 - 1.< J 1.: days

AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objectie: !"#* Section: !"$, %opic: Collection time

19-:>


6:. Current!y, your firm requires + days to process the checs &hich customers mai! in to pay for their credit purchases. 'he aerage mai! time associated &ith these payments is +. days and the chec c!earing time is +.1 days. 8f your firm adopts a !oc(o% system, the mai! time &i!! (e cut in ha!f. 8n addition, if emp!oyees are reassigned, checs cou!d (e processed the same day they are receied. o& !ong &i!! your co!!ection time (e if (oth the !oc(o% system and the ?o( reassignments are imp!emented* $. .<5 days B. 2.1> days C. 2.+5 days ". 2.2> days E. 2.55 days Co!!ection time J +. × >.5G  1  +.1 J 2.+5 days

AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objectie: !"#! Section: !"$, %opic: Collection time

6<. You are considering imp!ementing a !oc(o% system for your firm. 'he system is e%pected to reduce the aerage co!!ection time (y 1.+ days. Dn an aerage day, your firm receies +> checs &ith an aerage a!ue of =99 each. 'he dai!y interest rate on 'reasury (i!!s is >.>12 percent. )hat is the anticipated amount of the dai!y saings if this system is imp!emented* $. =+.61 B. =.+9 C. =2.25 D. =5.+ E. =5.:< "ai!y saings J +> × =99 × 1.+ × >.>>>12 J =5.+

AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objectie: !"#* Section: !"$, %opic: Loc-bo. (aily saings

19-:1


69. Roger4s "istri(utors receies an aerage of +16 checs a day. 'he aerage amount per chec is =6+9. 'he firm is considering a !oc(o% system &hich it anticipates &i!! reduce the aerage co!!ection time (y 1.5 days. 'he dai!y interest rate on 'reasury (i!!s is >.>11 percent. )hat is the amount of the e%pected e%pec ted dai!y saings of the !oc(o% system* $. =+.>2 $. =+.>2 B. =6.9+ B. =6.9+ C. =12.95 C. =12.95 ". =1<.1> ". =1<.1> E. =++.2+ "ai!y saings J +16 × =6+9 × 1.5 × >.>>>11 J =++.2+

AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objectie: !"#* Section: !"$, %opic: Loc-bo. (aily saings

:>. and 'oo!s, 8nc. receies an aerage of 611 checs a day. 'he aerage amount per chec is =2+5. 'he firm is considering a !oc(o% system &hich it anticipates &i!! reduce the aerage co!!ection time (y 1 day. 'he (an charges =>.+:5 a chec for this serice. 'he dai!y interest rate on 'reasury (i!!s is >.>1 percent. )hat is the aerage dai!y cost of the !oc(o% system* $. =1.16 $. =1.16 B. =52.19 B. =52.19 C. =16<.> ". =1<>.11 ". =1<>.11 E. =199.19 E. =199.19 "ai!y cost J 611 × =>.+:5 J =16<.>

AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objectie: !"#* Section: !"$, %opic: Loc-bo. (aily cost

19-:+


:1. You are considering imp!ementing a !oc(o% system for your firm. 'he system is e%pected to reduce the aerage co!!ection time (y 1. days. Dn an aerage day, your firm receies 16 checs &ith an aerage a!ue of =+19 each. 'he dai!y interest rate on 'reasury (i!!s is >.>+1 percent. 'he (an charge per chec is =>.++. )hat is the anticipated dai!y cost of the !oc(o% system* $. =.2< $. =.2< B. =6.+5 B. =6.+5 C. =1+.6> C. =1+.6> D. =+9.9+ E. =6.1: E. =6.1: "ai!y cost J 16 × =>.++ J =+9.9+

AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objectie: !"#* Section: !"$, %opic: Loc-bo. (aily cost

:+. You are considering imp!ementing a !oc(o% system for your firm. 'he system is e%pected to reduce the aerage co!!ection time (y +.< days. Dn an aerage day, your firm receies +,219 checs &ith an aerage a!ue of =1,+<: each. 'he dai!y interest rate on 'reasury (i!!s is >.>16 percent. 'he (an charge per chec is =>.>. )hat is the net present a!ue of this !oc(o% arrangement* $. -=2,55,6+5 $. -=2,55,6+5 B. -=+,611,5:5 B. -=+,611,5:5 C. =1<:,219 C. =1<:,219 D. =2,1<1,2< E. =1,+5+,: E. =1,+5+,: Aet present a!ue J K+,219 × =1,+<: × +..>G.>>>16N J =2,1<1,2<

AACSB: Analytic Bloom's: Analysis Difficulty: 6nterme(iate Learning Objectie: !"#* Section: !"$, %opic: Loc-bo. net present alue

19-:


:. Rose&e!! 8nternationa! receies an aerage of +6< checs a day &ith an aerage amount per chec of =<+>. 'he firm is considering a !oc(o% system &hich it anticipates &i!! reduce the aerage co!!ection time (y 1.2 days. 'he (an charges =>.+1 a chec for this serice. 'he dai!y interest rate on 'reasury (i!!s is >.>+ percent. )hat is the net present a!ue of this !oc(o% arrangement* $. -=61,62> $. -=61,62> B. -=+6,+62, B. -=+6,+62, C. =+6,+62 ". =>,<+> ". =>,<+> E. =61,62> E. =61,62> Aet present a!ue J K+6< × =<+> × 1.2N - K+6< × =>.+1G.>>>+N J =+6,+62

AACSB: Analytic Bloom's: Analysis Difficulty: 6nterme(iate Learning Objectie: !"#* Section: !"$, %opic: Loc-bo. net present alue

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9+. Each (usiness day, on aerage, a company &rites checs tota!ing =+6,>>> to pay its supp!iers. 'he usua! c!earing time for the checs is 5 days. Mean&hi!e, the company is receiing payments from its customers each day, in the form of checs, tota!ing =2>,>>>. 'he cash from the payments is aai!a(!e to the firm after + days. )hat is the amount of the firm4s aerage net f!oat* $. =>,>> $. =>,>> B. =5>,>>> C. =<>,>>> C. =<>,>>> ". =11>,>>> ". =11>,>>> E. =1>,>>> E. =1>,>>> Aet f!oat J 5=+6,>>>G - +=2>,>>>G J =5>,>>>

AACSB: Analytic Bloom's: Application Difficulty: Basic 3OC 7: !"#* Learning Objectie: !"#! Section: !"$* %opic: Net float

9. 7urp!e 0eet )ine, 8nc. receies an aerage of =6,>>> in checs per day. 'he de!ay in c!earing is typica!!y  days. 'he current interest rate is >.>+5 percent per day. $ssume > days per month. )hat is the highest dai!y fee the company shou!d (e &i!!ing to pay to e!iminate its f!oat entire!y* $. =1.5> $. =1.5> B. =.>> B. =.>> C. =.:5 C. =.:5 D. =2.5> E. =6.>> E. =6.>> Ma%imum dai!y fee J =6,>>> × G × >.>>>+5 J =2.5>

AACSB: Analytic Bloom's: Application Difficulty: Basic 3OC 7: !"#, Learning Objectie: !"#! Section: !"$* %opic: Cost of float

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92. Your neigh(or goes to the post office once a month and pics up t&o checs, one for =1<,>>> and one for =2,>>>. 'he !arger chec taes 2 days to c!ear after it is depositedI the sma!!er one taes 6 days. $ssume > days per month. )hat is the &eighted aerage de!ay* $. 2.+1 days B. 2.6 days C. 2.:< days ". 5.>> days E. 6.>> days 'ota! month!y receipts J =1<,>>>  =2,>>> J =++,>>> )eighted aerage de!ay J K=1<,>>>=++,>>>G × 2N  K=2,>>>=++,>>>G × 6N J 2.6 days

AACSB: Analytic Bloom's: Application Difficulty: Basic 3OC 7: !"# Learning Objectie: !"#! Section: !"$* %opic: 5eighte( aerage (elay

95. Your firm has an aerage receipt si/e of =6>. $ (an has approached you concerning a !oc(o% serice that &i!! decrease your tota! co!!ection time (y 1 day. You typica!!y receie +<,>>> checs per day. 'he dai!y interest rate is >.>16 percent. )hat is the A7@ of the !oc(o% pro?ect if the (an charges a fee of =+1> per day* A. =6:,5>> B. =2+:,5>> C. =9>,5> ". =1,21+,5>> E. =1,6<>,>>> A7@ of serice J =6>+<,>>>G - =+1>>.>>>16G J =6:,5>>

AACSB: Analytic Bloom's: Application Difficulty: Basic 3OC 7: !"#4 Learning Objectie: !"#* Section: !"$, %opic: Loc-bo. N)8

19-:6


96. $ mai!-order firm processes 5,>>> checs per month. Df these, 55 percent are for =55 and 25 percent are for =65. 'he =55 checs are de!ayed + days on aerageI the =65 checs are de!ayed 5 days on aerage. $ssume each month has > days. 'he interest rate is 6 percent per year. o& much shou!d the firm (e &i!!ing to pay to reduce the &eighted aerage f!oat (y 1.2 days* $. =2,165 B. =1,<< C. =21,65> ". =1<,<< E. =216,5>> Ma%imum payment J $erage dai!y f!oat J 1.2OK>.55 × 5,>>> × =55G  >.25 × 5,>>> × =65GN>P J =1,<<

AACSB: Analytic Bloom's: Application Difficulty: Basic 3OC 7: !"#9 Learning Objectie: !"#! Section: !"$* %opic: Aerage (aily float

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9:. 7aper u(marine Manufacturing is inestigating a !oc(o% system to reduce its co!!ection time. 8t has determined the fo!!o&ing3

'he tota! co!!ection time &i!! (e reduced (y + days if the !oc(o% system is adopted. )hat is the A7@ of adopting the !oc(o% system* $. =6>>,>>> B. =::5,>>> C. =9:5,>>> ". =1,+>>,>>> E. =1,2+5,>>> A7@ J + × >> × =2,>>>G - K=>.65 × >>G>.>>>+N J =1,2+5,>>>

AACSB: Analytic Bloom's: Application Difficulty: Basic 3OC 7: !"# Learning Objectie: !"#* Section: !"$, %opic: Loc-bo. N)8

19-:<


9<. ome Roasted 'ureys dis(urses checs eery 2 &ees that aerage =:>,>>> and tae 5 days to c!ear. o& much interest can the company earn if it de!ays transfer of funds from an interest-(earing account that pays >.>+ percent per day for these 5 days* 8gnore the effects of compound interest. $ssume 5+ &ees in a year. $. =6 B. =91 C. =1<+ ". =62 E. =91> 8nterest J =:>,>>> 5G 5+2G >.>>>+G J =91>

AACSB: Analytic Bloom's: Application Difficulty: Basic 3OC 7: !"#" Learning Objectie: !"#* Section: !"$, %opic: 8alue of (elay

99. Aeer $gain Enterprises has an agreement &ith 'he )orth Ban &here(y the (an hand!es =.1+ mi!!ion in co!!ections a day and requires a =1,>>>,>>> compensating (a!ance. Aeer $gain is contemp!ating cance!ing the agreement and diiding its eastern region so that t&o other (ans &i!! hand!e its (usiness. Bans $ and B &i!! each hand!e =1.56 mi!!ion of co!!ections a day, and each requires a compensating (a!ance of =1,55>,>>>. Aeer $gain4s financia! management e%pects that co!!ections &i!! (e acce!erated (y one day if the eastern region is diided. 'he '-(i!! rate is 5 percent annua!!y. )hat is the amount of the annua! net saings if this p!an is adopted* $. =1>,+>> B. =51,>>> C. =:6,5>> ". =1>+,>>> E. =1+5,>>> A7@ J =,1+>,>>> - K+=1,55>,>>>G - =1,>>>,>>>N J =1,>+>,>>> Aet saings J >.>5=1,>+>,>>>G J =51,>>>

AACSB: Analytic Bloom's: Application Difficulty: Basic 3OC 7: !"#!; Learning Objectie: !"#* Section: !"$, %opic: N)8 of float re(uction

19-:9


1>>. Mountaintop 8nns, a #entucy company, has determined that a ma?ority of its customers are !ocated in the 7ennsy!ania area. 8t therefore is considering using a !oc(o% system offered (y a (an !ocated in 7itts(urgh, 7ennsy!ania. 'he (an has estimated that use of the system &i!! reduce co!!ection time (y one day. 8n addition to the aria(!e charge sho&n (e!o&, there is a!so a fi%ed charge of =2,+> per year for the !oc(o% system. $ssume a year has 65 days. )hat is the A7@ of the !oc(o% system gien the fo!!o&ing information*

$. -=156,:+: B. -=11,>1 C. -=:2,+>< ". =11,5>: E. =+6,2 A7@ J 1 × :5> × =1,<>>G - K=>.> × :5>G1.>6165 - 1GN - K=2,+>>.>6N J -=11,>1

AACSB: Analytic Bloom's: Analysis Difficulty: 6nterme(iate 3OC 7: !"#!! Learning Objectie: !"#* Section: !"$, %opic: Loc-bo. N)8

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Chap 019

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