Chap019 - Test Bank - Chapter 19 Chap019 - Test Bank - Chapter 19

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Chap019 - Test Bank - Chapter 19
Finance (Harvard University)
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Chapter 19
Cash and Liquidity Management
Multiple Choice Questions
1. Yesterday, the president of RB Enterprises received a phone call from DLK, a

competitor. DLK is a sole proprietorship. An unexpected family situation has
caused the owner to suddenly want to retire and relocate closer to his family.
Thus, the assets of DLK are being offered to RB Enterprises at a bargain
basement price. While RB Enterprises had not anticipated purchasing these
assets, it was decided that the opportunity was too good to pass up. This
illustrates which of the following needs to hold cash?
A. precautionary
B. transaction
C. speculative
D. compensation
E. float

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2. GT Motors regularly issues short-term debt to finance its daily operations.

Suddenly, the credit markets froze and no funds were available for borrowing.
Fortunately, the firm had some cash reserves saved that it was able to use to
fund its operations until additional credit was available. The need to retain cash
for situations such as this is referred to as which one of the following motives
for holding cash?
A. speculative
B. float
C. compensating
D. precautionary
E. transaction
3. The cash found in a cash drawer that a check-out clerk uses to make change is
an example of which of the following motives for holding cash?
A. speculative
B. daily float
C. compensating balance
D. precautionary
E. transaction

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4. Float is defined as the:
A. amount of cash a firm can immediately withdraw from its bank account.
B. difference between book cash and bank cash.
C. change in a firm's cash balance from one accounting period to the next.
D. amount of cash a firm has on hand.
E. cash balance according to a firm's records.
5. A lockbox is a:
A. special safe used by a firm for overnight storage of any cash or undeposited
checks.
B. special safe used by a firm that can only be opened at prespecified times of
the day.
C. box located in a bank's vault that is rented by a firm and used to hold
unprocessed checks.
D. special post office box which can only be opened by prespecified postal
inspectors for direct delivery to the addressee.
E. post office box strategically located so that a firm's receivables can be

collected faster.

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6. The Presque Isle Center has branch operations in three states. Each branch
deals with a local bank. However, all excess funds in these branch bank
accounts are transferred on a daily basis to the firm's primary bank located
near the firm's home office. This routine of transferring cash to the primary
bank on a regular basis is referred to as:
A. cash
concentration.
B. strategic cash
disbursement.
C. transfer
flotation.
D. payables
management.
E. float
management.

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7. An account into which funds are deposited only in an amount equal to the
value of the checks presented for payment that day is called a _____ account.
A. lockbo
x
B. concentratio
n
C. zero-
balance
D. compensating
balance
E. revolvin
g

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8. An account into which a firm transfers funds, usually from a master account, in
an amount sufficient to cover the checks presented for payment that day is
called a _____ account.
A. lockbo
x
B. cleanu
p
C. compensating
balance
D. revolvin
g
E. controlled
disbursement

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9. The Snow Hut has analyzed the carrying and shortage costs associated with its
cash holdings and determined that the firm should ideally maintain a cash
balance of $3,600. This $3,600 represents which one of the following to the
firm?
A. target cash
balance
B. concentration
balance
C. available
balance
D. selected cash
amount
E. compensating
balance

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10.Adjustment costs is another name for which one of the following?
A. borrowing
costs
B. shortage
costs
C. cash transfer
costs
D. cash wire
costs
E. excess cash costs

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11.Why do firms need liquidity?
I. to meet compensating balance requirements

II. to take advantage of an opportunity that suddenly arises
III. to conduct daily business activities
IV. to be prepared for a financial emergency
A. I and II
only
B. III and IV
only
C. I, III, and IV
only
D. II, III, and IV

only
E. I, II, III, and IV

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12.Cash management primarily involves:
A. optimizing a firm's collections and disbursements of

cash.
B. maximizing the income a firm earns on its cash

reserves.
C. reconciling a firm's book balance with its bank

balance.
D. determining the optimal level of liquidity a firm should

maintain.
E. determining the best method of raising

capital.
13.Disbursements float:
A. occurs when a deposit is recorded but the funds are

unavailable.
B. causes the book balance to exceed the bank

balance.
C. has tended to increase since the enactment of the Check Clearing Act for the
21st Century.
D. is a recommended source of funds for short-term

investments.
E. is eliminated when payments are made

electronically.

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14.Collection float:
A. is more desirable to firms than disbursement

float.
B. is totally eliminated by the installation of a lockbox

system.
C. exists when a firm's available balance exceeds its book

balance.
D. can be avoided by collecting payments electronically at the time of

sale.
E. is eliminated by implementing a concentration banking

system.
15.Which one of the following statements is correct?
A. Net float decreases every time a firm issues a check to pay one of its
suppliers.
B. A positive net float indicates that collection float exceeds disbursements

float.
C. Firms prefer a zero net float over a positive net

float.
D. Net float is equal to collection float minus disbursement

float.
E. Net float is equal to a firm's available balance minus its book

balance.

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16.Check kiting is:
A. used by most firms as an ethical means of handling its cash

reserves.
B. the process of withdrawing all funds from a bank account as soon as the
funds are available.
C. the central core of a good cash management

system.
D. using uncollected cash to invest in short-term, liquid

assets.
E. increasingly popular due to recent banking law

changes.

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17.Which of the following will reduce collection time?
I. billing customers electronically rather than by mail

II. accepting debit cards but not checks as payment for a sale
III. offering cash discounts for early payment
IV. reducing the processing delay by one day
A. I and II
only
B. I and III
only
C. I, II, and III

only
D. II, III, and IV

only

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18.Which of the following should help reduce the total collection time for a firm?
I. opening a post office box so mail can be received earlier in the morning
II. assigning additional staff in the morning to process incoming payments
III. providing a discount for customers who pay electronically
IV. establishing preauthorized payments from customers
A. I and II
only
B. III and IV
only
C. II, III, and IV

only
D. I, II, and IV
only

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19.Which one of the following collection times is correctly described?
A. The processing delay starts when a firm mails out a billing statement and
ends when the payment is received from a customer.
B. Mailing time begins when a firm mails out a billing statement and ends
when the payment is received.
C. Collection time begins when a firm mails out a billing statement and ends
when the cash payment for that billing is available to the firm.
D. Availability delay begins when a firm deposits a customer's check into its
bank account and ends when the cash from that payment is available to the
firm.
E. Processing delay begins when a firm mails out billing statements and ends
when the firm deposits the payment for that statement into its bank
account.

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20.A lockbox system:
A. entails the use of a bank which is centrally located to collect payments on a

nationwide basis.
B. is designed to deposit a customer's check into the firm's bank account prior
to recording the receipt of that check to a customer's account.
C. is used to reduce the disbursement float of a

firm.
D. is efficient regardless of the locations selected for lockbox

destinations.
E. automatically records payments to a customer's account when the

customer's check is received at the lockbox location.
21.Lockboxes:
A. should be geographically located close to a firm's primary

customers.
B. should be located in remote locations to increase the net disbursement

float.
C. offer no additional benefit to a firm now that the Check Clearing Act for the
21st Century has been enacted.
D. tend to be negative net present value projects for firms with a large number
of sizeable transactions.
E. tend to also be used as concentration

accounts.

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22.Cash concentration accounts:
A. tend to increase the funds available for short-term

investing.
B. tend to increase the complexity of a firm's cash management

system.
C. that utilize wire transfers rather than automated clearing house transfers are
less expensive to maintain.
D. receive checks directly from all of a firm's

customers.
E. are all zero-balance

accounts.
A. Funds received via automated clearinghouse transfers are available that

day.
B. A depository transfer check is the most costly means of transferring funds

into a cash concentration account.
C. The means selected to transfer funds into a concentration account depends

primarily upon the size of the transfers.
D. Concentration accounts are used to transfer funds to lockbox locations as

needed.
E. The most expedient means of transferring funds into a concentration

account is a wire transfer.

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24.A cash concentration account:
A. is frequently used as a source of funds for short-term

investments.
B. cannot be used to cover a compensating balance

requirement.
C. cannot be used to transfer funds into zero-balance

accounts.
D. is generally the only bank account a firm needs to efficiently manage its
cash.
E. is another name for a controlled disbursement

account.
25.The main purpose of a cash concentration account is to:
A. decrease collection
float.
B. decrease disbursement
float.
C. consolidate
funds.
D. replace a lockbox
system.
E. cover compensating balance

requirements.

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26.Which one of the following statements is correct concerning a cash

management system that employs both lockboxes and a concentration bank
account?
A. All customer payments must be submitted to a

lockbox.
B. The party which collects the checks from the lockbox is responsible for
recording the payment on the customer's account.
C. Payments received in a lockbox are transferred immediately to the

concentration account.
D. The firm's cash manager determines how the funds in the concentration
account are disbursed.
E. The concentration account must be zeroed out on a daily

basis.

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27.A zero-balance account:
A. is used to cover the compensating balance requirement of a line of credit

agreement.
B. is only used to deposit funds received at local

lockboxes.
C. is funded on an as-needed basis

only.
D. is limited to handling payroll

disbursements.
E. requires a compensating
balance.

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28.Which one of the following statements is correct concerning zero-balance

accounts?
A. Each zero-balance account is offset by a compensating balance

account.
B. Zero-balance accounts are used for depositing incoming

funds.
C. A master account must be used in conjunction with a zero-balance

account.
D. Zero-balance accounts are used solely in conjunction with a lockbox

system.
E. Zero-balance accounts are still required to maintain a minimal

balance.

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A. The money market refers to securities that mature in two years or

less.
B. Banks are prohibited from investing cash surpluses on behalf of their

customers on a short- term basis.
C. Short-term securities tend to have a high degree of interest rate

risk.
D. A cyclical firm may purchase marketable securities as part of its short-term

financing plan.
E. Corporations are not permitted to invest in money market mutual funds but
can invest in bank money market accounts.

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30.Which two of the following are the primary reasons why firms temporarily
accumulate large cash surpluses?
I. cyclical activities
II. desire to invest funds
III. daily operations
IV. fixed asset purchases
A. I and III
only
B. II and IV
only
C. I and II
only
D. III and IV
only
E. I and IV
only

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A. Money market accounts are low-risk, high-return

investments.
B. The rate of return earned on short-term securities tends to exceed that

earned on long-term securities.
C. U.S. Treasury bills are well suited for short-term

investments.
D. The income earned on U.S. Treasury bills is exempt from all

taxation.
E. Short-term investments tend to have high levels of default

risk.
32.Municipal bonds:
A. are less liquid than U.S. Treasury

bills.
B. produce income that is subject to federal income

taxation.
C. generally pay a higher coupon than corporate

bonds.
D. are also referred to as commercial

paper.
E. are issued by the federal

government.

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33.Money market securities have which of the following characteristics?
I. long maturities
II. low default risk
III. high degree of liquidity
IV. low rates of return
A. I and III
only
B. II and III
only
C. I and IV
only
D. II, III, and IV

only

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34.A jumbo CD:
A. is issued by the federal

government.
B. generally matures between 2 and 5

years.
C. is a loan of $100,000 or more to a

municipality.
D. is a loan of $1 million or more on a short-term

basis.
E. is a short-term loan of $100,000 or more to a commercial

bank.

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35.Brown Trucking is buying a U.S. Treasury bill today with the understanding that
the seller will buy it back tomorrow at a slightly higher price. This investment is
known as a:
A. commercial paper
transaction.
B. repurchase
agreement.
C. private certificate of
deposit.
D. revenue anticipation
note.
E. bill anticipation
note.
36.A repurchase agreement generally has a maximum life of:
A. 1 day.
B. a few days.
C. one
month.
D. one to three
months.
E. three to six
months.

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37.A money market preferred stock:
A. has a floating
dividend.
B. is sold only under a repurchase

agreement.
C. is a special form of commercial

paper.
D. has more price volatility than an ordinary

preferred.
E. has its interest rate reset

daily.

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38.Which of the following costs related to holding cash are minimized when the
level of cash a firm holds is optimized?
A. opportunity
costs
B. trading
costs
C. total
costs
D. both trading and opportunity

costs
E. trading costs, opportunity costs, and total

costs

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39.Which of the following statements related to the BAT model is correct?
I. The BAT model is used to determine the target cash balance for a firm.
II. The BAT model is rarely used in business due to its complex nature.
III. The BAT model is a model that helps eliminate a firm's collection float.
IV. One disadvantage of the BAT model is the fact that it assumes all cash
outflows are known with certainty.
A. I and II
only
B. III and IV
only
C. II and III
only
D. I and III
only
E. I and IV
only

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40.Which of the following variables are included in the BAT model?
I. upper cash limit

II. interest rate on marketable securities
III. opportunity cost of holding cash
IV. fixed cost of each securities trade
A. II
only
B. I and III
only
C. II and IV
only
D. II, III, and IV

only
E. I, III, and IV
only

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41.The BAT model is used to:
A. maximize the benefits of

leverage.
B. determine the optimal cash position of a

firm.
C. eliminate all daily cash

surpluses.
D. analyze the cash balance given fluctuating cash inflows and

outflows.
E. maximize the opportunity costs of holding

cash.
42.The Miller-Orr model assumes that:
A. the cash balance is depleted at regular

intervals.
B. all cash flows are known with

certainty.
C. the average change in the daily cash flows is

positive.
D. management will set both the lower and the upper desired levels of
cash.
E. the cash balance fluctuates in a random

manner.

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43.The Miller-Orr model:
A. recommends selling securities in an amount equal to (U* - C) when the cash

balance reaches L.
B. requires that marketable securities be sold whenever the cash balance falls
below the target level.
C. bases the optimal level of cash solely on the opportunity costs of holding
cash.
D. supports the argument that the target cash balance declines as order costs
increase.
E. advocates investing an amount described as (U* - C) in marketable securities

when the cash balance reaches U*.
44.Which of the following statements is correct?
A. A firm has a greater likelihood of needing an unexpected loan when its cash
flows are relatively constant over time.
B. The cost of borrowing affects the target cash balance of a

firm.
C. Management's desire to maintain a low cash balance has no effect on the

borrowing needs of a firm.
D. The target cash balance increases as the interest rate

rises.
E. The target cash balance decreases as the order costs

increase.

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45.The Hobby Shop has a checking account with a ledger balance of $692. The
firm has $1,063 in uncollected deposits and $930 in outstanding checks. What
is the amount of the disbursement float on this account?
A. $
0
B. $21
7
C. $93
0
D. $99
0
E. $1,06
3

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46.On an average day, Plastics Enterprises writes 42 checks with an average

amount of $587. These checks clear the bank in an average of 2 days. What is
the average amount of the disbursement float?
A. $1,17
4
B. $5,80
5
C. $24,65
4
D. $49,30
8
E. $73,96
2

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47.On average, your firm receives 65 checks a day from customers. These checks,
on average, are worth $39.90 each and clear the bank in 1.5 days. In addition,
your firm disburses 38 checks a day with an average amount of $89.50. These
checks clear your bank in 2 days. What is the average amount of the collection
float?
A. $2,473.8
0
B. $3,401.0
0
C. $3,890.2
5
D. $5,101.5
0
E. $6,802.0
0

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48.When Chris balanced her business checkbook, she had an adjusted bank
balance of $11,418. She had 2 outstanding deposits worth $879 each and 11
checks outstanding with a total value of $3,648. What is the amount of the
collection float on this account?
A. -
$1,890
B. $1,75
8
C. $3,64
8
D. $5,40
6
E. $6,01
2

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49.Your company has an available balance of $7,911. A deposit of $2,480 that was
made this morning is not yet included in the bank's balance. There are also 4
checks outstanding with a value of $360 each. What is the net float?
A. net collection float of

$1,040
B. net collection float of

$2,480
C. net float of
$6,731
D. net disbursement float of

$1,300
E. net disbursement float of

$2,480

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50.A firm has $16,718 in outstanding checks that have not cleared the bank. The
firm also has $13,450 in deposits that have been recorded by the firm but not
by the bank. The current available balance is $11,407. What is the status of the
net float?

$8,138

$2,043
C. net collection float of

$13,450

$3,268

$5,311

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51.Your firm generally receives 4 checks a month. The check amounts and the
collection delay for each check is shown below. Given this information what is
the amount of the average daily float? Assume a 30 day month.
A. $1,12
0
B. $2,33
3
C. $2,64
0
D. $2,90
0
E. $3,41
6

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52.Hoyes Lumber generally receives 3 checks a month. The check amounts and the
collection delay for each check are shown below. Given this information, what
is the amount of the average daily float? Assume each month has 30 days.
A. $1,386.6
7
B. $1,407.1
9
C. $4,750.0
0
D. $6,833.3
3
E. $6,933.3
3

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53.The Blue Star generally receives only 3 checks a month. The check amounts and
the collection delay for each check are shown below. Given this information,
what is the amount of the average daily float? Assume every month has 30
days.
A. $971.4
3
B. $1,376.6
7
C. $3,351.3
3
D. $5,666.6
7
E. $6,800.0
0

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54.The Food Wholesaler generally receives 4 checks a month. The check amounts
and the collection delay for each check are shown below. Given this
information, what is the amount of the average daily float? Assume every
month has 30 days.
A. $3,963.8
9
B. $21,750.0
0
C. $22,236.6
7
D. $28,133.3
3
E. $35,675.0
0

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55.Hot Tub Builders sells to three retail outlets. Each retailer pays once a month in
the amounts shown below. The collection delay associated with each payment
is also given below. What is the amount of the average daily receipts if you
assume each month has 30 days?
A. $2,389.7
0
B. $8,513.3
3
C. $14,608.1
3
D. $23,896.9
7
E. $81,900.0
0

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56.Atlas Builders deals strictly with five customers. The average amount each
customer pays per month along with the collection delay associated with each
payment is shown below. Given this information, what is the amount of the
average daily receipts? Assume every month has 30 days.
A. $1,143.3
3
B. $2,546.6
7
C. $2,983.3
3
D. $6,166.6
7
E. $6,860.0
0

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57.National Exporters deals strictly with two customers. The average amount each
payment is shown below. Given this information, what is the amount of the
average daily receipts? Assume that every month has 30 days.
A. $2,653.3
3
B. $3,006.3
3
C. $4,533.3
3
D. $7,811.6
7
E. $8,600.0
0

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58.Cross Country Trucking provides transportation services exclusively for four

customers. The average amount each customer pays per month along with the
collection delay associated with each payment is shown below. Given this
information, what is the weighted average delay? Assume each month has 30
days.
A. 2.11 days
B. 2.27 days
C. 2.46 days
D. 2.50 days
E. 2.78 days

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59.High Brow Express deals strictly with two customers. The average amount each
payment is shown below. Given this information, what is the weighted average
delay? Assume that every month has 30 days.
A. 1.79 days
B. 1.84 days
C. 2.00 days
D. 2.07 days
E. 2.55 days

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60.The Metallurgical Specialty Co. deals strictly with four customers. The average
amount each customer pays per month along with the collection delay
associated with each payment is shown below. Given this information, what is
the weighted average delay? Assume each month has 30 days.
A. 1.98 days
B. 2.04 days
C. 2.09 days
D. 2.16 days
E. 2.23 days

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61.On an average day, Goose Down Feathers receives $2,400 in checks from
customers. These checks clear the bank in an average of 2.2 days. The
applicable daily interest rate is 0.04 percent. What is the present value of the
float? Assume each month has 30 days.
A. $115.2
0
B. $618.4
0
C. $4,080.0
0
D. $5,280.0
0
E. $6,256.5
0

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62.On an average day, Town Center Hardware receives $2,420 in checks from
applicable daily interest rate is 0.025 percent. What is the maximum amount
this store should pay to completely eliminate its collection float? Assume each
month has 30 days.
A. $1,152.3
8
B. $1,288.1
5
C. $2,109.1
6
D. $4,637.3
3
E. $5,082.0
0

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63.On an average day, your firm receives $11,800 in checks from customers. These
checks clear the bank in an average of 2.8 days. The applicable daily interest
rate is 0.015 percent. What is the highest daily fee your firm should pay to
completely eliminate the collection float? Assume each month has 30 days.
A. $3.7
2
B. $4.9
6
C. $17.7
8
D. $34.1
8
E. $37.2
0

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64.On an average day, Wilson & Wilson receives $7,800 in checks from customers.
These checks clear the bank in an average of 1.7 days. The applicable daily
interest rate is 0.022 percent. What is the highest daily fee this firm should pay
to completely eliminate its collection float? Assume each month has 30 days.
A. $1.7
2
B. $2.9
2
C. $17.2
0
D. $24.3
0
E. $29.1
7

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65.Your average customer is located 4.3 mailing days away from your firm. You
have determined that, on average, it is taking your staff 1.5 days to process
payments received from customers. In addition, it takes an average of 2.8 days
for your funds to be available for use once you have made your bank deposit.
What is your firm's collection time?
A. 2.2 days
B. 3.7 days
C. 4.3 days
D. 5.8 days
E. 8.6 days
66.It takes your firm 4.5 days to prepare and mail out all the monthly statements
to your customers. On average, the mail time between your firm and your
customers is 2.6 days. Customer checks take an average of 1.8 days to clear the
bank. You have determined that your total average collection time is 6.1 days.
How long, on average, does it take your firm to process the payments from
customers?
A. 1.7 days
B. 2.6 days
C. 4.4 days
D. 4.8 days
E. 6.2 days

lOMoARcPSD|9738710
67.Currently, your firm requires 2 days to process the checks which customers mail
in to pay for their credit purchases. The average mail time associated with
these payments is 3.4 days and the check clearing time is 2.1 days. If your firm
adopts a lockbox system, the mail time will be cut in half. In addition, if
employees are reassigned, checks could be processed the same day they are
received. How long will your collection time be if both the lockbox system and
the job reassignments are implemented?
A. 3.85 days
B. 4.10 days
C. 4.80 days
D. 4.90 days
E. 5.55 days

lOMoARcPSD|9738710
68.You are considering implementing a lockbox system for your firm. The system is
expected to reduce the average collection time by 1.2 days. On an average day,
your firm receives 320 checks with an average value of $99 each. The daily
interest rate on Treasury bills is 0.014 percent. What is the anticipated amount
of the daily savings if this system is implemented?
A. $2.6
1
B. $3.2
9
C. $4.4
5
D. $5.3
2
E. $5.7
8

lOMoARcPSD|9738710
69.Roger's Distributors receives an average of 310 checks a day. The average

amount per check is $629. The firm is considering a lockbox system which it
anticipates will reduce the average collection time by 1.5 days. The daily
interest rate on Treasury bills is 0.011 percent. What is the amount of the
expected daily savings of the lockbox system?
A. $2.0
4
B. $6.9
2
C. $14.9
5
D. $22.4
2
E. $32.1
7

lOMoARcPSD|9738710
70.Hand Tools, Inc. receives an average of 611 checks a day. The average amount
per check is $425. The firm is considering a lockbox system which it anticipates
will reduce the average collection time by 1 day. The bank charges $0.275 a
check for this service. The daily interest rate on Treasury bills is 0.013 percent.
What is the average daily cost of the lockbox system?
A. $31.1
6
B. $54.1
9
C. $168.0
3
D. $180.1
1
E. $199.1
9

lOMoARcPSD|9738710
your firm receives 136 checks with an average value of $219 each. The daily
interest rate on Treasury bills is 0.021 percent. The bank charge per check is
$0.26. What is the anticipated daily cost of the lockbox system?
A. $3.4
8
B. $6.2
5
C. $12.6
0
D. $35.3
6
E. $36.1
7

lOMoARcPSD|9738710
your firm receives 2,419 checks with an average value of $1,287 each. The daily
interest rate on Treasury bills is 0.016 percent. The bank charge per check is
$0.30. What is the net present value of this lockbox arrangement?
A. -
$4,535,625
B. -
$2,611,575
C. $187,41
9
D. $4,181,48
3
E. $13,252,73
3

lOMoARcPSD|9738710
73.Rosewell International receives an average of 268 checks a day with an average

amount per check of $780. The firm is considering a lockbox system which it
anticipates will reduce the average collection time by 1.4 days. The bank
charges $0.21 a check for this service. The daily interest rate on Treasury bills is
0.02 percent. What is the net present value of this lockbox arrangement?
A. -
$61,640
B. -
$11,256
C. $11,25
6
D. $30,82
0
E. $61,64
0

lOMoARcPSD|9738710
74.The Eliot Co. needs $185,000 a week to pay bills. The standard deviation of the
weekly disbursements is $17,600. The firm has established a lower cash
balance limit of $75,000. The applicable interest rate is 5.5 percent and the
fixed cost of transferring funds is $47. Based on the BAT model, what is the
optimal initial cash balance?
A. $90,66
8
B. $97,51
5
C. $104,14
1
D. $128,22
4
E. $136,50
9

lOMoARcPSD|9738710
75.Theo's Bar & Grill needs $153,000 a week to pay bills. The standard deviation of
the weekly disbursements is $9,600. The firm has established a lower cash
optimal average cash balance?
A. $36,19
9
B. $49,56
8
C. $67,42
6
D. $99,13
6
E. $112,40
0

lOMoARcPSD|9738710
76.Parkway Express needs $318,000 a week to pay bills. The standard deviation of
opportunity cost of holding cash?
A. $3,87
3
B. $4,91
8
C. $5,20
7
D. $109,28
3
E. $110,44
0

lOMoARcPSD|9738710
77.Penco Supply spends $325,000 a week to pay bills and maintains a lower cash
balance limit of $75,000. The standard deviation of its disbursements is
$18,900. The applicable interest rate is 5 percent and the fixed cost of
transferring funds is $65. What is the firm's optimal initial cash balance based
on the BAT model?
A. $150,60
0
B. $158,92
9
C. $170,09
6
D. $221,50
6
E. $209,61
9

lOMoARcPSD|9738710
78.Your firm spends $54,000 a week to pay bills and maintains a lower cash
balance limit of $45,000. The standard deviation of your disbursements is
$12,100. The applicable interest rate is 4.5 percent and the fixed cost of
transferring funds is $55. What is your opportunity cost of holding cash based
on the BAT model?
A. $1,31
8
B. $1,86
4
C. $2,20
4
D. $2,31
1

lOMoARcPSD|9738710
79.Rosie O'Grady's spends $115,000 a week to pay bills and maintains a lower
cash balance limit of $95,000. The standard deviation of the disbursements is
transferring funds is $50. What is this firm's total cost of holding cash based on
the BAT model?
A. $1,43
1
B. $2,86
2
C. $3,03
4
D. $4,91
2
E. $5,35
8

lOMoARcPSD|9738710
transferring funds is $60. What is your optimal average cash balance based on
the BAT model?
A. $103,90
0
B. $146,50
0
C. $182,20
0
D. $207,80
0
E. $249,90
0

lOMoARcPSD|9738710
81.The Cow Pie Spreader Co. spends $214,000 a week to pay bills and maintains a
lower cash balance limit of $150,000. The standard deviation of the
disbursements is $16,000. The applicable weekly interest rate is 0.025 percent
and the fixed cost of transferring funds is $49. What is the firm's cash balance
target based on the Miller-Orr model?
A. $183,51
1
B. $208,51
1
C. $251,00
6
D. $254,54
5
E. $258,87
8

lOMoARcPSD|9738710
82.The Blue Moon Hotel and Spa spends $359,000 a week to pay bills and
maintains a lower cash balance limit of $250,000. The standard deviation of the
disbursements is $46,800. The applicable weekly interest rate is 0.045 percent
and the fixed cost of transferring funds is $60. What is the hotel's optimal
upper cash limit based on the Miller-Orr model?
A. $430,83
6
B. $447,90
5
C. $528,70
0
D. $739,45
9
E. $861,67
2

lOMoARcPSD|9738710
83.Donaldson, Inc. spends $94,000 a week to pay bills and maintains a lower cash
balance limit of $25,000. The standard deviation of the disbursements is
$13,000. The applicable weekly interest rate is 0.045 percent and the fixed cost
of transferring funds is $52. What is your optimal average cash balance based
on the Miller-Orr model?
A. $48,33
4
B. $57,62
3
C. $82,62
3
D. $236,33
4
E. $247,33
4

lOMoARcPSD|9738710
84.The Burger Stop spends $52,000 a week to pay bills and maintains a lower cash
$7,500. The applicable weekly interest rate is 0.04 percent and the fixed cost of
transferring funds is $50. What is your optimal average cash balance based on
the Miller-Orr model?
A. $79,11
6
B. $83,20
8
C. $110,31
5
D. $237,34
8
E. $249,62
4

lOMoARcPSD|9738710
of transferring funds is $65. What is your cash balance target based on the
Miller-Orr model?
A. $48,15
6
B. $49,99
0
C. $54,88
4
D. $68,09
3
E. $75,72
6

lOMoARcPSD|9738710
86.Travel Inn Express spends $109,000 a week to pay bills and maintains a lower
cash balance limit of $125,000. The standard deviation of the disbursements is
of transferring funds is $58. What is the inn's cash balance target based on the
Miller-Orr model?
A. $28,49
2
B. $31,35
9
C. $153,49
2
D. $156,35
9
E. $225,41
7

lOMoARcPSD|9738710
87.Each business day, on average, a company writes checks totaling $26,000 to

pay its suppliers. The usual clearing time for the checks is 5 days. Meanwhile,
the company is receiving payments from its customers each day, in the form of
checks, totaling $40,000. The cash from the payments is available to the firm
after 2 days. What is the amount of the firm's average net float?
A. $30,0
0
B. $50,00
0
C. $80,00
0
D. $110,00
0
E. $130,00
0

lOMoARcPSD|9738710
88.Purple Feet Wine, Inc. receives an average of $6,000 in checks per day. The
delay in clearing is typically 4 days. The current interest rate is 0.025 percent
per day. Assume 30 days per month. What is the highest daily fee the company
should be willing to pay to eliminate its float entirely?
A. $1.5
0
B. $3.0
0
C. $3.7
5
D. $6.0
0
E. $6.5
0

lOMoARcPSD|9738710
89.Your neighbor goes to the post office once a month and picks up two checks,
one for $18,000 and one for $4,000. The larger check takes 4 days to clear after
it is deposited; the smaller one takes 6 days. Assume 30 days per month. What
is the weighted average delay?
A. 4.21 days
B. 4.36 days
C. 4.78 days
D. 5.00 days
E. 6.00 days

lOMoARcPSD|9738710
90.Your firm has an average receipt size of $60. A bank has approached you
concerning a lockbox service that will decrease your total collection time by 1
day. You typically receive 25,000 checks per day. The daily interest rate is 0.016
percent. What is the NPV of the lockbox project if the bank charges a fee of
$210 per day?
A. $187,50
0
B. $367,50
0
C. $903,35
0
D. $1,412,50
0
E. $1,680,00
0

lOMoARcPSD|9738710
91.A mail-order firm processes 5,000 checks per month. Of these, 55 percent are
for $55 and 45 percent are for $65. The $55 checks are delayed 2 days on
average; the $65 checks are delayed 5 days on average. Assume each month
has 30 days. The interest rate is 6 percent per year. How much should the firm
be willing to pay to reduce the weighted average float by 1.4 days?
A. $4,16
5
B. $13,88
3
C. $41,65
0
D. $138,88
3
E. $416,50
0

lOMoARcPSD|9738710
92.Paper Submarine Manufacturing is investigating a lockbox system to reduce its

collection time. It has determined the following:
The total collection time will be reduced by 2 days if the lockbox system is
adopted. What is the NPV of adopting the lockbox system?
A. $600,00
0
B. $675,00
0
C. $695,00
0
D. $745,00
0
E. $795,00
0

lOMoARcPSD|9738710
93.Home Roasted Turkeys disburses checks every 4 weeks that average $70,000
and take 5 days to clear. How much interest can the company earn if it delays
transfer of funds from an interest-bearing account that pays 0.02 percent per
day for these 5 days? Ignore the effects of compound interest. Assume 52
weeks in a year.
A. $3
6
B. $9
1
C. $18
2
D. $36
4
E. $91
0

lOMoARcPSD|9738710
94.Never Again Enterprises has an agreement with The Worth Bank whereby the
bank handles $3.12 million in collections a day and requires a $1,000,000
compensating balance. Never Again is contemplating canceling the agreement
and dividing its eastern region so that two other banks will handle its business.
Banks A and B will each handle $1.56 million of collections a day, and each
requires a compensating balance of $1,550,000. Never Again's financial
management expects that collections will be accelerated by one day if the
eastern region is divided. The T-bill rate is 4 percent annually. What is the
amount of the annual net savings if this plan is adopted?
A. $10,20
0
B. $40,80
0
C. $76,50
0
D. $102,00
0
E. $125,00
0

lOMoARcPSD|9738710
95.Mountaintop Inns, a Kentucky company, has determined that a majority of its

customers are located in the Pennsylvania area. It therefore is considering using
a lockbox system offered by a bank located in Pittsburgh, Pennsylvania. The
bank has estimated that use of the system will reduce collection time by one
day. In addition to the variable charge shown below, there is also a fixed charge
of $4,320 per year for the lockbox system. Assume a year has 365 days. What is
the NPV of the lockbox system given the following information?
A. -
$156,727
B. -
$131,301
C. -
$74,208
D. $11,50
7
E. $26,43
3

lOMoARcPSD|9738710
96.Cow Chips, Inc., a large fertilizer distributor based in California, is planning to

use a lockbox system to speed up collections from its customers located on the
East Coast. A Philadelphia-area bank will provide this service for an annual fee
of $25,000 plus 12 cents per transaction. The estimated reduction in collection
and processing time is one day. The average customer payment in this region is
$8,200. Treasury bills are currently yielding 5 percent per year. Assume a year
has 365 days. Approximately how many customers each day, on average, are
needed to make the system profitable for Cow Chips, Inc.?
A. 5
6
B. 6
8
C. 7
4
D. 8
3
E. 8
9
Essay Questions

lOMoARcPSD|9738710
97.Explain how a lockbox system operates and why a firm might consider
implementing such a system.
98.Explain how the Check Clearing Act for the 21st Century affects both collection
and disbursement float.

lOMoARcPSD|9738710
99.Explain how the unethical use of uncollected funds has been impacted by the
growth of on-line retailing and banking.
100 Float management systems may provide only minimal benefits to a firm. Given
. that most firms have other projects with higher positive net present values,
why should a firm's managers spend time implementing a float management
system?

lOMoARcPSD|9738710
101 Explain what a zero-balance account is, how it is used, and how it affects cash
. management.

lOMoARcPSD|9738710
Chapter 19 Cash and Liquidity Management Answer Key
Multiple Choice Questions

lOMoARcPSD|9738710
1. Yesterday, the president of RB Enterprises received a phone call from DLK, a

competitor. DLK is a sole proprietorship. An unexpected family situation has
caused the owner to suddenly want to retire and relocate closer to his
family. Thus, the assets of DLK are being offered to RB Enterprises at a
bargain basement price. While RB Enterprises had not anticipated
purchasing these assets, it was decided that the opportunity was too good to
pass up. This illustrates which of the following needs to hold cash?
A. precautionar
y
B. transactio
n
C. speculativ
e
D. compensatio
n
E. floa
t
Refer to section 19.1
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 19-01 The importance of float and how it affects the cash
balances.
Section: 19.1
Topic: Speculative motive

lOMoARcPSD|9738710
2. GT Motors regularly issues short-term debt to finance its daily operations.

Suddenly, the credit markets froze and no funds were available for
borrowing. Fortunately, the firm had some cash reserves saved that it was
able to use to fund its operations until additional credit was available. The
need to retain cash for situations such as this is referred to as which one of
the following motives for holding cash?
A. speculativ
e
B. floa
t
C. compensatin
g
D. precautionar
y
E. transactio
n
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
balances.
Section: 19.1
Topic: Precautionary motive

lOMoARcPSD|9738710
3. The cash found in a cash drawer that a check-out clerk uses to make change
is an example of which of the following motives for holding cash?
A. speculativ
e
B. daily
float
C. compensating
balance
D. precautionar
y
E. transactio
n
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
balances.
Section: 19.1
Topic: Transaction motive

lOMoARcPSD|9738710
4. Float is defined as the:
A. amount of cash a firm can immediately withdraw from its bank

account.
B. difference between book cash and bank

cash.
C. change in a firm's cash balance from one accounting period to the

next.
D. amount of cash a firm has on

hand.
E. cash balance according to a firm's

records.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
balances.
Section: 19.2
Topic: Float

lOMoARcPSD|9738710
5. A lockbox is a:
A. special safe used by a firm for overnight storage of any cash or

undeposited checks.
B. special safe used by a firm that can only be opened at prespecified times
of the day.
C. box located in a bank's vault that is rented by a firm and used to hold
unprocessed checks.
D. special post office box which can only be opened by prespecified postal
inspectors for direct delivery to the addressee.
E. post office box strategically located so that a firm's receivables can be

collected faster.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 19-02 How firms manage their cash and some of the
collection; concentration; and disbursement techniques used.
Section: 19.3
Topic: Lockbox

lOMoARcPSD|9738710
6. The Presque Isle Center has branch operations in three states. Each branch
deals with a local bank. However, all excess funds in these branch bank
accounts are transferred on a daily basis to the firm's primary bank located
near the firm's home office. This routine of transferring cash to the primary
bank on a regular basis is referred to as:
A. cash
concentration.
B. strategic cash
disbursement.
C. transfer
flotation.
D. payables
management.
E. float
management.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Section: 19.3
Topic: Cash concentration

lOMoARcPSD|9738710
7. An account into which funds are deposited only in an amount equal to the
value of the checks presented for payment that day is called a _____
account.
A. lockbo
x
B. concentratio
n
C. zero-
balance
D. compensating
balance
E. revolvin
g
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Section: 19.4
Topic: Zero-balance accounts

lOMoARcPSD|9738710
8. An account into which a firm transfers funds, usually from a master account,
in an amount sufficient to cover the checks presented for payment that day
is called a _____ account.
A. lockbo
x
B. cleanu
p
C. compensating
balance
D. revolvin
g
E. controlled
disbursement
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Section: 19.4
Topic: Controlled disbursement account

lOMoARcPSD|9738710
9. The Snow Hut has analyzed the carrying and shortage costs associated with
its cash holdings and determined that the firm should ideally maintain a cash
balance of $3,600. This $3,600 represents which one of the following to the
firm?
A. target cash
balance
B. concentration
balance
C. available
balance
D. selected cash
amount
E. compensating
balance
Refer to section 19.A
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 19-03 The advantages and disadvantages to holding cash and
some of the ways to invest idle cash.
Section: 19.A
Topic: Target cash balance

lOMoARcPSD|9738710
10. Adjustment costs is another name for which one of the following?
A. borrowing
costs
B. shortage
costs
C. cash transfer
costs
D. cash wire
costs
E. excess cash costs
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Section: 19.A
Topic: Adjustment costs

lOMoARcPSD|9738710
11. Why do firms need liquidity?
I. to meet compensating balance requirements

II. to take advantage of an opportunity that suddenly arises
III. to conduct daily business activities
IV. to be prepared for a financial emergency
A. I and II
only
B. III and IV
only
C. I, III, and IV
only
D. II, III, and IV

only
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
balances.
Section: 19.1
Topic: Motives for liquidity

lOMoARcPSD|9738710
12. Cash management primarily involves:
A. optimizing a firm's collections and disbursements of

cash.
B. maximizing the income a firm earns on its cash

reserves.
C. reconciling a firm's book balance with its bank

balance.
D. determining the optimal level of liquidity a firm should

maintain.
E. determining the best method of raising

capital.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
balances.
Section: 19.1
Topic: Cash management

lOMoARcPSD|9738710
13. Disbursements float:
A. occurs when a deposit is recorded but the funds are

unavailable.
B. causes the book balance to exceed the bank

balance.
C. has tended to increase since the enactment of the Check Clearing Act for
the 21st Century.
D. is a recommended source of funds for short-term

investments.
E. is eliminated when payments are made

electronically.
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
balances.
Section: 19.2
Topic: Disbursement float

lOMoARcPSD|9738710
14. Collection float:
A. is more desirable to firms than disbursement

float.
B. is totally eliminated by the installation of a lockbox

system.
C. exists when a firm's available balance exceeds its book

balance.
D. can be avoided by collecting payments electronically at the time of

sale.
E. is eliminated by implementing a concentration banking

system.
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
balances.
Section: 19.2
Topic: Collection float

lOMoARcPSD|9738710
15. Which one of the following statements is correct?
A. Net float decreases every time a firm issues a check to pay one of its
suppliers.
B. A positive net float indicates that collection float exceeds disbursements

float.
C. Firms prefer a zero net float over a positive net

float.
D. Net float is equal to collection float minus disbursement

float.
E. Net float is equal to a firm's available balance minus its book

balance.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
balances.
Section: 19.2
Topic: Net float

lOMoARcPSD|9738710
16. Check kiting is:
A. used by most firms as an ethical means of handling its cash

reserves.
B. the process of withdrawing all funds from a bank account as soon as the
funds are available.
C. the central core of a good cash management

system.
D. using uncollected cash to invest in short-term, liquid

assets.
E. increasingly popular due to recent banking law

changes.
AACSB: Ethics
Blooms: Remember
Difficulty: 1 Easy
balances.
Section: 19.2
Topic: Ethical issue

lOMoARcPSD|9738710
17. Which of the following will reduce collection time?
I. billing customers electronically rather than by mail

II. accepting debit cards but not checks as payment for a sale
III. offering cash discounts for early payment
IV. reducing the processing delay by one day
A. I and II
only
B. I and III
only
C. I, II, and III

only
D. II, III, and IV

only
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
Section: 19.3
Topic: Collection time

lOMoARcPSD|9738710
18. Which of the following should help reduce the total collection time for a
firm?
I. opening a post office box so mail can be received earlier in the morning
II. assigning additional staff in the morning to process incoming payments
III. providing a discount for customers who pay electronically
IV. establishing preauthorized payments from customers
A. I and II
only
B. III and IV
only
C. II, III, and IV

only
D. I, II, and IV
only
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
Section: 19.3

lOMoARcPSD|9738710
19. Which one of the following collection times is correctly described?
A. The processing delay starts when a firm mails out a billing statement and
ends when the payment is received from a customer.
B. Mailing time begins when a firm mails out a billing statement and ends
when the payment is received.
C. Collection time begins when a firm mails out a billing statement and ends
when the cash payment for that billing is available to the firm.
D. Availability delay begins when a firm deposits a customer's check into its
bank account and ends when the cash from that payment is available to
the firm.
E. Processing delay begins when a firm mails out billing statements and ends
when the firm deposits the payment for that statement into its bank
account.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Section: 19.3

lOMoARcPSD|9738710
20. A lockbox system:
A. entails the use of a bank which is centrally located to collect payments on

a nationwide basis.
B. is designed to deposit a customer's check into the firm's bank account

prior to recording the receipt of that check to a customer's account.
C. is used to reduce the disbursement float of a

firm.
D. is efficient regardless of the locations selected for lockbox

destinations.
E. automatically records payments to a customer's account when the

customer's check is received at the lockbox location.
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
Section: 19.3
Topic: Lockbox

lOMoARcPSD|9738710
21. Lockboxes:
A. should be geographically located close to a firm's primary

customers.
B. should be located in remote locations to increase the net disbursement

float.
C. offer no additional benefit to a firm now that the Check Clearing Act for
the 21st Century has been enacted.
D. tend to be negative net present value projects for firms with a large
number of sizeable transactions.
E. tend to also be used as concentration

accounts.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Section: 19.3
Topic: Lockbox

lOMoARcPSD|9738710
22. Cash concentration accounts:
A. tend to increase the funds available for short-term

investing.
B. tend to increase the complexity of a firm's cash management

system.
C. that utilize wire transfers rather than automated clearing house transfers
are less expensive to maintain.
D. receive checks directly from all of a firm's

customers.
E. are all zero-balance

accounts.
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
Section: 19.3

lOMoARcPSD|9738710
A. Funds received via automated clearinghouse transfers are available that

day.
B. A depository transfer check is the most costly means of transferring funds

into a cash concentration account.
C. The means selected to transfer funds into a concentration account

depends primarily upon the size of the transfers.
D. Concentration accounts are used to transfer funds to lockbox locations as

needed.
E. The most expedient means of transferring funds into a concentration

account is a wire transfer.
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
Section: 19.3

lOMoARcPSD|9738710
24. A cash concentration account:
A. is frequently used as a source of funds for short-term

investments.
B. cannot be used to cover a compensating balance

requirement.
C. cannot be used to transfer funds into zero-balance

accounts.
D. is generally the only bank account a firm needs to efficiently manage its
cash.
E. is another name for a controlled disbursement

account.
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
Section: 19.3

lOMoARcPSD|9738710
25. The main purpose of a cash concentration account is to:
A. decrease collection
float.
B. decrease disbursement
float.
C. consolidate
funds.
D. replace a lockbox
system.
E. cover compensating balance

requirements.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Section: 19.3

lOMoARcPSD|9738710
26. Which one of the following statements is correct concerning a cash

management system that employs both lockboxes and a concentration bank
account?
A. All customer payments must be submitted to a

lockbox.
B. The party which collects the checks from the lockbox is responsible for
recording the payment on the customer's account.
C. Payments received in a lockbox are transferred immediately to the

concentration account.
D. The firm's cash manager determines how the funds in the concentration
account are disbursed.
E. The concentration account must be zeroed out on a daily

basis.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Section: 19.3

lOMoARcPSD|9738710
27. A zero-balance account:
A. is used to cover the compensating balance requirement of a line of credit

agreement.
B. is only used to deposit funds received at local

lockboxes.
C. is funded on an as-needed basis

only.
D. is limited to handling payroll

disbursements.
E. requires a compensating
balance.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Section: 19.4

lOMoARcPSD|9738710
28. Which one of the following statements is correct concerning zero-balance

accounts?
A. Each zero-balance account is offset by a compensating balance

account.
B. Zero-balance accounts are used for depositing incoming

funds.
C. A master account must be used in conjunction with a zero-balance

account.
D. Zero-balance accounts are used solely in conjunction with a lockbox

system.
E. Zero-balance accounts are still required to maintain a minimal

balance.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Section: 19.4

lOMoARcPSD|9738710
A. The money market refers to securities that mature in two years or

less.
B. Banks are prohibited from investing cash surpluses on behalf of their

customers on a short- term basis.
C. Short-term securities tend to have a high degree of interest rate

risk.
D. A cyclical firm may purchase marketable securities as part of its short-

term financing plan.
E. Corporations are not permitted to invest in money market mutual funds

but can invest in bank money market accounts.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Section: 19.5
Topic: Management of cash surplus

lOMoARcPSD|9738710
30. Which two of the following are the primary reasons why firms temporarily
accumulate large cash surpluses?
I. cyclical activities
II. desire to invest funds
III. daily operations
IV. fixed asset purchases
A. I and III
only
B. II and IV
only
C. I and II
only
D. III and IV
only
E. I and IV
only
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Section: 19.5
Topic: Management of cash surplus

lOMoARcPSD|9738710
A. Money market accounts are low-risk, high-return

investments.
B. The rate of return earned on short-term securities tends to exceed that

earned on long-term securities.
C. U.S. Treasury bills are well suited for short-term

investments.
D. The income earned on U.S. Treasury bills is exempt from all

taxation.
E. Short-term investments tend to have high levels of default

risk.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Section: 19.5
Topic: Short-term securities

lOMoARcPSD|9738710
32. Municipal bonds:
A. are less liquid than U.S. Treasury

bills.
B. produce income that is subject to federal income

taxation.
C. generally pay a higher coupon than corporate

bonds.
D. are also referred to as commercial

paper.
E. are issued by the federal

government.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Section: 19.5

lOMoARcPSD|9738710
33. Money market securities have which of the following characteristics?
I. long maturities
II. low default risk
III. high degree of liquidity
IV. low rates of return
A. I and III
only
B. II and III
only
C. I and IV
only
D. II, III, and IV

only
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Section: 19.5

lOMoARcPSD|9738710
34. A jumbo CD:
A. is issued by the federal

government.
B. generally matures between 2 and 5

years.
C. is a loan of $100,000 or more to a

municipality.
D. is a loan of $1 million or more on a short-term

basis.
E. is a short-term loan of $100,000 or more to a commercial

bank.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Section: 19.5

lOMoARcPSD|9738710
35. Brown Trucking is buying a U.S. Treasury bill today with the understanding
that the seller will buy it back tomorrow at a slightly higher price. This
investment is known as a:
A. commercial paper
transaction.
B. repurchase
agreement.
C. private certificate of
deposit.
D. revenue anticipation
note.
E. bill anticipation
note.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Section: 19.5

lOMoARcPSD|9738710
36. A repurchase agreement generally has a maximum life of:
A. 1 day.
B. a few days.
C. one
month.
D. one to three
months.
E. three to six
months.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Section: 19.5

lOMoARcPSD|9738710
37. A money market preferred stock:
A. has a floating
dividend.
B. is sold only under a repurchase

agreement.
C. is a special form of commercial

paper.
D. has more price volatility than an ordinary

preferred.
E. has its interest rate reset

daily.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Section: 19.5

lOMoARcPSD|9738710
38. Which of the following costs related to holding cash are minimized when the
level of cash a firm holds is optimized?
A. opportunity
costs
B. trading
costs
C. total
costs
D. both trading and opportunity

costs
E. trading costs, opportunity costs, and total

costs
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Section: 19.A
Topic: Cash balance

lOMoARcPSD|9738710
39. Which of the following statements related to the BAT model is correct?
I. The BAT model is used to determine the target cash balance for a firm.
II. The BAT model is rarely used in business due to its complex nature.
III. The BAT model is a model that helps eliminate a firm's collection float.
IV. One disadvantage of the BAT model is the fact that it assumes all cash
outflows are known with certainty.
A. I and II
only
B. III and IV
only
C. II and III
only
D. I and III
only
E. I and IV
only
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Section: 19.A
Topic: BAT model

lOMoARcPSD|9738710
40. Which of the following variables are included in the BAT model?
I. upper cash limit

II. interest rate on marketable securities
III. opportunity cost of holding cash
IV. fixed cost of each securities trade
A. II
only
B. I and III
only
C. II and IV
only
D. II, III, and IV

only
E. I, III, and IV
only
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Section: 19.A
Topic: BAT model

lOMoARcPSD|9738710
41. The BAT model is used to:
A. maximize the benefits of

leverage.
B. determine the optimal cash position of a

firm.
C. eliminate all daily cash

surpluses.
D. analyze the cash balance given fluctuating cash inflows and

outflows.
E. maximize the opportunity costs of holding

cash.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Section: 19.A
Topic: BAT model

lOMoARcPSD|9738710
42. The Miller-Orr model assumes that:
A. the cash balance is depleted at regular

intervals.
B. all cash flows are known with

certainty.
C. the average change in the daily cash flows is

positive.
D. management will set both the lower and the upper desired levels of
cash.
E. the cash balance fluctuates in a random

manner.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Section: 19.A
Topic: Miller-Orr model

lOMoARcPSD|9738710
43. The Miller-Orr model:
A. recommends selling securities in an amount equal to (U* - C) when the

cash balance reaches L.
B. requires that marketable securities be sold whenever the cash balance

falls below the target level.
C. bases the optimal level of cash solely on the opportunity costs of holding
cash.
D. supports the argument that the target cash balance declines as order
costs increase.
E. advocates investing an amount described as (U* - C) in marketable

securities when the cash balance reaches U*.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Section: 19.A

lOMoARcPSD|9738710
44. Which of the following statements is correct?
A. A firm has a greater likelihood of needing an unexpected loan when its

cash flows are relatively constant over time.
B. The cost of borrowing affects the target cash balance of a

firm.
C. Management's desire to maintain a low cash balance has no effect on the

borrowing needs of a firm.
D. The target cash balance increases as the interest rate

rises.
E. The target cash balance decreases as the order costs

increase.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Section: 19.A
Topic: Target cash balance

lOMoARcPSD|9738710
45. The Hobby Shop has a checking account with a ledger balance of $692. The
firm has $1,063 in uncollected deposits and $930 in outstanding checks.
What is the amount of the disbursement float on this account?
A. $
0
B. $21
7
C. $93
0
D. $99
0
E. $1,06
3
Disbursement float = $930
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
balances.
Section: 19.2

lOMoARcPSD|9738710
46. On an average day, Plastics Enterprises writes 42 checks with an average

amount of $587. These checks clear the bank in an average of 2 days. What
is the average amount of the disbursement float?
A. $1,17
4
B. $5,80
5
C. $24,65
4
D. $49,30
8
E. $73,96
2
Disbursement float = 42 × $587 × 2 = $49,308
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
balances.
Section: 19.2

lOMoARcPSD|9738710
47. On average, your firm receives 65 checks a day from customers. These
checks, on average, are worth $39.90 each and clear the bank in 1.5 days. In
addition, your firm disburses 38 checks a day with an average amount of
$89.50. These checks clear your bank in 2 days. What is the average amount
of the collection float?
A. $2,473.8
0
B. $3,401.0
0
C. $3,890.2
5
D. $5,101.5
0
E. $6,802.0
0
Collection float = 65 × $39.90 × 1.5 = $3,890.25
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
balances.
Section: 19.2

lOMoARcPSD|9738710
48. When Chris balanced her business checkbook, she had an adjusted bank
balance of $11,418. She had 2 outstanding deposits worth $879 each and 11
checks outstanding with a total value of $3,648. What is the amount of the
collection float on this account?
A. -
$1,890
B. $1,75
8
C. $3,64
8
D. $5,40
6
E. $6,01
2
Collection float = $879 × 2 = $1,758
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
balances.
Section: 19.2

lOMoARcPSD|9738710
49. Your company has an available balance of $7,911. A deposit of $2,480 that
was made this morning is not yet included in the bank's balance. There are
also 4 checks outstanding with a value of $360 each. What is the net float?

$1,040

$2,480
C. net float of
$6,731

$1,300

$2,480
Net collection float = $2,480 - (4 × $360) = $1,040
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
balances.
Section: 19.2
Topic: Net float

lOMoARcPSD|9738710
50. A firm has $16,718 in outstanding checks that have not cleared the bank.
The firm also has $13,450 in deposits that have been recorded by the firm
but not by the bank. The current available balance is $11,407. What is the
status of the net float?

$8,138

$2,043
C. net collection float of

$13,450

$3,268

$5,311
Net disbursement float = $16,718 - $13,450 = $3,268
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
balances.
Section: 19.2
Topic: Net float

lOMoARcPSD|9738710
51. Your firm generally receives 4 checks a month. The check amounts and the
collection delay for each check is shown below. Given this information what
is the amount of the average daily float? Assume a 30 day month.
A. $1,12
0
B. $2,33
3
C. $2,64
0
D. $2,90
0
E. $3,41
6
Average daily float = [($1,500 × 2) + ($3,900 × 1) + ($6,100 × 3) + ($4,200 ×

2)]/30 = $1,120
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy

lOMoARcPSD|9738710
balances.
Section: 19.2
Topic: Average daily float

lOMoARcPSD|9738710
52. Hoyes Lumber generally receives 3 checks a month. The check amounts and
the collection delay for each check are shown below. Given this information,
what is the amount of the average daily float? Assume each month has 30
days.
A. $1,386.6
7
B. $1,407.1
9
C. $4,750.0
0
D. $6,833.3
3
E. $6,933.3
3
Average daily float = [($6,100 × 3) + ($5,500 × 1) + ($8,900 × 2)]/30 =

$1,386.67
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy

lOMoARcPSD|9738710
balances.
Section: 19.2

lOMoARcPSD|9738710
53. The Blue Star generally receives only 3 checks a month. The check amounts
and the collection delay for each check are shown below. Given this
month has 30 days.
A. $971.4
3
B. $1,376.6
7
C. $3,351.3
3
D. $5,666.6
7
E. $6,800.0
0
Average daily float = [($8,800 × 2) + ($2,300 × 3) + ($8,400 × 2]/30 =

$1,376.67
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy

lOMoARcPSD|9738710

Section: 19.2

lOMoARcPSD|9738710
54. The Food Wholesaler generally receives 4 checks a month. The check
amounts and the collection delay for each check are shown below. Given this
month has 30 days.
A. $3,963.8
9
B. $21,750.0
0
C. $22,236.6
7
D. $28,133.3
3
E. $35,675.0
0
Average daily float = [($67,200 × 3) + ($91,600 × 1) + ($54,200 × 2) +

($88,500 × 3)]/30 = $22,236.67
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy

lOMoARcPSD|9738710
balances.
Section: 19.2

lOMoARcPSD|9738710
55. Hot Tub Builders sells to three retail outlets. Each retailer pays once a month
in the amounts shown below. The collection delay associated with each
payment is also given below. What is the amount of the average daily
receipts if you assume each month has 30 days?
A. $2,389.7
0
B. $8,513.3
3
C. $14,608.1
3
D. $23,896.9
7
E. $81,900.0
0
Average daily receipts = ($42,500 + $149,800 + $63,100)/30 = $8,513.33
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
balances.

lOMoARcPSD|9738710
Section: 19.2
Topic: Average daily receipts

lOMoARcPSD|9738710
56. Atlas Builders deals strictly with five customers. The average amount each
customer pays per month along with the collection delay associated with
each payment is shown below. Given this information, what is the amount of
the average daily receipts? Assume every month has 30 days.
A. $1,143.3
3
B. $2,546.6
7
C. $2,983.3
3
D. $6,166.6
7
E. $6,860.0
0
Average daily receipts = ($6,800 + $8,500 + $2,000 + $9,500 + $7,500)/30 =

$1,143.33
AACSB: Analytic
Blooms: Apply

lOMoARcPSD|9738710
Difficulty: 1 Easy
balances.
Section: 19.2

lOMoARcPSD|9738710
57. National Exporters deals strictly with two customers. The average amount
each customer pays per month along with the collection delay associated
with each payment is shown below. Given this information, what is the
amount of the average daily receipts? Assume that every month has 30 days.
A. $2,653.3
3
B. $3,006.3
3
C. $4,533.3
3
D. $7,811.6
7
E. $8,600.0
0
Average daily receipts = ($63,200 + $72,800)/30 = $4,533.33
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
balances.
Section: 19.2

lOMoARcPSD|9738710
58. Cross Country Trucking provides transportation services exclusively for four
customers. The average amount each customer pays per month along with
the collection delay associated with each payment is shown below. Given
this information, what is the weighted average delay? Assume each month
has 30 days.
A. 2.11 days
B. 2.27 days
C. 2.46 days
D. 2.50 days
E. 2.78 days
Total monthly collections = $64,000 + $88,200 + $96,500 + $47,900 =

$296,600
Weighted average delay = [($64,000/$296,600) × 2] + [($88,200/$296,600) ×
3] + [($96,500/$296,600) × 2] + [($47,900/$296,600) × 3] = 2.46 days
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy

lOMoARcPSD|9738710
balances.
Section: 19.2
Topic: Weighted average delay
59. High Brow Express deals strictly with two customers. The average amount
each customer pays per month along with the collection delay associated
with each payment is shown below. Given this information, what is the
weighted average delay? Assume that every month has 30 days.
A. 1.79 days
B. 1.84 days
C. 2.00 days
D. 2.07 days
E. 2.55 days
Total monthly collections = $478,000 + $575,000 = $1,053,000

Weighted average delay = [($478,000/$1,053,000) × 2] +
[($575,000/$1,053,000) × 3] = 2.55 days
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy

lOMoARcPSD|9738710
balances.
Section: 19.2
60. The Metallurgical Specialty Co. deals strictly with four customers. The
average amount each customer pays per month along with the collection
delay associated with each payment is shown below. Given this information,
what is the weighted average delay? Assume each month has 30 days.
A. 1.98 days
B. 2.04 days
C. 2.09 days
D. 2.16 days
E. 2.23 days
Total monthly collections = $287,000 + $416,000 + $139,000 + $233,000 =

$1,075,000
Weighted average delay = [($287,000/$1,075,000) × 4] +
[($416,000/$1,075,000) × 1] + [($139,000/$1,075,000) × 1] +
[($233,000/$1,075,000) × 3] = 2.23 days
AACSB: Analytic

lOMoARcPSD|9738710
Blooms: Apply
Difficulty: 1 Easy
balances.
Section: 19.2
61. On an average day, Goose Down Feathers receives $2,400 in checks from
applicable daily interest rate is 0.04 percent. What is the present value of the
float? Assume each month has 30 days.
A. $115.2
0
B. $618.4
0
C. $4,080.0
0
D. $5,280.0
0
E. $6,256.5
0
Present value of the float = $2,400 × 2.2 = $5,280
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy

lOMoARcPSD|9738710
balances.
Section: 19.2
Topic: Cost of float
62. On an average day, Town Center Hardware receives $2,420 in checks from
applicable daily interest rate is 0.025 percent. What is the maximum amount
this store should pay to completely eliminate its collection float? Assume
each month has 30 days.
A. $1,152.3
8
B. $1,288.1
5
C. $2,109.1
6
D. $4,637.3
3
E. $5,082.0
0
Maximum cost = Present value of the float = $2,420 × 2.1 = $5,082.00
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy

lOMoARcPSD|9738710
balances.
Section: 19.2
63. On an average day, your firm receives $11,800 in checks from customers.
These checks clear the bank in an average of 2.8 days. The applicable daily
interest rate is 0.015 percent. What is the highest daily fee your firm should
pay to completely eliminate the collection float? Assume each month has 30
days.
A. $3.7
2
B. $4.9
6
C. $17.7
8
D. $34.1
8
E. $37.2
0
Maximum daily fee = $11,800 × 2.8 × 0.00015 = $4.96
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
balances.

lOMoARcPSD|9738710
Section: 19.2
Topic: Maximum daily fee
64. On an average day, Wilson & Wilson receives $7,800 in checks from
applicable daily interest rate is 0.022 percent. What is the highest daily fee
this firm should pay to completely eliminate its collection float? Assume
each month has 30 days.
A. $1.7
2
B. $2.9
2
C. $17.2
0
D. $24.3
0
E. $29.1
7
Maximum daily fee = $7,800 × 1.7 × 0.00022 = $2.92
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
balances.
Section: 19.2

lOMoARcPSD|9738710
Topic: Maximum daily fee
65. Your average customer is located 4.3 mailing days away from your firm. You
have determined that, on average, it is taking your staff 1.5 days to process
payments received from customers. In addition, it takes an average of 2.8
days for your funds to be available for use once you have made your bank
deposit. What is your firm's collection time?
A. 2.2 days
B. 3.7 days
C. 4.3 days
D. 5.8 days
E. 8.6 days
Collection time = 4.3 + 1.5 + 2.8 = 8.6 days
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
Section: 19.3

lOMoARcPSD|9738710
66. It takes your firm 4.5 days to prepare and mail out all the monthly
statements to your customers. On average, the mail time between your firm
and your customers is 2.6 days. Customer checks take an average of 1.8 days
to clear the bank. You have determined that your total average collection
time is 6.1 days. How long, on average, does it take your firm to process the
payments from customers?
A. 1.7 days
B. 2.6 days
C. 4.4 days
D. 4.8 days
E. 6.2 days
Processing time = 6.1 - 2.6 - 1.8 = 1.7 days
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
Section: 19.3

lOMoARcPSD|9738710
67. Currently, your firm requires 2 days to process the checks which customers
mail in to pay for their credit purchases. The average mail time associated
with these payments is 3.4 days and the check clearing time is 2.1 days. If
your firm adopts a lockbox system, the mail time will be cut in half. In
addition, if employees are reassigned, checks could be processed the same
day they are received. How long will your collection time be if both the
lockbox system and the job reassignments are implemented?
A. 3.85 days
B. 4.10 days
C. 4.80 days
D. 4.90 days
E. 5.55 days
Collection time = (3.4 × 0.5) + 1 + 2.1 = 4.80 days
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
balances.
Section: 19.3

lOMoARcPSD|9738710
68. You are considering implementing a lockbox system for your firm. The system
is expected to reduce the average collection time by 1.2 days. On an average
day, your firm receives 320 checks with an average value of $99 each. The
daily interest rate on Treasury bills is 0.014 percent. What is the anticipated
amount of the daily savings if this system is implemented?
A. $2.6
1
B. $3.2
9
C. $4.4
5
D. $5.3
2
E. $5.7
8
Daily savings = 320 × $99 × 1.2 × 0.00014 = $5.32
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
Section: 19.3
Topic: Lockbox daily savings

lOMoARcPSD|9738710
69. Roger's Distributors receives an average of 310 checks a day. The average
anticipates will reduce the average collection time by 1.5 days. The daily
interest rate on Treasury bills is 0.011 percent. What is the amount of the
expected daily savings of the lockbox system?
A. $2.0
4
B. $6.9
2
C. $14.9
5
D. $22.4
2
E. $32.1
7
Daily savings = 310 × $629 × 1.5 × 0.00011 = $32.17
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
Section: 19.3
Topic: Lockbox daily savings

lOMoARcPSD|9738710
70. Hand Tools, Inc. receives an average of 611 checks a day. The average
anticipates will reduce the average collection time by 1 day. The bank
charges $0.275 a check for this service. The daily interest rate on Treasury
bills is 0.013 percent. What is the average daily cost of the lockbox system?
A. $31.1
6
B. $54.1
9
C. $168.0
3
D. $180.1
1
E. $199.1
9
Daily cost = 611 × $0.275 = $168.03
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
Section: 19.3
Topic: Lockbox daily cost

lOMoARcPSD|9738710
day, your firm receives 136 checks with an average value of $219 each. The
daily interest rate on Treasury bills is 0.021 percent. The bank charge per
check is $0.26. What is the anticipated daily cost of the lockbox system?
A. $3.4
8
B. $6.2
5
C. $12.6
0
D. $35.3
6
E. $36.1
7
Daily cost = 136 × $0.26 = $35.36
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
Section: 19.3
Topic: Lockbox daily cost

lOMoARcPSD|9738710
day, your firm receives 2,419 checks with an average value of $1,287 each.
The daily interest rate on Treasury bills is 0.016 percent. The bank charge per
check is $0.30. What is the net present value of this lockbox arrangement?
A. -
$4,535,625
B. -
$2,611,575
C. $187,41
9
D. $4,181,48
3
E. $13,252,73
3
Net present value = [2,419 × $1,287 × 2.8] - [(2,419 × $0.30)/.00016] =

$4,181,483
AACSB: Analytic
Blooms: Analyze
Difficulty: 2 Medium
Section: 19.3
Topic: Lockbox net present value

lOMoARcPSD|9738710
73. Rosewell International receives an average of 268 checks a day with an

average amount per check of $780. The firm is considering a lockbox system
which it anticipates will reduce the average collection time by 1.4 days. The
bank charges $0.21 a check for this service. The daily interest rate on
Treasury bills is 0.02 percent. What is the net present value of this lockbox
arrangement?
A. -
$61,640
B. -
$11,256
C. $11,25
6
D. $30,82
0
E. $61,64
0
Net present value = [268 × $780 × 1.4] - [(268 × $0.21)/.0002] = $11,256
AACSB: Analytic
Blooms: Analyze
Section: 19.3
Topic: Lockbox net present value

lOMoARcPSD|9738710
74. The Eliot Co. needs $185,000 a week to pay bills. The standard deviation of
optimal initial cash balance?
A. $90,66
8
B. $97,51
5
C. $104,14
1
D. $128,22
4
E. $136,50
9
AACSB: Analytic
Blooms: Analyze
Section: 19.A

lOMoARcPSD|9738710
Topic: BAT model
75. Theo's Bar & Grill needs $153,000 a week to pay bills. The standard deviation
of the weekly disbursements is $9,600. The firm has established a lower cash
optimal average cash balance?
A. $36,19
9
B. $49,56
8
C. $67,42
6
D. $99,13
6
E. $112,40
0
AACSB: Analytic
Blooms: Analyze

lOMoARcPSD|9738710

Section: 19.A
Topic: BAT model
76. Parkway Express needs $318,000 a week to pay bills. The standard deviation
of the weekly disbursements is $31,000. The firm has established a lower
cash balance limit of $60,000. The applicable interest rate is 4.5 percent and
the fixed cost of transferring funds is $65. Based on the BAT model, what is
the opportunity cost of holding cash?
A. $3,87
3
B. $4,91
8
C. $5,20
7
D. $109,28
3
E. $110,44
0
AACSB: Analytic
Blooms: Analyze

lOMoARcPSD|9738710
Section: 19.A
Topic: BAT model

lOMoARcPSD|9738710
77. Penco Supply spends $325,000 a week to pay bills and maintains a lower
cash balance limit of $75,000. The standard deviation of its disbursements is
transferring funds is $65. What is the firm's optimal initial cash balance
based on the BAT model?
A. $150,60
0
B. $158,92
9
C. $170,09
6
D. $221,50
6
E. $209,61
9
AACSB: Analytic
Blooms: Analyze

lOMoARcPSD|9738710
Section: 19.A
Topic: BAT model
78. Your firm spends $54,000 a week to pay bills and maintains a lower cash
transferring funds is $55. What is your opportunity cost of holding cash
based on the BAT model?
A. $1,31
8
B. $1,86
4
C. $2,20
4
D. $2,31
1
AACSB: Analytic
Blooms: Analyze
Section: 19.A

lOMoARcPSD|9738710
Topic: BAT model

lOMoARcPSD|9738710

lOMoARcPSD|9738710
79. Rosie O'Grady's spends $115,000 a week to pay bills and maintains a lower
cash balance limit of $95,000. The standard deviation of the disbursements
is $14,600. The applicable interest rate is 4.8 percent and the fixed cost of
transferring funds is $50. What is this firm's total cost of holding cash based
on the BAT model?
A. $1,43
1
B. $2,86
2
C. $3,03
4
D. $4,91
2
E. $5,35
8
Trading cost = [52/($111,616.90/$115,000)] × $50 = $2,678.81

Total cost = $2,678.81 + $2,678.81 = $5,358

lOMoARcPSD|9738710
AACSB: Analytic
Blooms: Analyze
Section: 19.A
Topic: BAT model

lOMoARcPSD|9738710
transferring funds is $60. What is your optimal average cash balance based
on the BAT model?
A. $103,90
0
B. $146,50
0
C. $182,20
0
D. $207,80
0
E. $249,90
0
AACSB: Analytic
Blooms: Analyze

lOMoARcPSD|9738710
Section: 19.A
Topic: BAT model
81. The Cow Pie Spreader Co. spends $214,000 a week to pay bills and maintains
a lower cash balance limit of $150,000. The standard deviation of the
disbursements is $16,000. The applicable weekly interest rate is 0.025
percent and the fixed cost of transferring funds is $49. What is the firm's
cash balance target based on the Miller-Orr model?
A. $183,51
1
B. $208,51
1
C. $251,00
6
D. $254,54
5
E. $258,87
8
Cash balance target = $150,000 + [0.75 × $49 × ($16,0002/.00025)]1/3 =

$183,511
AACSB: Analytic
Blooms: Analyze

lOMoARcPSD|9738710
Section: 19.A
82. The Blue Moon Hotel and Spa spends $359,000 a week to pay bills and
maintains a lower cash balance limit of $250,000. The standard deviation of
the disbursements is $46,800. The applicable weekly interest rate is 0.045
percent and the fixed cost of transferring funds is $60. What is the hotel's
optimal upper cash limit based on the Miller-Orr model?
A. $430,83
6
B. $447,90
5
C. $528,70
0
D. $739,45
9
E. $861,67
2

$310,278.70
Upper cash limit = 3 × $310,278.70 - (2 × $250,000) = $430,836
AACSB: Analytic
Blooms: Analyze

lOMoARcPSD|9738710

Section: 19.A
83. Donaldson, Inc. spends $94,000 a week to pay bills and maintains a lower
is $13,000. The applicable weekly interest rate is 0.045 percent and the fixed
cost of transferring funds is $52. What is your optimal average cash balance
based on the Miller-Orr model?
A. $48,33
4
B. $57,62
3
C. $82,62
3
D. $236,33
4
E. $247,33
4

$49,466.94
Average cash balance = [(4 × $49,466.94) - $50,000]/3 = $57,623
AACSB: Analytic
Blooms: Analyze

lOMoARcPSD|9738710
Section: 19.A
84. The Burger Stop spends $52,000 a week to pay bills and maintains a lower
cost of transferring funds is $50. What is your optimal average cash balance
based on the Miller-Orr model?
A. $79,11
6
B. $83,20
8
C. $110,31
5
D. $237,34
8
E. $249,62
4

$77,405.96
Average cash balance = [(4 × $77,405.96) - $60,000]/3 = $83,208
AACSB: Analytic
Blooms: Analyze

lOMoARcPSD|9738710
Section: 19.A
$8,100. The applicable weekly interest rate is 0.054 percent and the fixed
cost of transferring funds is $65. What is your cash balance target based on
the Miller-Orr model?
A. $48,15
6
B. $49,99
0
C. $54,88
4
D. $68,09
3
E. $75,72
6
Cash balance target = $50,000 + [.75 × $65 × ($8,1002/.00054)]1/3 = $68,093
AACSB: Analytic
Blooms: Analyze

lOMoARcPSD|9738710
Section: 19.A
86. Travel Inn Express spends $109,000 a week to pay bills and maintains a lower
cost of transferring funds is $58. What is the inn's cash balance target based
on the Miller-Orr model?
A. $28,49
2
B. $31,35
9
C. $153,49
2
D. $156,35
9
E. $225,41
7

$153,492
AACSB: Analytic
Blooms: Analyze

lOMoARcPSD|9738710
Section: 19.A
87. Each business day, on average, a company writes checks totaling $26,000 to
pay its suppliers. The usual clearing time for the checks is 5 days. Meanwhile,
the company is receiving payments from its customers each day, in the form
of checks, totaling $40,000. The cash from the payments is available to the
firm after 2 days. What is the amount of the firm's average net float?
A. $30,0
0
B. $50,00
0
C. $80,00
0
D. $110,00
0
E. $130,00
0
Net float = 5($26,000) - 2($40,000) = $50,000
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
EOC: 19-2

lOMoARcPSD|9738710
balances.
Section: 19.2
Topic: Net float
88. Purple Feet Wine, Inc. receives an average of $6,000 in checks per day. The
delay in clearing is typically 4 days. The current interest rate is 0.025 percent
per day. Assume 30 days per month. What is the highest daily fee the
company should be willing to pay to eliminate its float entirely?
A. $1.5
0
B. $3.0
0
C. $3.7
5
D. $6.0
0
E. $6.5
0
Maximum daily fee = ($6,000 × 4) × 0.00025 = $6.00
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
EOC: 19-3

lOMoARcPSD|9738710
balances.
Section: 19.2
89. Your neighbor goes to the post office once a month and picks up two checks,
one for $18,000 and one for $4,000. The larger check takes 4 days to clear
after it is deposited; the smaller one takes 6 days. Assume 30 days per
month. What is the weighted average delay?
A. 4.21 days
B. 4.36 days
C. 4.78 days
D. 5.00 days
E. 6.00 days
Total monthly receipts = $18,000 + $4,000 = $22,000

Weighted average delay = [($18,000/$22,000) × 4] + [($4,000/$22,000) × 6] =
4.36 days
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
EOC: 19-4
balances.
Section: 19.2

lOMoARcPSD|9738710
90. Your firm has an average receipt size of $60. A bank has approached you
concerning a lockbox service that will decrease your total collection time by
1 day. You typically receive 25,000 checks per day. The daily interest rate is
0.016 percent. What is the NPV of the lockbox project if the bank charges a
fee of $210 per day?
A. $187,50
0
B. $367,50
0
C. $903,35
0
D. $1,412,50
0
E. $1,680,00
0
NPV of service = $60(25,000) - ($210/0.00016) = $187,500
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
EOC: 19-5
Section: 19.3
Topic: Lockbox NPV

lOMoARcPSD|9738710
91. A mail-order firm processes 5,000 checks per month. Of these, 55 percent
are for $55 and 45 percent are for $65. The $55 checks are delayed 2 days on
average; the $65 checks are delayed 5 days on average. Assume each month
has 30 days. The interest rate is 6 percent per year. How much should the
firm be willing to pay to reduce the weighted average float by 1.4 days?
A. $4,16
5
B. $13,88
3
C. $41,65
0
D. $138,88
3
E. $416,50
0
Maximum payment = Average daily float = 1.4{[(0.55 × 5,000 × $55) + (0.45 ×

5,000 × $65)]/30} = $13,883
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
EOC: 19-6
balances.
Section: 19.2

lOMoARcPSD|9738710
92. Paper Submarine Manufacturing is investigating a lockbox system to reduce

its collection time. It has determined the following:
The total collection time will be reduced by 2 days if the lockbox system is
adopted. What is the NPV of adopting the lockbox system?
A. $600,00
0
B. $675,00
0
C. $695,00
0
D. $745,00
0
E. $795,00
0
NPV = (2 × 300 × $3,200) - [($0.75 × 300)/0.0002] = $795,000
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy

lOMoARcPSD|9738710
EOC: 19-7
Section: 19.3
Topic: Lockbox NPV
93. Home Roasted Turkeys disburses checks every 4 weeks that average $70,000
and take 5 days to clear. How much interest can the company earn if it delays
transfer of funds from an interest-bearing account that pays 0.02 percent per
day for these 5 days? Ignore the effects of compound interest. Assume 52
weeks in a year.
A. $3
6
B. $9
1
C. $18
2
D. $36
4
E. $91
0
Interest = $70,000 (5) (52/4) (0.0002) = $910
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy

lOMoARcPSD|9738710
EOC: 19-9
Section: 19.3
Topic: Value of delay

lOMoARcPSD|9738710
94. Never Again Enterprises has an agreement with The Worth Bank whereby
the bank handles $3.12 million in collections a day and requires a $1,000,000
compensating balance. Never Again is contemplating canceling the
agreement and dividing its eastern region so that two other banks will
handle its business. Banks A and B will each handle $1.56 million of
collections a day, and each requires a compensating balance of $1,550,000.
Never Again's financial management expects that collections will be
accelerated by one day if the eastern region is divided. The T-bill rate is 4
percent annually. What is the amount of the annual net savings if this plan is
adopted?
A. $10,20
0
B. $40,80
0
C. $76,50
0
D. $102,00
0
E. $125,00
0
NPV = $3,120,000 - [2($1,550,000) - $1,000,000] = $1,020,000

Net savings = 0.04($1,020,000) = $40,800
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy

lOMoARcPSD|9738710
EOC: 19-10
Section: 19.3
Topic: NPV of float reduction

lOMoARcPSD|9738710
95. Mountaintop Inns, a Kentucky company, has determined that a majority of

its customers are located in the Pennsylvania area. It therefore is considering
using a lockbox system offered by a bank located in Pittsburgh, Pennsylvania.
The bank has estimated that use of the system will reduce collection time by
one day. In addition to the variable charge shown below, there is also a fixed
charge of $4,320 per year for the lockbox system. Assume a year has 365
days. What is the NPV of the lockbox system given the following
information?
A. -
$156,727
B. -
$131,301
C. -
$74,208
D. $11,50
7
E. $26,43
3
NPV = (1 × 750 × $1,800) - [($0.30 × 750)/(1.061/365 - 1)] - [$4,320/0.06] = -

$131,301

lOMoARcPSD|9738710
AACSB: Analytic
Blooms: Analyze
EOC: 19-11
Section: 19.3
Topic: Lockbox NPV

lOMoARcPSD|9738710
96. Cow Chips, Inc., a large fertilizer distributor based in California, is planning to
use a lockbox system to speed up collections from its customers located on
the East Coast. A Philadelphia-area bank will provide this service for an
annual fee of $25,000 plus 12 cents per transaction. The estimated reduction
in collection and processing time is one day. The average customer payment
in this region is $8,200. Treasury bills are currently yielding 5 percent per
year. Assume a year has 365 days. Approximately how many customers each
day, on average, are needed to make the system profitable for Cow Chips,
Inc.?
A. 5
6
B. 6
8
C. 7
4
D. 8
3
E. 8
9
NPV = 0 = ($8,200 × 1 × N) - ($0.12 × N)/0.000134 - $25,000/0.05

N = 68 customers per day
AACSB: Analytic
Blooms: Analyze
EOC: 19-12

lOMoARcPSD|9738710
Section: 19.3
Topic: Transactions required
Essay Questions
97. Explain how a lockbox system operates and why a firm might consider
implementing such a system.
A lockbox system entails opening post office boxes in various geographic

locations. These locations are selected such that they are close to the firm's
key customers. At each of those sites, a representative from a local bank
collects the incoming checks and deposits them into the firm's account. The
information on the deposits is forwarded to the firm so customer accounts
can be credited for the payments. The firm transfers funds from these
remote bank accounts into one or more centralized bank accounts on a
routine basis. A lockbox system reduces mailing and processing times, and
creates a one-time cash inflow for the firm.
Feedback: Refer to section 19.3
AACSB: Reflective Thinking

Blooms: Apply
Difficulty: 1 Easy
Section: 19.3

lOMoARcPSD|9738710
Topic: Lockbox systems
98. Explain how the Check Clearing Act for the 21st Century affects both
collection and disbursement float.
Check 21 eliminated the need to present an original check to the check

writer's bank to receive payment. Now, the bank receiving the check as a
deposit can electronically transmit a copy of the check to the check writer's
bank and receive immediate payment. This reduces both collection and
disbursement float times.

Blooms: Understand
Difficulty: 1 Easy
balances.
Section: 19.2
Topic: Check Clearing Act for the 21st Century

lOMoARcPSD|9738710
99. Explain how the unethical use of uncollected funds has been impacted by
the growth of on-line retailing and banking.
Whenever cash is moved electronically, both collection and disbursement

float disappears. Reducing float limits the ability of a firm to earn income by
investing uncollected cash.
AACSB: Ethics
Blooms: Understand
Difficulty: 1 Easy
balances.
Section: 19.2
Topic: Internet banking

lOMoARcPSD|9738710
100. Float management systems may provide only minimal benefits to a firm.
Given that most firms have other projects with higher positive net present
values, why should a firm's managers spend time implementing a float
management system?
Students should explain that any project with a positive net present value
adds value to the overall firm and should be implemented. Generally
speaking, the majority of employee or management time required by a float
management system is spent on the implementation of the system. Once the
system is in place, management and employee time required for float
management tends to be rather minimal.

Blooms: Apply
Difficulty: 1 Easy
balances.
Section: 19.2
Topic: NPV of float management

lOMoARcPSD|9738710
101. Explain what a zero-balance account is, how it is used, and how it affects
cash management.
A zero-balance account is a checking account which is frequently used either

for payroll or accounts payable purposes. Funds are transferred from a
master account into the zero-balance account only as needed to cover
checks presented for payment. All excess funds are held in the master
account. By concentrating the firm's safety stock of cash in one account, the
firm can better utilize its funds.

Blooms: Understand
Difficulty: 1 Easy
Section: 19.4

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Cash and Liquidity Management

Multiple Choice Questions

1. Yesterday, the president of RB Enterprises received a phone call from DLK, a

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2. GT Motors regularly issues short-term debt to finance its daily operations.

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4. Float is defined as the:

B. difference between book cash and bank cash.

D. amount of cash a firm has on hand.

E. cash balance according to a firm's records.

E. post office box strategically located so that a firm's receivables can be

Downloaded by Thuy An (thuyancutee@gmail.com)

Downloaded by Thuy An (thuyancutee@gmail.com)

Downloaded by Thuy An (thuyancutee@gmail.com)

Downloaded by Thuy An (thuyancutee@gmail.com)

Downloaded by Thuy An (thuyancutee@gmail.com)

10.Adjustment costs is another name for which one of the following?

E. excess cash costs

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11.Why do firms need liquidity?

I. to meet compensating balance requirements

D. II, III, and IV

E. I, II, III, and IV

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12.Cash management primarily involves:

A. optimizing a firm's collections and disbursements of

B. maximizing the income a firm earns on its cash

C. reconciling a firm's book balance with its bank

D. determining the optimal level of liquidity a firm should

E. determining the best method of raising

A. occurs when a deposit is recorded but the funds are

B. causes the book balance to exceed the bank

D. is a recommended source of funds for short-term

E. is eliminated when payments are made

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A. is more desirable to firms than disbursement

B. is totally eliminated by the installation of a lockbox

C. exists when a firm's available balance exceeds its book

D. can be avoided by collecting payments electronically at the time of

E. is eliminated by implementing a concentration banking

15.Which one of the following statements is correct?

B. A positive net float indicates that collection float exceeds disbursements

C. Firms prefer a zero net float over a positive net

D. Net float is equal to collection float minus disbursement

E. Net float is equal to a firm's available balance minus its book

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16.Check kiting is:

A. used by most firms as an ethical means of handling its cash

C. the central core of a good cash management

D. using uncollected cash to invest in short-term, liquid

E. increasingly popular due to recent banking law

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17.Which of the following will reduce collection time?

I. billing customers electronically rather than by mail