Finance exam 4 review

The granite rock manufacturing company is considering the use of a lock box collection system. Granted average check receipt is $1,350. The company invests excess cash in money market certificates and receives an average of 3.5% annual interest. The lock box system will speed up granites collections by 2.5 days. What is the maximum per check processing cost that granite rock company should be willing to pay for the lock box system?

$.3236

Assume that liquid funds can be invested to yield 4.5 percent. If annual remittance checks total $2 billion, what is it worth for the firm to reduce float by 1 days?

$246,575

If you compare the yield of a municipal bond with that of a negotiable certificate of deposit, what is the equivalent before tax yield of the certificate of deposit if the municipal bond has a yield of 8% per year and the investor has a marginal tax rate of 28%

11.11%

Determine the annualized cost of forgoing the trade discount on terms 1/20 net 45. Use 360 day year.

14.55%

Determine the annualized cost of forgoing the trade discount on terms 2/15 net 65. Use 360 day year.

14.69%

Martin inc is considering a lockbox system that will increase its check processing cost by $.20 per check. The company estimates an average check size of $900 and expects any funds freed up by the new lockbox system can be invested in an accounts that earns 4% per year before taxes. What reduction in collection time is necessary for the lockbox to be beneficial to Martin inc ?

2.03 days

The Davis Manufacturing Company will collect an estimated $12,000,000 next year; and it will receive an estimated 20,000 checks. Davis' bank has offered to set up a lock-box system that will reduce float time by 4.5 days. The cost of the system will be $ .15 per check. What is the minimum annual interest rate on its cash balance that Davis should receive before it would be willing to adopt the lock-box system?

2.03%

If a firm extends 4/10, net 60 day terms of sale, what is the cost in terms of nominal APR? Assume a 360 day year.

30.0%

Martin inc is negotiating with the bank for a lockbox system that is expected to reduce check recollection time by 4 days. Martins average check size is $1,200 and any funds freed up by the new system will be invested in a money market account that is currently paying 2.5% annually. What is the most Martin should be willing to pay the bank for the lockbox service, assuming the bank charges a per check processing fee?

32.877 cents

A trade credit discount such as 3/10 net 40 means:

A 3 percent discount if payment is made within 10 days, otherwise, the total amount is due in 40 days

When a corporation designs an investment strategy for investing temporary excess cash balances in marketable securities, it must consider a variety of factors. Which of the following is the least important?

Achieving the highest yield

Which of the following would be an example of the "precautionary motive" for a firm holding cash balances?

Anticipating a strike

Total float consists of each of the following elements except:

Audit float

Centralized control over disbursements is assisted by which of the following cash management techniques?

Both zero balance accounts and payable through drafts

Cash inflows come from

Cash sales

Which of the following factors determines the amount that a firm would have invested in accounts receivable?

Collection efforts, the percentage of credit sales to total sales, the volume of sales, the terms of aale

Funds that are available in a company's bank account until its payment check has cleared refers to

Disbursing float

The benefits of a lockbox system include all of the following except

Increase in total float

A company is technically insolvent when:

It lacks the necessary liquidity to promptly pay its current debt obligations

A lock box system reduces

Mail float and transit float

When a corporation designs an investment strategy for investing temporary excess cash balances in markets me securities, it must consider a variety of factors. Which of the following is the most important?

Maintaining the safety of principal

Considerations in the selection of a proper marketable securities mix include all of the following except

Maturity

A company that has an unpredictable cash flow, and is holding cash because of things that might happen due to this uncertainty, is holding a larger minimum cash balance due to which type of motive?

Precautionary

A retailer sells most of its merchandise on credit and bills clients monthly. Which of the following elements of float does the retailer have the most control over?

Processing float

Which of the following would be an example of the "transactions motive" for a firm holding cash balances?

Purchase of inventory

The financial manger is concerned with:

Striking a balance between holding too much and too little cash, maintaining high levels of profitability, and minimizing the chance of insolvency

A firms credit and collection policies usually include:

Terms of sale, quality of customers, and collection of credit sales

Compare the risk of a 90-day unsecured promissory note issued by Southwest Airlines to a 20-year U.S. Government Treasury Bond.

The Treasury Bond has a lower financial risk, but a higher interest rate risk.

An aging schedule of accounts receivable aids the financial manager in determining

The amount of receivables that are past due

Which of the following is generally under the control of the financial manager?

The credit policies

All of the following are false except:

The disbursing float derived from the fact that funds remain in a firms bank account until its payment check is cleared through the banking system

Transit float is caused by:

The time necessary for a deposited check to clear the banking system and become usable funds to the company

Float is best described by which of the below?

The time required for a deposited check to clear through the commercial banking system and be available for payment

The time necessary for a deposited check to clear through the commercial banking system causes which of the following types of floats?

Transit

Money market funds

Typically invest in a diversified portfolio of short term, high grade debt instruments

A way of managing a firms cash disbursements would be through:

Zero balance accounts

Which of the following has the highest interest rate risk?

a 20-year U.S. Treasury Bond

If a firm with credit terms of 2/10 net 30 were to change its terms to 2/10 net 60, the result would probably be:

fewer customers would take advantage of the cash discount.

If a firm with credit terms of 1/10 net 30 were to change its terms to 3/10 net 30, the result would probably be

increased accounts receivable turnover.

What is the greatest risk associated with cash management?

insolvency

A construction firm that accumulates cash in anticipation of a significant drop in lumber costs is an example of the _____ motive for holding cash

speculative

John Maynard Keynes segmented a firms demand for cash into the following motives:

transaction, speculative, precautionary