Principles of Finance - Chapter 19 and Smartbook

On an average day, Anozie Gallery writes 19 checks for an average amount of $796 per check. These checks clear the bank in an average of two days. What is the average amount of the disbursement float?

$30,248

On average, Kim Construction receives 72 payments each day with an average value of $343 each. These payments clear the bank in an average of 2.5 days. In addition, it disburses 3.6 checks a day with an average amount of $4,758. These checks clear the bank in two days. What is the average amount of the collection float?

$61,740

Weisbro and Sons purchases its inventory one quarter prior to the quarter of sale. The purchase price is 60 percent of the sales price. The accounts payable period is 60 days. The accounts payable balance at the beginning of Quarter 1 is $27,000. What is the amount of the expected disbursements for Quarter 2 given the following expected quarterly sales? Quarter 1:$ 73,000 Quarter 2:$ 114,000 Quarter 3:$ 106,000 Quarter 4:$ 115,000

$66,800

With Check 21, the check clearing time is typically _____ day(s).

1

Ferry's Furniture Outlet has an accounts receivable period of 48.72 days and an accounts payable period of 33.71 days. The company turns over its inventory 4.97 times per year. What is the length of the company's operating cycle? Assume 365 days per year.

122.16 days Reason: Take year and divide by inventory turnover. 365/4.97 = 73.4406439 Than add that to the accounts rec. period.

Franklin, Incorporated, has an inventory turnover of 19.5 times, a payables turnover of 11.5 times, and a receivables turnover of 10.1 times. What is the company's cash cycle? Assume 365 days per year.

23.12

Murkywater Company is considering a lockbox system. Its collection delay is currently 12 days. Reduction in mailing time = 1.5 day Reduction in clearing time = 1.5 day Reduction in firm processing time = 1.0 day Total = 4.0 days The following is also known: Daily interest on Treasury bills = 0.025% Average number of daily payments to lockboxes = 4,000 Average size of payment = $400 A local bank has agreed to operate this lockbox system for a fee of $0.25 per check processed. What are the costs associated with the proposal?

4,000,000

A company has an inventory period of 25.4 days, an accounts payable period of 36.5 days, and an accounts receivable period of 31.4 days. What is the company's operating cycle?

56.8 Reason: Inventory period + Accounts rec. period

To avoid interest rate risk, firms often limit their investment maturities to ______ days.

90

______ is a preprinted check needing no signature.

A DTC

Shannara Manufacturing writes 23 checks a day for an average amount of $469 each that generally clear 3 days after they are written. In addition, the firm generally receives 31 checks each day with an average amount of $520 each that are available after 2.5 days. Is this a collection or disbursement float? What is the amount of the float?

A collection float of $7939

(Select all that apply) Which of the following are true?

A firm buys marketable securities when there is surplus cash flow. A firm borrows when deficits occur. A firm sells marketable securities when a cash deficit occurs.

______ delay refers to the time required to clear a check through the banking system.

Availability

A straightforward model that is useful for illustrating the factors in cash management and current asset management is the _____ model.

BAT

Which of the following is not a component of collection time?

Bad debt collection delay

(Select all that apply) When a company receives payments via checks in the mail, which components of collection time become relevant?

Bank availability delays Mail delays Check processing delays

(Select all that apply) Which of the following are true about using uncollected balances?

Banks charge a penalty rate for that practice. There are legal and ethical problems with this practice.

BAT in the BAT model stands for _____.

Baumol-Allais-Tobin

(Select all that apply) Which of the following are true about availability delay?

Check clearing time is not crucial. Availability time is crucial.

(Select all that apply) Which of the following are goals of cash disbursement?

Control payments Minimize payment costs

What type of risk is rated by bond ratings?

Default risk

What type of risk refers to the probability that interest and principal will not be paid in the promised amounts on the due dates?

Default risk

Which of the following refers to mailing time?

Delays in check delivery because of postal delays

(Select all that apply) Which of the following are options for transferring cash to a concentration bank?

Depository transfer checks Wire transfers ACH transfers

True or false: In a cash concentration system, only one concentration bank is typically used.

False

True or false: It is not a good strategy to carry temporary cash surpluses because cash does not generate any return.

False

True or false: The decision to use a bank cash management service depends on a firm's WACC.

False

True or false: The only way to satisfy the speculative motive is to hold cash.

False

In which case would a firm probably choose wire payments?

Fewer but larger payments

Which of the following is not an additional consideration in regards to cash management?

For large firms, trading costs of buying/selling securities are high compared to opportunity costs of holding cash.

(Select all that apply) Which of the following are ways for a firm to slow down disbursements?

Increasing processing float Increasing mail float

Which of the following is not considered an ethical and/or economic problem with increasing disbursement float?

Inventory shrinkage

(Select all that apply) Which of the following are true about a zero-balance account?

It involves a set of subaccounts. It involves a master account.

Which of the following is true about commercial paper?

It is unsecured.

(Select all that apply) Which of the following are true about commercial paper?

Its marketability can be low. It has no especially active secondary market.

Certificates of deposits in excess of $100,000 are called ______ CDs.

JUMBO

(Select all that apply) Interest earned on money market securities that are not some kind of government obligation (federal or state) is taxable at which levels?

Local Federal State

(Select all that apply) Which of the following are true about lockboxes?

Lockboxes are maintained by a local bank. Customers mail checks to post office boxes rather than to a firm.

(Select all that apply) What creates a strong incentive for a corporation to invest in the preferred stock of another corporation?

Low taxes High dividend yields

(Select all that apply) Which of the following are ways to increase disbursement float?

Mailing checks from remote post offices Writing checks on geographically distant banks

Which part of the collection and disbursement process arises when checks are trapped in the postal system?

Mailing time

(Select all that apply) Which of the following are true with respect to mailing time?

Mailing time is a component of disbursement float. Mailing time is not a component of collection float.

Which of the following is a good business disbursement practice?

Maintaining no more than the minimum amount of money necessary to pay bills

(Select all that apply) Which of the following can be used to satisfy the speculative motive?

Marketable securities Borrowing ability

The ______ model assumes that the cash balances fluctuate randomly and that the average change is zero.

Miller-Orr

Which of the following constitutes an ethical and/or legal problem with increasing disbursement float?

Not paying bills when they are due

The target cash balance trades off the __________ cost of holding too much cash with the costs of holding too little cash.

OPPORTUNITY

(Select all that apply) Which of the following are examples of the disbursement of cash?

Paying taxes Paying interest and dividends Paying wages and salaries

(Select all that apply) Which of the following are examples of cash flows that can be grouped under the transaction motive for holding cash?

Payment of trade debts Payment of wages

Which of the following is not a motive for holding cash?

The acquisitive motive

(Select all that apply) Assume a firm has a balance of $100,000 and then writes a check for $25,000. Which of the following are true?

The firm's book balance immediately falls by $25,000. The firm's float becomes $25,000.

Which of the following is not an implication of the BAT and Miller-Orr models?

The greater the order cost, the lower the target cash balance.

What is the basic cost of the collection float?

The opportunity cost of not being able to use the cash

(Select all that apply) Which of the following are true about preauthorized payment arrangements?

The payment amounts are fixed in advance. The payment dates are fixed in advance.

(Select all that apply) What considerations does borrowing cash introduce?

The probability that borrowing is more expensive than selling marketable securities Borrowing will depend on management's desire to hold low cash balances.

(Select all that apply) Which of the following are motives for holding cash?

The transaction motive The precautionary motive The speculative motive

Which of the following is true about certificates of deposit (CDs)?

There are active markets in CDs with maturities of 3, 6, 9, and 12 months.

(Select all that apply) Which of the following are true about short-term tax-exempt securities?

They are less marketable than U.S. Treasury issues. They have more default risk than U.S. Treasury issues.

(Select all that apply) Which of the following are true about U.S. Treasury bills?

They are obligations of the U.S. government. They mature in 30, 90, or 180 days.

(Select all that apply) Which of the following are true with regard to the sale of U.S. Treasury bills?

They are sold by auction. They are sold weekly.

Which one of the following is true about repurchases agreements?

They are very short term, lasting overnight to a few days.

(Select all that apply) Which of the following are true about money market preferred stock?

This type of stock has less volatility than ordinary preferred stock. The dividend is reset every 49 days.

What is the main objective of cash management?

To keep the investment in cash as low as possible

What securities are generally used in repurchase agreements?

Treasury Bills

True or false: 70 to 80 percent of dividends received by one corporation from another are exempt from taxation.

True

(Select all that apply) Which of the following are types of money market securities?

U.S. T-bills Certificates of deposit

Disbursement float causes ______ in the firm's book balance but ______ in its available balance.

a decrease; no change

Money market securities generally have _____.

a low default risk

Determining the firm's target cash balance involves a trade-off between the carrying costs and the shortage costs, which are also called the _____ costs.

adjustment(s)

The basic objective in cash management, other things constant, is to keep the investment in cash _____.

as low as possible

A money market preferred stock is also called _____ rate preferred.

auction

The cash balance in a firm's bank account that can be spent is called its ______ balance.

available

(Select all that apply) The effects of Check 21 are that _____.

banks can transmit electronic images of checks it significantly reduces float

A firm should be more concerned with its net float and available balance than with its ______ balance because it can keep a lower cash balance.

book

(Select all that apply) If a firm holds too little cash, it may have to _____.

borrow sell marketable securities

Marketable securities are also called _____ equivalents.

cash

The practice of ______ management is related to collecting and disbursing cash.

cash

Marketable securities are sometimes referred to as _____.

cash equivalents

The cash manager must work with ______ bank balances, not the firm's ______ balance.

collected; book

Checks received by the firm create ______ float.

collection

The basic cost of ______ float to the firm is simply the opportunity cost of not being able to use the cash.

collection

Cash balances are often held at commercial banks in order to _____.

compensate for banking services

A minimum ______ balance is a requirement that imposes a lower limit on the level of cash a firm holds.

compensating

(Select all that apply) The main drawbacks of EDI are that it is _____.

complex to set up expensive

The movement of cash from different banks and different accounts into a main account is called cash ______.

concentration

(Select all that apply) EDI helps _____.

consumers pay bills with automatic debiting companies electronically transfer financial information

(Select all that apply) The decision to use a bank cash management service that incorporates lockboxes and concentration banks depends on _____.

customer location the speed of the postal system

For outgoing checks, what matters is the date the account is ______, not when the recipient is granted ______.

debited; availability

Electronic funds transfers _____ (increase/decrease) the transaction demand for cash.

decrease

Bond ratings by major agencies, such as Standard and Poor's, rate bonds on their ______ risk.

default

The risk that the corporation may not be able to repay the principal amount due on debt is known as ______ risk.

default

(Select all that apply) Lockboxes enable a firm to get its receipts ______ faster.

deposited cleared processed

Checks written by a firm generate ______ float.

disbursement

Writing checks on geographically distant bank can increase ______ float.

disbursement

(Select all that apply) The size of the float depends on the _____.

dollar amount involved time delay involved

Stated concisely, the basic objective in cash management is to collect _____.

early and pay late

An alternative to a traditional lockbox in which a customer may use the phone or internet to access his/her account is called a(n) _____ lockbox.

electronic

(Select all that apply) Over-the-counter collection reduces float by _____.

eliminating mailing delay using local banks

Trading costs _____ (fall/rise) as the cash balance grows.

fall

The ______ represents the net effect of checks in the process of clearing.

float

The difference between the available balance and the ledger balance is called the ______.

float

______ management involves controlling the collection and disbursement of cash.

float

All else equal, firms that invest in long-term securities are accepting ______ risk than firms that invest in short-term securities.

greater

(Select all that apply) The marketability of securities refers to _____.

how quickly assets can be converted to cash the liquidity of assets

To slow disbursements, one can _____.

increase mailing time increase processing delay

A flexible short-term financial policy:

incurs more carrying costs than a restrictive policy.

Product sales and new financing are examples of cash ______.

inflows

The opportunity cost of holding cash balances at banks is the _____.

interest income that could be earned from the next best use of those funds

The increased change in value that occurs because longer maturity investments are affected more by interest rate changes than are shorter maturity investments is called _____ risk.

interest rate

The problem with running out of cash and having to borrow or sell marketable securities is that _____.

it is costly

If you have disbursement float, then your book balance is _____.

less than your available balance

The greater the marketability of a security, the higher its _____.

liquidity

The practice of ______ management is more general than cash management.

liquidity

For both the BAT and Miller-Orr models, all else being equal, the greater the interest rate, the _____.

lower the target cash balance

Money market instruments are an example of short-term ______ securities.

marketable

Short-term _____ securities can be bought and sold in financial markets and have minimal default risk.

marketable

The market for short-term financial assets is called the _____.

money

For a given change in level of interest rates, the prices of longer-maturity securities will change ____ than those of shorter-maturity securities.

more

Interest earned on ________ securities is exempt from federal taxes.

municipal

The sum of total collection and disbursement floats is the ______ float.

net

When a firm holds cash in excess of some necessary minimum, it incurs a(n) ______ cost.

opportunity

Cash disbursement refers to the ______ of cash.

outflow

(Select all that apply) Firms may accumulate temporary investments in marketable securities for _____.

plant construction programs dividend payments

If the available balance exceeds the book balance, then the net float is _____.

positive

If the disbursement float exceeds the collection float, then the net float is _____.

positive

Firms use lockboxes to accelerate collections. Where are the lockboxes set up?

post offices

A cash collection approach that is becoming more common is the _____ payment arrangement in which the payment amounts and dates are fixed in advance. (Enter one word per blank.)

preauthorized

The _____ motive for holding cash is the need to hold cash as a safety margin to act as a financial reserve.

precautionary

The need for a safety supply to act as a financial reserve represents the _____ motive.

precautionary

(Select all that apply) Cash is collected from _____.

product sales new financing asset sales

The practice of liquidity management concerns the optimal _______ of liquid assets a firm should have on hand.

quantity

The main advantage of EDI to the seller is that it _____.

reduces float

If cash levels are too low, a firm will _____.

run out of cash too often

(Select all that apply) Two of the most important reasons firms have temporary cash surpluses are _____.

seasonal firm activities financing of planned expenditures

(Select all that apply) The top reasons that e-commerce and extranets will not replace EDI soon are _____.

security concerns lack of standardization

If a firm sets aside some cash to take advantage of an anticipated favorable change in oil prices, the firm has a ________ motive for holding cash:

speculative

The need to hold cash in order to take advantage of favorable changes in interest or currency rates is called the _____ motive.

speculative

(Select all that apply) Short-term tax-exempts are short-term securities issued by

states. municipalities

The effect of electronic funds transfers and other high-speed paperless payment mechanisms reduces the ______ demand for cash.

transaction

The need to have cash on hand to pay bills fits the _____ motive.

transaction

A(n) ______ is the most expensive means of transferring cash.

wire transfer

The Miller-Orr model assumes that the cash balances fluctuate randomly and that the average change is _____.

zero

A _____ account is a disbursement account in which a firm transfers money from a master account as needed to cover checks presented for payment.

zero-balance

If a firm receives a check for $50,000, its available balance will increase immediately by ______ and its book balance will increase immediately by ______.

zero; $50,000