Deck 19: Cash and Liquidity Management

Question 1

Disbursement float is created by cheques which have been deposited into a firm's bank account but which have not yet cleared.

Answer 1

False

Question 2

Collection float is the time that elapses between when a customer mails a payment and when the cheque clears the banking system.

Answer 2

False

Question 3

Use of remote post office box help reduce collection float.

Answer 3

False

Question 4

Availability delay is a component of collection float.

Question 5

Concentration time is a component of collection float.

Question 6

Net float is the difference between a firm's ledger balance and its available balance.

Question 7

Net float that is positive is called net collection float.

Question 8

Collection float is equal to the sum of mail float, processing float, and availability float.

Question 9

Disbursement float is virtually eliminated when payments are made electronically.

Question 10

Net float that is positive is preferred by firms over net float that is negative.

Question 11

Collection float increases book balances but does not immediately change available balances.

Question 12

Disbursement float is sometimes used by firms to fund short-term investments even though such use is ethically questionable.

Question 13

Processing delay is a components of collection float.

Question 14

Mailing time is a component of collection float.

Question 15

Net float is the sum of the total collection and disbursements float.

Question 16

Preauthorized payments help reduce collection float.

Question 17

With respect to the workings of a lockbox system, the company gathers their mail from the lockboxes and immediately deposits the cheques.

Question 18

With respect to the workings of a lockbox system, the payments are recorded on the customer's account prior to the cheques being deposited.

Question 19

Electronic lockboxes help reduce collection float.

Question 20

Disbursement float is created by any transaction which decreases a firm's book balance but not its available cash balance.

Question 21

Providing a discount for customers who pay electronically should help reduce the total collection time for your firm.

Question 22

Accepting debit card transactions will decrease the total collection time for a firm.

Question 23

Billing customers electronically will decrease the total collection time for a firm.

Question 24

A zero-balance account is funded on an as-needed basis only.

Question 25

One of the objectives of the cash management process is to determine the Appropriate level of cash that must be kept on hand.

Question 26

A zero-balance account helps the firm free up surplus cash.

Question 27

The use of a lockbox system to collect payments provides one principal benefit: a reduction in processing time.

Question 28

Establishing preauthorized payment arrangements will decrease the total collection time for a firm.

Question 29

One of the objectives of the cash management process is to determine the Best way to invest the temporary excess cash reserves of the firm.

Question 30

Adding additional staff in the mornings for mail and payment processing should help reduce the total collection time for your firm.

Question 31

One of the objectives of the cash management process is to determine the best way to pay for materials, services, etc., provided to the firm.

Question 32

Peterson Products uses a zero-balance account for cash management purposes. McLeod Enterprises does not. If the firms are otherwise identical, one would expect McLeod to maintain a larger total cash safety stock than Peterson.

Question 33

Collecting your firm's mail earlier in the morning and delivering it directly to the people who process these payments should help reduce the total collection time for your firm.

Question 34

Over-the-counter collections help reduce collection float.

Question 35

A zero-balance account receives funds from a master account.

Question 36

One of the objectives of the cash management process is to determine the Best means by which to collect cash owed to the firm.

Question 37

Implementing a lockbox system will decrease the total collection time for a firm.

Question 38

Establishing preauthorized payments for fixed payments from customers should help reduce the total collection time for your firm.

Question 39

With respect to the workings of a lockbox system, by the time the company starts to record the payments, the cheques are already in the clearing process.

Question 40

A zero-balance account is required to maintain a safety stock.

Question 41

The amount of cash needed for transactions over a period of time is needed to determine the optimal strategy using the BAT model.

Question 42

In regards to the Miller-Orr Model, the cash balance of the firm is permitted to fluctuate within a given range.

Question 43

Management's desire to maintain a low cash balance affects their need to borrow money.

Question 44

The BAT model is more useful than the Miller-Orr model because the Miller-Orr model is too complex for most firms.

Question 45

In regards to the Miller-Orr Model, the greater the variance of the cash flows, the greater the distance between the target balance and the minimum balance.

Question 46

One disadvantage of the BAT model is the fact that it assumes all cash outflows are known with certainty.

Question 47

The opportunity cost of holding cash is needed to determine the optimal strategy using the BAT model.

Question 48

The cost of borrowing and the cost of selling securities affect the target cash balance of a firm.

Question 49

In regards to the Miller-Orr Model, the higher the interest rate, the lower the target cash balance.

Question 50

In regards to the BAT and Miller-Orr cash management models, the lower the uncertainty of cash flows, the higher the target cash balance.

Question 51

The target cash balance decreases as the interest rate rises.

Question 52

A shortcoming of both the BAT and the Miller-Orr models is that the cost of borrowing is likely more expensive than selling marketable securities.

Question 53

A firm has a greater likelihood of needing an unexpected loan when its cash flows are relatively constant over time.

Question 54

If the lower limit on cash balances rises by one dollar, the upper limit as specified by the Miller-Orr model also rises one dollar.

Question 55

Under the BAT model, a decrease in the total amount of new cash needed for transactions over the planning period will cause the optimal initial balance to decline.

Question 56

Under the BAT model, an increase in the interest rate on marketable securities will cause the optimal initial balance to decline.

Question 57

Management's desired lower level of cash is needed to determine the optimal strategy using the BAT model.

Question 58

The BAT model is a complex model designed to estimate the cash flows of a firm.

Question 59

One advantage of the BAT model is that it assumes that a firm has a constant cash outflow every day.

Question 60

The fixed cost of a securities trade is needed to determine the optimal strategy using the BAT model.

Question 61

Highly marketable is a characteristic of money market securities.

Question 62

A firm's marketable securities account has both 270-day corporate commercial paper and three-month Treasury bills. If the firm chooses to shift its policy and invest 100% in commercial paper, it would likely increase the interest rate risk of its marketable securities portfolio.

Question 63

The opportunity cost of holding cash is inversely related to the level of market interest rates.

Question 64

Precautionary motive is a reason for a firm to maintain liquidity.

Question 65

Financing of planned expenditures is a primary reason why firms have cash surpluses.

Question 66

Liquidity is a characteristic of money market securities.

Question 67

Float motive is a reason for a firm to maintain liquidity.

Question 68

Long-term maturities are a characteristic of money market securities.

Question 69

A company receives an average of 280 cheques a day with an average value of $160 a cheque. The annual interest rate is 4%. The current delay in processing and clearing is three days. If the company implements a lockbox service that has been proposed to them, the clearing time will be reduced by two days. What is the maximum fee per cheque that can be charged by the bank and still have the lockbox service be acceptable to the company?

A) $.0300
B) $.0351
C) $.0367
D) $.0398
E) $.0400

Question 70

A firm's marketable securities account has both 270-day corporate commercial paper and three-month Treasury bills. If the firm chooses to shift its policy and invest 100% in commercial paper, it would likely increase the default risk of its marketable securities portfolio.

Question 71

Desire to invest funds is a primary reason why firms have cash surpluses.

Question 72

Newco, Inc. has gathered the following information relevant to implementing a lockbox system: What is the net cash flow per cheque if a lockbox system is adopted?

A) $.1128
B) $.1197
C) $.1414
D) $.1628
E) $.1686

Question 73

With respect to the workings of a lockbox system, the cheque clearing process begins before the company even knows the payments have been received.

Question 74

Excessive short-term financing is a primary reason why firms have cash surpluses.

Question 75

A firm's marketable securities account has both 270-day corporate commercial paper and three-month Treasury bills. If the firm chooses to shift its policy and invest 100% in commercial paper, it would likely increase the marketability risk of its marketable securities portfolio.

Question 76

A firm's marketable securities account has both 270-day corporate commercial paper and three-month Treasury bills. If the firm chooses to shift its policy and invest 100% in commercial paper, it would likely increase the maturity risk of its marketable securities portfolio.

Question 77

Low default risk is a characteristic of money market securities.

Question 78

Transaction motive is a reason for a firm to maintain liquidity.

Question 79

Speculative motive is a reason for a firm to maintain liquidity.

Question 80

Cyclical activities are a primary reason why firms have cash surpluses.