Deck 16: Current Asset Management

Question 1

The most important reasons firms hold cash balances are the transaction and precautionary motives.

Answer 1

True

Question 2

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

A) transaction
B) speculative
C) hedging
D) precautionary

Answer 2

speculative

Question 3

Generally,the least important motive for holding liquid assets for a typical company is the speculative motive.

Answer 3

True

Question 4

Transaction balances are used to meet the regular cash needs of the firm,not irregular outflows that will be handled with speculative balances.

Question 5

Which of the following affects the precautionary motive for holding cash?

A) the cash flow predictability
B) the firm's access to external funds
C) both A and B
D) none of the above

Question 6

The industry in which a firm operates has relatively little effect on the relative amounts of transaction cash held.

Question 7

Near-cash assets consist of marketable securities and accounts receivable.

Question 8

Motives for holding stocks of cash include transaction,precautionary,and speculative.

Question 9

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

A) investing "excess cash balances"
B) anticipating a downturn in the economy
C) purchase of inventory
D) take advantage of an anticipated decline in the price of raw materials

Question 10

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

A) make dividend payments
B) anticipating a strike
C) purchase of inventory
D) take advantage of an anticipated decline in the price of raw materials

Question 11

The funds needed to satisfy the precautionary motive are entirely held in cash.

Question 12

Cash inflows come from

A) purchase of marketable securities.
B) purchase of fixed assets.
C) credit sales.
D) cash sales.

Question 13

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

A) purchase of inventory
B) anticipating a strike
C) purchase fixed assets
D) make dividend payments

Question 14

Speculative cash balances are held to take advantage of uncertain profit-making opportunities.

Question 15

The goal of cash management is to hold the minimum amount of cash necessary to meet the firm's obligations in a timely manner.

Question 16

Marketable securities are purchased when excess cash is temporarily available and sold when cash is needed.

Question 17

John Maynard Keynes segmented a firm's demand for cash into the following motives:

A) risk, investment, and liquidity.
B) transaction, speculative and precautionary.
C) transaction, liquidity, and speculative.
D) transaction, speculative, and risky.

Question 18

Effective cash management involves the tradeoff between the risk of insolvency (resulting in higher near cash balances)and the desire to earn higher returns (resulting in lower near cash balances).

Question 19

The more difficult it is to estimate a firm's cash flow needs,the greater the need to carry higher precautionary balances.

Question 20

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?

A) transaction
B) precautionary
C) speculative
D) common sense

Question 21

The objective of managing cash inflows is to decrease the float while the objective of managing cash outflows is to increase the float.

Question 22

The initial step in any effective cash management program is cash flow forecasting.

Question 23

Companies with the largest cash balances reduce their risk of insolvency and thus maximize the value of the companies for their shareholders.

Question 24

Zero balance accounts reduce disbursing float.

Question 25

The risk-return tradeoff leads to two objectives:
(1)keep enough cash on hand to make necessary payments,and (2)reduce investments in idle cash to a minimum.

Question 26

The estimated value of reducing float by 1-day is one day's interest on the freed up sales.

Question 27

Lockbox arrangements may reduce mail float,processing float,and transit float.

Question 28

All of the following elements of a cash management program will likely contribute to an increase in the value of the firm except:

A) collect cash more quickly.
B) slow down cash disbursements.
C) prepare more accurate cash flow forecasts.
D) increase cash balances for precautionary reasons.

Question 29

In a lockbox system,customer payments are collected directly by the bank and deposited immediately in the corporation's account.

Question 30

The main purpose of using a payable-through draft system is to gain effective control over field payments.

Question 31

What is the greatest risk associated with cash management?

A) yields
B) insolvency
C) holding too much cash
D) managing float

Question 32

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?

A) liquidity
B) financial risk
C) achieving the highest yield
D) maintaining the safety of principal

Question 33

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 most important?

A) maintaining the safety of principal
B) maintaining the greatest float
C) achieving the highest yield
D) illiquidity

Question 34

A zero balance account permits divisions to disburse funds while maintaining centralized control of several bank accounts.

Question 35

Cash management system objectives include

A) maintaining sufficient cash to meet disbursal needs.
B) maintaining idle cash balances at "doomsday event" levels.
C) maintaining accounts payable balances at zero by early bill payment.
D) all of the above are objectives of the system.

Question 36

One advantage of zero balance accounts is an increase in disbursing float.

Question 37

Firms like to hold large stocks of cash since the risk of becoming insolvent is minimized.

Question 38

Which of the following is not a motive for a corporation to hold cash balances?

A) transactions
B) float
C) precautionary
D) speculative

Question 39

A company is technically insolvent when

A) cash outflows in a given period are greater than cash inflows.
B) earnings before interest payments are less than the interest payments.
C) it lacks the necessary liquidity to promptly pay its current debt obligations.
D) current ratio is less than 1.0.

Question 40

Payable-through drafts look like checks but are not drawn on a bank.

Question 41

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 account that earns 4% per year before taxes.What reduction in collection time is necessary for the lockbox to be beneficial to Martin Inc.?

A) 1.96 days
B) 2.03 days
C) 1.73 days
D) 2.15 days

Question 42

Martin Inc.is negotiating with the bank for a lockbox system that is expected to reduce check collection time by 4 days.Martin's 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?

A) 20.500 cents
B) 29.767 cents
C) 30.726 cents
D) 32.877 cents

Question 43

Martin Inc.is considering a lockbox system that will increase its check processing cost by $.15 per check.The company estimates an average check size of $1,700 and expects the lockbox to reduce check collection time by 3 days.What annual before-tax yield must Martin Inc.earn on its marketable securities for the lockbox system to be beneficial?

A) 1.825%
B) 1.118%
C) 1.074%
D) 0.735%

Question 44

Which of the following is used to manage a firm's cash disbursements?

A) lockbox system
B) bankers' acceptances
C) repurchase agreements
D) zero balance accounts

Question 45

A company with national sales but only one large manufacturing operation and one administrative headquarters located in the same large northeastern city would most likely use which of the following techniques for cash management?

A) lockbox system
B) zero balance accounts
C) payable-through drafts
D) bankers' acceptances

Question 46

A company trying to optimize the use of float will try to

A) increase its disbursing float.
B) decrease its disbursing float.
C) decrease processing float.
D) Both A and C.

Question 47

The Yardscape Corp processes an estimated 200,000 checks per year from its customers.Total revenue collected by check is $40,000,000.The average float time until the funds are credited to Yardscape's checking account is 6 days.For an extra cost of $ .06/check,Yardscape's bank will install a lock-box system that will reduce float time from 6 days to 2.5 days.If Yardscape earns 3.5% on its checking account,how much per check will Yardscape make if it uses the lock-box system?

A) $.005
B) $.006
C) $.007
D) $.008

Question 48

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

A) increased working cash.
B) elimination of clerical functions.
C) increase in total float.
D) early knowledge of dishonored checks.

Question 49

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?

A) 3.25%
B) 2.03%
C) 1.82%
D) 1.07%

Question 50

Lock-box arrangements yield benefits for all companies regardless of the size of sales or customer remittance checks.

Question 51

Payable through drafts

A) provides for effective control over field payments.
B) are not legal instruments.
C) cannot be cleared through the banking system.
D) are a form of commercial paper.

Question 52

Zero balance accounts permit centralized control over cash outflows while maintaining divisional disbursing authority.

Question 53

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 day?

A) $388,349
B) $246,575
C) $257,534
D) $24,658

Question 54

The benefits derived from reduced mail and processing floats must be greater than the bank fees associated with a lockbox system or else a firm would be better off without the lockbox.

Question 55

The Granite Rock Manufacturing Company is considering the use of a lock-box collection system.Granite's 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 Granite's collections by 2.5 days.What is the maximum per check processing cost that Granite Rock Manufacturing Company should be willing to pay for the lock-box system?

A) $0.1871
B) $0.2987
C) $0.3236
D) $0.4519

Question 56

Transit float is caused by

A) the time necessary for a deposited check to clear the banking system and become usable funds to the company.
B) the time funds are not available, through the company's bank account, until its payment check has cleared the banking system.
C) the elapsed time from the moment a customer mails his remittance check until the firm begins to process it.
D) the time required for the firm to process remittance checks.

Question 57

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

A) lockbox system
B) zero balance accounts
C) payable-through drafts
D) both B and C

Question 58

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

A) mail
B) processing
C) transit
D) disbursing

Question 59

A lockbox system can reduce all of the following elements of float except:

A) mail float.
B) processing float.
C) transit float.
D) disbursing float.

Question 60

A lock-box system reduces

A) mail float.
B) transit float.
C) disbursing float.
D) A and B

Question 61

Premium Seed Sales,Inc.expects to generate sales of $22,000,000 in the coming year.All sales are done on a credit basis,net 45 days.Premium Seed has estimated that it takes an average of three days for payments to reach their central office and an additional two days to process the payments.What is the opportunity cost of the funds tied up in the mail and processing?
Premium Seed uses a 360-day year in all calculations and can invest free funds at 6.5%.

Question 62

Commercial paper is a short-term,unsecured,promissory note.

Question 63

Jay's Lumber Supplies earns 2.5 percent on its investment in marketable securities.A draft disbursing system has been proposed that will increase disbursement float by 4 days.Purchases next year are expected to total $18 million.Individual payments average $1,000.Use a 365-day year.
a.If the draft system is adopted,what amount of funds can the firm expect to release during the year?
b.If each issue draft costs the firm $0.30,should the draft system be adopted?
c.Should the firm consider any other factors?

Question 64

All of the following are false except:

A) the mail float is caused by the time lapse from the moment a firm receives the check and begins to process it.
B) the processing float is caused by the time necessary for a bank to process the check.
C) the transit float is caused by the time lapse from the moment a customer mails a check until the firm begins to process it.
D) the disbursing float derives from the fact that funds remain in a firm's bank account until its payment check is cleared through the banking system.

Question 65

Customer Concern Insurance Company tries to settle claims as quickly as possible.In certain cases,agents can present payments to claimants which are cleared through the banking system like a check,but must be passed through the Insurance Company for approved prior to payment.This is an example of a

A) zero balance account.
B) payable-through draft.
C) insurance float voucher.
D) post-dated check.

Question 66

A negotiable certificate of deposit is a marketable receipt for funds deposited in a bank for a period of one to 18 months.

Question 67

Managing a firm's cash outflows through use of a "zero balance account" system offers all but which of the following benefits?

A) centralized control over disbursements
B) reduction of management time spent on superficial cash management activities
C) higher rate of return on invested funds
D) reduction of excess balances in outlying accounts

Question 68

Alexis Jewelry expects to have $35 million in credit sales during the coming year.In spite of a national distributing system,all remittances are sent to the home office.A proposed system can eliminate 3 days of float,releasing funds which,when invested,will earn 6.5 percent.What annual savings can Alexis Jewelry expect if the system is implemented?
Use a 365-day year.

Question 69

Float is best described by which of the below?

A) investing excess cash balances
B) the time required for a deposited check to clear through the commercial banking system and be available for payment
C) the term used to describe payment for the purchase of raw materials that are needed to complete production of a luxury liner
D) the time that is required to receive payment on a zero balance account

Question 70

Assume that Biggie-Mart,whose credit card billings total $120 billion per year,were to implement a lockbox arrangement that would speed up the collection of its credit card billings by 2 full days.If Biggie-Mart could earn 3.5% on its marketable securities,how much would the firm earn per year from such a lockbox arrangement? Assume a 365-day year.

A) $316.99 million
B) $244.58 million
C) $230.14 million
D) $183.50 million

Question 71

Lockbox arrangement benefits include

A) increased working capital from shorter receivables/cash transformation time.
B) elimination of bank charges for handling and audit functions.
C) increased cash flows from delays in uncollectible check processing.
D) all of the above are benefits from this arrangement.

Question 72

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

A) mail float.
B) processing float.
C) transit float.
D) disbursing float.

Question 73

The objectives of a zero balance account system for the firm include

A) reduce disbursing float.
B) achieve better control over its cash payments.
C) increase cash balances in regional rather than national banks.
D) all of the above are correct.

Question 74

Baker Coat Company is a national distributor of women's apparel.The company expects to receive 95,000 checks during the coming year totaling $78 million.A large bank has offered to install a lock-box system at a charge of $0.45 per processed check.If Baker Coat Company is able to earn 5 percent before tax on additional funds,what is the minimum amount of total float days that must be saved to make the system worthwhile?
Use a 365-day year.

Question 75

Crimson Plumbing Supplies expects total sales of $9,000,000 this year.Ten percent of the company's sales are paid in cash; credit sales are usually paid by check.The average check size is $3,000.Second National Bank is offering the company a lock-box system.The fees are $800 per month plus $.60 per check.Short-term marketable securities are currently earning 8 percent per year.What reduction in check collection time is necessary for Carrollton Plumbing Supplies to be neither better nor worse off from adopting the proposed system?
Use a 365-day year.

Question 76

One of the attractive features of commercial paper is an active secondary market.

Question 77

If current interest rates are low,and therefore expected to increase in the future,a firm wanting to reduce its interest rate risk would hold debt with longer maturities.

Question 78

Howton Mining expects to have credit sales of $8,000,000 this year.First National Bank is offering Howton Mining a lock-box system for $1,200 per month.Howton Mining estimates that the new lock-box system will reduce float by 4.5 days.What rate of return must Howton Mining earn on its marketable securities to make it worthwhile for the company to institute this lock-box system?
Use a 365-day year.

Question 79

A way of managing a firm's cash disbursements would be through

A) zero balance accounts.
B) accounts receivable factoring.
C) lockbox system.
D) floating lien.

Question 80

Fast Delivery Service has received a proposal from its bank to establish a lock-box system to accelerate the receipt of $600 million annually on 900,000 checks.By its own analysis Fast Delivery believes such a system would decrease total float by 3.5 days.If Fast Delivery Service can earn 7 percent before taxes on the released funds,what is the maximum that Fast Delivery Service should be willing to pay the bank per check for the service?
Use a 365-day year.