Deck 28: Advanced Issues in Cash Management and Inventory Control

Question 1

(The following information applies to the next problems.)
The Norris Company is trying to determine its optimal average cash balance. The firm has determined that it will need $5,000,000 net new cash during the coming year. The fixed transaction cost of converting securities to cash is
$50, and the firm earns 10 percent on its marketable securities investments.
According to the Baumol model, what should be Norris' average cash balance?

A) $35,356
B) $ 3,536
C) $22,157
D) $70,711
E) $42,918

Answer 1

A

Question 2

For some firms, holding highly liquid marketable securities is a substitute for holding cash because a marketable securities portfolio can accomplish the same objective as cash.

Answer 2

True

Question 3

Williams Company's optimal cash transfer amount, using the Baumol model, is $60,000. The firm's fixed cost per cash transfer of marketable securities to cash is $180, and the total cash needed for transactions annually is $960,000. In addition, the total estimated cash costs (transfers and carrying cost) for the firm, based on 16 transactions per year, are $5,760. On what opportunity cost of holding cash was this analysis based?

A) 19.2%
B) 10.4%
C) 6.3%
D) 12.1%
E) 9.6%

Answer 3

E

Question 4

If a company increases its safety stock, then its average inventory will go up.

Question 5

Thoroughbred Industries has been practicing cash management for some time by using the Baumol model for determining cash balances. Some time ago, the model called for an average balance (C*/2) of $500; at that time, the rate on marketable securities was 4 percent. A rapid increase in interest rates has driven the interest rate up to 9 percent. What is the appropriate average cash balance now?

A) $200
B) $333
C) $414
D) $500
E) $666

Question 6

Which of the following is true of the Baumol model? Note that the optimal cash transfer amount is C*?

A) If the fixed costs of selling securities or obtaining a loan (cost per transaction) increase by 20%, then C* will increase by 20%
B) If the total amount of cash needed during the year increases by 20%, then C* will increase by 20%.
C) If the average cash balance increases by 20%, then the total holding costs will increase by 20%.
D) If the average cash balance increases by 20% the total transactions costs will increase by 20%.
E) The optimal transfer amount is the same for all companies.

Question 7

The easier a firm's access to borrowed funds the higher its precautionary balances will be, in order to protect against sudden increases in interest rates.

Question 8

(The following information applies to the next problems.)
The Norris Company is trying to determine its optimal average cash balance. The firm has determined that it will need $5,000,000 net new cash during the coming year. The fixed transaction cost of converting securities to cash is
$50, and the firm earns 10 percent on its marketable securities investments.
According to the Baumol model, what is the optimal transaction size for transfers from marketable securities to cash?

A) $ 7,071
B) $ 38,357
C) $ 70,711
D) $102,956
E) $ 87,000

Question 9

(The following information applies to the next problems.)
Aberwald Corporation expects to order 126,000 memory chips for inventory during the coming year, and it will use this inventory at a constant rate. Fixed ordering costs are $200 per order; the purchase price per chip is $25; and the firm's inventory carrying costs is equal to 20 percent of the purchase price. (Assume a 360-day year.)
How many orders should Aberwald place during the year?

A) 12
B) 25
C) 30
D) 40

Question 10

The cash balances of most firms consist of transactions, compensating, precautionary, and speculative balances. We can produce a total desired cash balance by calculating the amount needed for each purpose and then summing them together.

Question 11

Which of the following would cause average inventory holdings to decrease, other things held constant?

A) Fixed order costs double.
B) The purchase price of inventory items decreases by 50 percent.
C) The carrying price of an item decreases (as a percent of purchase price).
D) The sales forecast is revised downward by 10 percent.
E) Interest rates fall.

Question 12

Once each year, B. Smith Inc. receives a $2 million payment. Of this amount, $700,000 is needed for cash payments made during the next year. Each time Smith deposits money in its account, a charge of $2.00 is assessed to cover clerical costs. If Smith can hold marketable securities which yield 5 percent, and then convert these securities to cash at a cost of only the $2 deposit charge, what is the total cost for one year of holding the minimum cost cash balance according to the Baumol model?

A) $7,483
B) $ 187
C) $3,741
D) $ 374
E) $ 748

Question 13

(The following information applies to the next problems.)
Aberwald Corporation expects to order 126,000 memory chips for inventory during the coming year, and it will use this inventory at a constant rate. Fixed ordering costs are $200 per order; the purchase price per chip is $25; and the firm's inventory carrying costs is equal to 20 percent of the purchase price. (Assume a 360-day year.)
What is the economic ordering quantity
For chips?

A) 12,088
B) 3,175
C) 6,243
D) 13,675
E) 8,124

Question 14

Suppose the Campus Bookstore purchases 50,000 boxes of writing tablets every year. Ordering costs are $100 per order and carrying costs are
$0)40 per box. Moreover, management has determined that the EOQ is 5,000 boxes. The vendor now offers a quantity discount of $0.20 per box if the company buys tablets in order sizes of 10,000 boxes. Determine the before-tax benefit or loss of accepting the quantity discount. (Assume the carrying cost remains at $0.40 per box whether or not the discount is taken.)

A) $1,000 loss
B) $1,000 benefit
C) $ 500 loss
D) $ 500 benefit
E) $ 0 (The change would not affect profits.)

Question 15

(The following information applies to the next problems.)
Aberwald Corporation expects to order 126,000 memory chips for inventory during the coming year, and it will use this inventory at a constant rate. Fixed ordering costs are $200 per order; the purchase price per chip is $25; and the firm's inventory carrying costs is equal to 20 percent of the purchase price. (Assume a 360-day year.)
If the lead time for placing an order is 5 days, and Aberwald holds a safety stock equal to a 30-day supply of chips, then at what inventory level should an order be placed?

A) 15,570
B) 3,175
C) 12,250
D) 13,675
E) 8,124

Question 16

Which of the following is true of the EOQ model? Note that the optimal order quantity, Q, will be called EOQ.

A) If the fixed per order cost increases by 20%, then EOQ will increase by 20%
B) If the annual sales, in units, increases by 20%, then EOQ will increase by 20%.
C) If the average inventory increases by 20%, then the total carrying costs will increase by 20%.
D) If the average inventory increases by 20% the total order costs will increase by 20%.
E) The EOC is the same for all comppanies.

Question 17

(The following information applies to the next problems.)
The Norris Company is trying to determine its optimal average cash balance. The firm has determined that it will need $5,000,000 net new cash during the coming year. The fixed transaction cost of converting securities to cash is
$50, and the firm earns 10 percent on its marketable securities investments.
What will be the total cost to Norris of maintaining the optimal average cash balance, as determined by the Baumol model?

A) $35,356
B) $ 7,071
C) $18,493
D) $70,711
E) $53,190

Question 18

(The following information applies to the next problems.)
Aberwald Corporation expects to order 126,000 memory chips for inventory during the coming year, and it will use this inventory at a constant rate. Fixed ordering costs are $200 per order; the purchase price per chip is $25; and the firm's inventory carrying costs is equal to 20 percent of the purchase price. (Assume a 360-day year.)
If Aberwald holds a safety stock equal to a 30-day supply of chips, what is its average inventory level?

A) 12,088
B) 3,175
C) 15,750
D) 13,675
E) 8,124

Question 19

If a company increases its safety stock, then its EOQ will go up.

Question 20

A just-in-time system is designed to stretch accounts payable as long as possible.