Question 1

Arshadi Wineries is considering the purchase of lockbox services from Bob's Bank. Currently, it
takes six days to collect funds from customers; this would be reduced by two days with the lockbox
system. The average number of payments received per day is 300 and the average cheque size is
$150. Bob's will charge 5¢ per cheque in return for operating the lockbox system. Assume one-year
T-bills yield 5%, and use a 360-day year.
Suppose one-year T-bills yield 6%. Should Arshadi Wineries purchase the system?

Accepted Answer

A)   Yes, because the NPV is $54,000.
B)   Yes, because the NPV is $28,000.
C)   Since the NPV is zero, the ﬁrm is indifferent.
D)   No, because the NPV is -$28,000.
E)   No, because the NPV is -$54,000.F) A) and C)
G) A) and B)

Question 2

The costs of holding too little cash are called:

Accepted Answer

A)   Carrying costs.
B)   Adjustment costs.
C)   Maintenance costs.
D)   Variable costs.
E)   Total costs.F) B) and D)
G) D) and E)

Question 3

The need to hold cash to take advantage of additional investment opportunities is called the:

Accepted Answer

A)   Speculative motive.
B)   Precautionary motive.
C)   Transaction motive.
D)   Float motive.
E)   Compensating balances motive.F) A) and B)
G) All of the above

Question 4

The Miller-Orr model assumes that:

Accepted Answer

A)   All cash ﬂows are constant.
B)   All cash ﬂows are known with certainty.
C)   The average change in the daily cash ﬂows is positive and continually increasing.
D)   Management sets the upper cash limit.
E)   All cash ﬂows ﬂuctuate randomly.F) C) and E)
G) B) and E)

Question 5

Which one of the following will decrease a ﬁrm's collection time?

Accepted Answer

A)   Encouraging customers to use debit cards rather than cheques.
B)   Having payments from all locations mailed directly to the head oﬃce rather than to local post oﬃce boxes.
C)   Recording payments to customer accounts before depositing the cheques.
D)   Using a bank in a remote location as your primary bank.
E)   Assigning a single employee to open the mail and prepare the deposits rather than using a team approach.F) C) and E)
G) A) and B)

Question 6

The Cherry Hill Furniture Company sets its initial cash balance at $30,000. This amount is evenly disbursed over a 14-day period. As soon as the account is depleted another $30,000 is deposited.
The costs of replenishing the account are $20 per transaction. The market rate of return is 8%. Use
A 365-day year.
What is the annual opportunity cost of the cash balance?

Accepted Answer

A)   $1,100
B)   $1,150
C)   $1,167
D)   $1,200
E)   $1,250F) B) and E)
G) B) and D)

Question 7

Maverick Unlimited receives an average of 120 cheques a day. The average cheque amount is $40. The delay in processing and clearing averages 2 days and the daily applicable interest rate is .02%.
What is the highest daily fee the ﬁrm should pay to completely eliminate its ﬂoat?

Accepted Answer

A)   $1.18
B)   $1.36
C)   $1.54
D)   $1.87
E)   $1.92F) D) and E)
G) A) and D)

Question 8

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

Accepted Answer

A) True 
 B)False

Question 9

Which of the following is the best deﬁnition of adjustment costs?

Accepted Answer

A)   The costs associated with holding too little cash.
B)   An automated teller machine card used at the point of purchase to avoid the use of cash. As this is not a credit card, money must be available in the user's bank account.
C)   A chequing account in which a zero balance is maintained by transfers of funds from a master account in an amount only large enough to cover cheques presented.
D)   The need to hold cash to satisfy normal disbursement and collection activities associated with a ﬁrm's ongoing operations
E)   A ﬁrm's desired cash level as determined by the trade-off between carrying costs and shortage costs.F) B) and C)
G) A) and E)

Question 10

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

Accepted Answer

A) True 
 B)False

Question 11

Which one of the following statements is correct?

Accepted Answer

A)   Short-term assets that trade in the money market account mature in two years or less.
B)   Banks forbid the transfer of excess funds from a chequing account into an investment account on a daily basis.
C)   Firms sometimes create a temporary cash surplus because they are saving funds for a major expenditure.
D)   Cyclical ﬁrms increase their long-term ﬁnancing such that they continually have a cash surplus.
E)   Corporations are not permitted to use money market mutual funds but can use bank money market accounts.F) None of the above
G) B) and D)

Question 12

Explain how zero balance accounts work in conjunction with a master account.

Accepted Answer

Zero balance accounts are used for disbu...

Question 13

The ﬁrm's desired cash level as determined by the tradeoff between carrying costs and shortage costs is called its:

Accepted Answer

A)   Target cash balance.
B)   Adjustment costs.
C)   Variable costs.
D)   Total costs.
E)   Compensating balance.F) A) and D)
G) None of the above

Question 14

The target cash balance is deﬁned as the cash level that:

Accepted Answer

A)   Equals the average transaction needs of the ﬁrm.
B)   Equals the average transaction, precaution, and compensating balance needs of a ﬁrm.
C)   Maximizes the disbursement ﬂoat and minimizes the collection ﬂoat.
D)   Eliminates any ﬂoat caused by availability delays.
E)   Equalizes the opportunity costs and the trading costs of holding cash.F) B) and C)
G) B) and D)

Question 15

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

Accepted Answer

A) True 
 B)False

Question 16

Duo, Inc. deals strictly with two customers. The average amount each customer pays per month along with the collection delay associated with each payment is shown below. Given this
Information, what is the amount of the average daily receipts? Assume that every month has 30
Days.

Accepted Answer

A)   $1,833.33
B)   $4,583.33
C)   $11,500.00
D)   $22,000.00
E)   $27,500.00F) A) and E)
G) None of the above

Question 17

Provide a deﬁnition for transaction motive.

Accepted Answer

The need to hold cash to satis...

Question 18

Arshadi Wineries is considering the purchase of lockbox services from Bob's Bank. Currently, it
takes six days to collect funds from customers; this would be reduced by two days with the lockbox
system. The average number of payments received per day is 300 and the average cheque size is
$150. Bob's will charge 5¢ per cheque in return for operating the lockbox system. Assume one-year
T-bills yield 5%, and use a 360-day year.
What is the maximum acceptable cost per cheque that Arshadi Wineries could pay and still ﬁnd the
System acceptable?

Accepted Answer

A)   2.5¢
B)   3.0¢
C)   3.5¢
D)   4.0¢
E)   4.5¢F) A) and E)
G) B) and E)

Question 19

Which of the following is the best deﬁnition of zero-balance account?

Accepted Answer

A)   The costs associated with holding too little cash.
B)   An automated teller machine card used at the point of purchase to avoid the use of cash. As this is not a credit card, money must be available in the user's bank account.
C)   A chequing account in which a zero balance is maintained by transfers of funds from a master account in an amount only large enough to cover cheques presented.
D)   The need to hold cash to satisfy normal disbursement and collection activities associated with a ﬁrm's ongoing operations
E)   A ﬁrm's desired cash level as determined by the trade-off between carrying costs and shortage costs.F) B) and E)
G) A) and D)

Question 20

A ﬁrm ﬁnds that its customer base is growing in geographical terms and needs to reduce its ﬂoat by obtaining cheques from receiving locations near the customers, rather than having them send their
Cheques directly to the ﬁrm's main oﬃce. This setup is called (a) :

Accepted Answer

A)   Lockbox arrangement.
B)   Wire transfer arrangement.
C)   Cash concentration.
D)   Overnight mail.
E)   Compensating balance.F) B) and C)
G) A) and C)

Exam 19: Cash and Liquidity Management

Provide a deﬁnition for transaction motive.

Correct Answer
verified
The need to hold cash to satis...
View Answer

Correct Answer
verified

Explain how zero balance accounts work in conjunction with a master account.

Correct Answer
verified
Zero balance accounts are used for disbu...
View Answer

The Miller-Orr model assumes that:

Correct Answer
verified

Which of the following is the best deﬁnition of zero-balance account?

Correct Answer
verified

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

Correct Answer
verified

The costs of holding too little cash are called:

Correct Answer
verified

Correct Answer
verified

Which one of the following will decrease a ﬁrm's collection time?

Correct Answer
verified

Maverick Unlimited receives an average of 120 cheques a day. The average cheque amount is $40. The delay in processing and clearing averages 2 days and the daily applicable interest rate is .02%. What is the highest daily fee the ﬁrm should pay to completely eliminate its ﬂoat?

Correct Answer
verified

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

Correct Answer
verified

A ﬁrm ﬁnds that its customer base is growing in geographical terms and needs to reduce its ﬂoat by obtaining cheques from receiving locations near the customers, rather than having them send their Cheques directly to the ﬁrm's main oﬃce. This setup is called (a) :

Correct Answer
verified

The ﬁrm's desired cash level as determined by the tradeoff between carrying costs and shortage costs is called its:

Correct Answer
verified

Which one of the following statements is correct?

Correct Answer
verified

The target cash balance is deﬁned as the cash level that:

Correct Answer
verified

Correct Answer
verified

Which of the following is the best deﬁnition of adjustment costs?

Correct Answer
verified

Duo, Inc. deals strictly with two customers. The average amount each customer pays per month along with the collection delay associated with each payment is shown below. Given this Information, what is the amount of the average daily receipts? Assume that every month has 30 Days.

Correct Answer
verified

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

Correct Answer
verified

The need to hold cash to take advantage of additional investment opportunities is called the:

Correct Answer
verified

Exam 19: Cash and Liquidity Management

Provide a deﬁnition for transaction motive.

Correct AnswerverifiedThe need to hold cash to satis...View AnswerShow Answer

Correct AnswerverifiedShow Answer

Explain how zero balance accounts work in conjunction with a master account.

Correct AnswerverifiedZero balance accounts are used for disbu...View AnswerShow Answer

The Miller-Orr model assumes that:

Correct AnswerverifiedShow Answer

Which of the following is the best deﬁnition of zero-balance account?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

The costs of holding too little cash are called:

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which one of the following will decrease a ﬁrm's collection time?

Correct AnswerverifiedShow Answer

Maverick Unlimited receives an average of 120 cheques a day. The average cheque amount is $40. The delay in processing and clearing averages 2 days and the daily applicable interest rate is .02%. What is the highest daily fee the ﬁrm should pay to completely eliminate its ﬂoat?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

A ﬁrm ﬁnds that its customer base is growing in geographical terms and needs to reduce its ﬂoat by obtaining cheques from receiving locations near the customers, rather than having them send their Cheques directly to the ﬁrm's main oﬃce. This setup is called (a) :

Correct AnswerverifiedShow Answer

The ﬁrm's desired cash level as determined by the tradeoff between carrying costs and shortage costs is called its:

Correct AnswerverifiedShow Answer

Which one of the following statements is correct?

Correct AnswerverifiedShow Answer

The target cash balance is deﬁned as the cash level that:

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following is the best deﬁnition of adjustment costs?

Correct AnswerverifiedShow Answer

Duo, Inc. deals strictly with two customers. The average amount each customer pays per month along with the collection delay associated with each payment is shown below. Given this Information, what is the amount of the average daily receipts? Assume that every month has 30 Days.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

The need to hold cash to take advantage of additional investment opportunities is called the:

Correct AnswerverifiedShow Answer

Correct Answer
verified
The need to hold cash to satis...
View Answer

Correct Answer
verified

Correct Answer
verified
Zero balance accounts are used for disbu...
View Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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