New Charter University

BUISNESS BA521

Chapter 19 Cash and Liquidity Management

Multiple Choice Questions

1)Yesterday, the president of RB Enterprises received a phone call from DLK, a competitor. DLK is a sole proprietorship. An unexpected family situation has caused the owner to suddenly want to retire and relocate closer to his family. Thus, the assets of DLK are being offered to RB Enterprises at a bargain basement price. While RB Enterprises had not anticipated purchasing these assets, it was decided that the opportunity was too good to pass up. This illustrates which of the following needs to hold cash?

1. 1. precautionary
   2. transaction
   3. speculative
   4. compensation
   5. float

2. GT Motors regularly issues short-term debt to finance its daily operations. Suddenly, the credit markets froze and no funds were available for borrowing. Fortunately, the firm had some cash reserves saved that it was able to use to fund its operations until additional credit was available. The need to retain cash for situations such as this is referred to as which one of the following motives for holding cash?
   1. speculative
   2. float
   3. compensating
   4. precautionary
   5. transaction

3. The cash found in a cash drawer that a check-out clerk uses to make change is an example of which of the following motives for holding cash?
   1. speculative
   2. daily float
   3. compensating balance
   4. precautionary
   5. transaction

4. Float is defined as the:
   1. amount of cash a firm can immediately withdraw from its bank account.
   2. difference between book cash and bank cash.
   3. change in a firm's cash balance from one accounting period to the next.
   4. amount of cash a firm has on hand.
   5. cash balance according to a firm's records.

5. A lockbox is a:
   1. special safe used by a firm for overnight storage of any cash or undeposited checks.
   2. special safe used by a firm that can only be opened at prespecified times of the day.
   3. box located in a bank's vault that is rented by a firm and used to hold unprocessed checks.
   4. special post office box which can only be opened by prespecified postal inspectors for direct delivery to the addressee.
   5. post office box strategically located so that a firm's receivables can be collected faster.

6. The Presque Isle Center has branch operations in three states. Each branch deals with a local bank. However, all excess funds in these branch bank accounts are transferred on a daily basis to the firm's primary bank located near the firm's home office. This routine of transferring cash to the primary bank on a regular basis is referred to as:
   1. cash concentration.
   2. strategic cash disbursement.
   3. transfer flotation.
   4. payables management.
   5. float management.

7. An account into which funds are deposited only in an amount equal to the value of the checks presented for payment that day is called a                          account.
   1. lockbox
   2. concentration
   3. zero-balance
   4. compensating balance
   5. revolving

8. An account into which a firm transfers funds, usually from a master account, in an amount sufficient to cover the checks presented for payment that day is called a                                                    account.
   1. lockbox
   2. cleanup
   3. compensating balance
   4. revolving
   5. controlled disbursement

9. The Snow Hut has analyzed the carrying and shortage costs associated with its cash holdings and determined that the firm should ideally maintain a cash balance of $3,600. This $3,600 represents which one of the following to the firm?
   1. target cash balance
   2. concentration balance
   3. available balance
   4. selected cash amount
   5. compensating balance

10. Adjustment costs is another name for which one of the following?
    1. borrowing costs
    2. shortage costs
    3. cash transfer costs
    4. cash wire costs
    5. excess cash costs

11. Why do firms need liquidity?

1. to meet compensating balance requirements
2. to take advantage of an opportunity that suddenly arises
3. to conduct daily business activities
4. to be prepared for a financial emergency

1. I and II only
2. III and IV only
3. I, III, and IV only
4. II, III, and IV only
5. I, II, III, and IV

12. Cash management primarily involves:
    1. optimizing a firm's collections and disbursements of cash.
    2. maximizing the income a firm earns on its cash reserves.
    3. reconciling a firm's book balance with its bank balance.
    4. determining the optimal level of liquidity a firm should maintain.
    5. determining the best method of raising capital.

13. Disbursements float:
    1. occurs when a deposit is recorded but the funds are unavailable.
    2. causes the book balance to exceed the bank balance.
    3. has tended to increase since the enactment of the Check Clearing Act for the 21^st Century.
    4. is a recommended source of funds for short-term investments.
    5. is eliminated when payments are made electronically.

14. Collection float:
    1. is more desirable to firms than disbursement float.
    2. is totally eliminated by the installation of a lockbox system.
    3. exists when a firm's available balance exceeds its book balance.
    4. can be avoided by collecting payments electronically at the time of sale.
    5. is eliminated by implementing a concentration banking system.

15. Which one of the following statements is correct?
    1. Net float decreases every time a firm issues a check to pay one of its suppliers.
    2. A positive net float indicates that collection float exceeds disbursements float.
    3. Firms prefer a zero net float over a positive net float.
    4. Net float is equal to collection float minus disbursement float.
    5. Net float is equal to a firm's available balance minus its book balance.

16. Check kiting is:
    1. used by most firms as an ethical means of handling its cash reserves.
    2. the process of withdrawing all funds from a bank account as soon as the funds are available.
    3. the central core of a good cash management system.
    4. using uncollected cash to invest in short-term, liquid assets.
    5. increasingly popular due to recent banking law changes.

17. Which of the following will reduce collection time?

1. billing customers electronically rather than by mail
2. accepting debit cards but not checks as payment for a sale
3. offering cash discounts for early payment
4. reducing the processing delay by one day

1. I and II only
2. I and III only
3. I, II, and III only
4. II, III, and IV only
5. I, II, III, and IV

18. Which of the following should help reduce the total collection time for a firm?

1. opening a post office box so mail can be received earlier in the morning
2. assigning additional staff in the morning to process incoming payments
3. providing a discount for customers who pay electronically
4. establishing preauthorized payments from customers

1. I and II only
2. III and IV only
3. II, III, and IV only
4. I, II, and IV only
5. I, II, III, and IV

19. Which one of the following collection times is correctly described?
    1. The processing delay starts when a firm mails out a billing statement and ends when the payment is received from a customer.
    2. Mailing time begins when a firm mails out a billing statement and ends when the payment is received.
    3. Collection time begins when a firm mails out a billing statement and ends when the cash payment for that billing is available to the firm.
    4. Availability delay begins when a firm deposits a customer's check into its bank account and ends when the cash from that payment is available to the firm.
    5. Processing delay begins when a firm mails out billing statements and ends when the firm deposits the payment for that statement into its bank account.

20. A lockbox system:
    1. entails the use of a bank which is centrally located to collect payments on a nationwide basis.
    2. is designed to deposit a customer's check into the firm's bank account prior to recording the receipt of that check to a customer's account.
    3. is used to reduce the disbursement float of a firm.
    4. is efficient regardless of the locations selected for lockbox destinations.
    5. automatically records payments to a customer's account when the customer's check is received at the lockbox location.

21. Lockboxes:
    1. should be geographically located close to a firm's primary customers.
    2. should be located in remote locations to increase the net disbursement float.
    3. offer no additional benefit to a firm now that the Check Clearing Act for the 21^st Century has been enacted.
    4. tend to be negative net present value projects for firms with a large number of sizeable transactions.
    5. tend to also be used as concentration accounts.

22. Cash concentration accounts:
    1. tend to increase the funds available for short-term investing.
    2. tend to increase the complexity of a firm's cash management system.
    3. that utilize wire transfers rather than automated clearing house transfers are less expensive to maintain.
    4. receive checks directly from all of a firm's customers.
    5. are all zero-balance accounts.

23. Which one of the following statements is correct?
    1. Funds received via automated clearinghouse transfers are available that day.
    2. A depository transfer check is the most costly means of transferring funds into a cash concentration account.
    3. The means selected to transfer funds into a concentration account depends primarily upon the size of the transfers.
    4. Concentration accounts are used to transfer funds to lockbox locations as needed.
    5. The most expedient means of transferring funds into a concentration account is a wire transfer.

24. A cash concentration account:
    1. is frequently used as a source of funds for short-term investments.
    2. cannot be used to cover a compensating balance requirement.
    3. cannot be used to transfer funds into zero-balance accounts.
    4. is generally the only bank account a firm needs to efficiently manage its cash.
    5. is another name for a controlled disbursement account.

25. The main purpose of a cash concentration account is to:
    1. decrease collection float.
    2. decrease disbursement float.
    3. consolidate funds.
    4. replace a lockbox system.
    5. cover compensating balance requirements.

26. Which one of the following statements is correct concerning a cash management system that employs both lockboxes and a concentration bank account?
    1. All customer payments must be submitted to a lockbox.
    2. The party which collects the checks from the lockbox is responsible for recording the payment on the customer's account.
    3. Payments received in a lockbox are transferred immediately to the concentration account.
    4. The firm's cash manager determines how the funds in the concentration account are disbursed.
    5. The concentration account must be zeroed out on a daily basis.

27. A zero-balance account:
    1. is used to cover the compensating balance requirement of a line of credit agreement.
    2. is only used to deposit funds received at local lockboxes.
    3. is funded on an as-needed basis only.
    4. is limited to handling payroll disbursements.
    5. requires a compensating balance.

28. Which one of the following statements is correct concerning zero-balance accounts?
    1. Each zero-balance account is offset by a compensating balance account.
    2. Zero-balance accounts are used for depositing incoming funds.
    3. A master account must be used in conjunction with a zero-balance account.
    4. Zero-balance accounts are used solely in conjunction with a lockbox system.
    5. Zero-balance accounts are still required to maintain a minimal balance.

29. Which one of the following statements is correct?
    1. The money market refers to securities that mature in two years or less.
    2. Banks are prohibited from investing cash surpluses on behalf of their customers on a short- term basis.
    3. Short-term securities tend to have a high degree of interest rate risk.
    4. A cyclical firm may purchase marketable securities as part of its short-term financing plan.
    5. Corporations are not permitted to invest in money market mutual funds but can invest in bank money market accounts.

30. Which two of the following are the primary reasons why firms temporarily accumulate large cash surpluses?

1. cyclical activities
2. desire to invest funds
3. daily operations
4. fixed asset purchases

1. I and III only
2. II and IV only
3. I and II only
4. III and IV only
5. I and IV only

31. Which one of the following statements is correct?
    1. Money market accounts are low-risk, high-return investments.
    2. The rate of return earned on short-term securities tends to exceed that earned on long-term securities.
    3. U.S. Treasury bills are well suited for short-term investments.
    4. The income earned on U.S. Treasury bills is exempt from all taxation.
    5. Short-term investments tend to have high levels of default risk.

32. Municipal bonds:
    1. are less liquid than U.S. Treasury bills.
    2. produce income that is subject to federal income taxation.
    3. generally pay a higher coupon than corporate bonds.
    4. are also referred to as commercial paper.
    5. are issued by the federal government.

33. Money market securities have which of the following characteristics?

1. long maturities
2. low default risk
3. high degree of liquidity
4. low rates of return

1. I and III only
2. II and III only
3. I and IV only
4. II, III, and IV only
5. I, II, III, and IV

34. A jumbo CD:
    1. is issued by the federal government.
    2. generally matures between 2 and 5 years.
    3. is a loan of $100,000 or more to a municipality.
    4. is a loan of $1 million or more on a short-term basis.
    5. is a short-term loan of $100,000 or more to a commercial bank.

35. Brown Trucking is buying a U.S. Treasury bill today with the understanding that the seller will buy it back tomorrow at a slightly higher price. This investment is known as a:
    1. commercial paper transaction.
    2. repurchase agreement.
    3. private certificate of deposit.
    4. revenue anticipation note.
    5. bill anticipation note.

36. A repurchase agreement generally has a maximum life of:
    1. 1 day.
    2. a few days.
    3. one month.
    4. one to three months.
    5. three to six months.

37. A money market preferred stock:
    1. has a floating dividend.
    2. is sold only under a repurchase agreement.
    3. is a special form of commercial paper.
    4. has more price volatility than an ordinary preferred.
    5. has its interest rate reset daily.

38. Which of the following costs related to holding cash are minimized when the level of cash a firm holds is optimized?
    1. opportunity costs
    2. trading costs
    3. total costs
    4. both trading and opportunity costs
    5. trading costs, opportunity costs, and total costs

39. Which of the following statements related to the BAT model is correct?

1. The BAT model is used to determine the target cash balance for a firm.
2. The BAT model is rarely used in business due to its complex nature.
3. The BAT model is a model that helps eliminate a firm's collection float.
4. One disadvantage of the BAT model is the fact that it assumes all cash outflows are known with certainty.

1. I and II only
2. III and IV only
3. II and III only
4. I and III only
5. I and IV only

40. Which of the following variables are included in the BAT model?

1. upper cash limit
2. interest rate on marketable securities
3. opportunity cost of holding cash
4. fixed cost of each securities trade

1. II only
2. I and III only
3. II and IV only
4. II, III, and IV only
5. I, III, and IV only

41. The BAT model is used to:
    1. maximize the benefits of leverage.
    2. determine the optimal cash position of a firm.
    3. eliminate all daily cash surpluses.
    4. analyze the cash balance given fluctuating cash inflows and outflows.
    5. maximize the opportunity costs of holding cash.

42. The Miller-Orr model assumes that:
    1. the cash balance is depleted at regular intervals.
    2. all cash flows are known with certainty.
    3. the average change in the daily cash flows is positive.
    4. management will set both the lower and the upper desired levels of cash.
    5. the cash balance fluctuates in a random manner.

43. The Miller-Orr model:
    1. recommends selling securities in an amount equal to (U* - C) when the cash balance reaches L.
    2. requires that marketable securities be sold whenever the cash balance falls below the target level.
    3. bases the optimal level of cash solely on the opportunity costs of holding cash.
    4. supports the argument that the target cash balance declines as order costs increase.
    5. advocates investing an amount described as (U* - C) in marketable securities when the cash balance reaches U*.

44. Which of the following statements is correct?
    1. A firm has a greater likelihood of needing an unexpected loan when its cash flows are relatively constant over time.
    2. The cost of borrowing affects the target cash balance of a firm.
    3. Management's desire to maintain a low cash balance has no effect on the borrowing needs of a firm.
    4. The target cash balance increases as the interest rate rises.
    5. The target cash balance decreases as the order costs increase.

45. The Hobby Shop has a checking account with a ledger balance of $692. The firm has $1,063 in uncollected deposits and $846 in outstanding checks. What is the amount of the disbursement float on this account?
    1. $0

B. $217

C. $846

D. $909

E. $1,063

46. On an average day, Plastics Enterprises writes 42 checks with an average amount of $587. These checks clear the bank in an average of 2 days. What is the average amount of the disbursement float?

A. $1,174

B. $5,805

C. $24,654

D. $49,308

E. $73,962

47. On average, your firm receives 62 checks a day from customers. These checks, on average, are worth

$39.90 each and clear the bank in 1.5 days. In addition, your firm disburses 38 checks a day with an average amount of $89.50. These checks clear your bank in 2 days. What is the average amount of the collection float?

A. $2,473.80

B. $3,401.00

C. $3,710.70

D. $5,101.50

E. $6,802.00

48. When Chris balanced her business checkbook, she had an adjusted bank balance of $11,418. She had 2 outstanding deposits worth $879 each and 11 checks outstanding with a total value of $3,648. What is the amount of the collection float on this account?

A. -$1,890

B. $1,758

C. $3,648

D. $5,406

E. $6,012

49. Your company has an available balance of $7,911. A deposit of $2,480 that was made this morning is not yet included in the bank's balance. There are also 4 checks outstanding with a value of $325 each. What is the net float?
    1. net collection float of $1,180
    2. net collection float of $2,480
    3. net float of $6,731
    4. net disbursement float of $1,300
    5. net disbursement float of $2,480

50. A firm has $16,718 in outstanding checks that have not cleared the bank. The firm also has $13,450 in deposits that have been recorded by the firm but not by the bank. The current available balance is $11,407. What is the status of the net float?
    1. net collection float of $8,138
    2. net collection float of $2,043
    3. net collection float of $13,450
    4. net disbursement float of $3,268
    5. net disbursement float of $5,311

51. 
    Your firm generally receives 4 checks a month. The check amounts and the collection delay for each check is shown below. Given this information what is the amount of the average daily float? Assume a 30 day month.

A. $1,070

B. $2,333

C. $2,640

D. $2,900

E. $3,416

52. 
    Hoyes Lumber generally receives 3 checks a month. The check amounts and the collection delay for each check are shown below. Given this information, what is the amount of the average daily float? Assume each month has 30 days.

A. $1,386.67

B. $1,407.19

C. $4,750.00

D. $6,833.33

E. $6,933.33

53. 
    The Blue Star generally receives only 3 checks a month. The check amounts and the collection delay for each check are shown below. Given this information, what is the amount of the average daily float? Assume every month has 30 days.

A. $971.43

B. $1,456.67

C. $3,351.33

D. $5,666.67

E. $6,800.00

54. 
    The Food Wholesaler generally receives 4 checks a month. The check amounts and the collection delay for each check are shown below. Given this information, what is the amount of the average daily float? Assume every month has 30 days.

A. $3,963.89

B. $21,750.00

C. $22,236.67

D. $28,133.33

E. $35,675.00

55. Hot Tub Builders sells to three retail outlets. Each retailer pays once a month in the amounts shown below. The collection delay associated with each payment is also given below. What is the amount of the average daily receipts if you assume each month has 30 days?

A. $2,389.70

B. $8,190.00

C. $14,608.13

D. $23,896.97

E. $81,900.00

56. Atlas Builders deals strictly with five 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 every month has 30 days.

A. $1,143.33

B. $2,546.67

C. $2,983.33

D. $6,166.67

E. $6,860.00

57. National Exporters 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.

A. $2,653.33

B. $3,006.33

C. $5,306.67

D. $7,811.67

E. $8,600.00

58. Cross Country Trucking provides transportation services exclusively for four 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 weighted average delay? Assume each month has 30 days.

1. 1. 2.11 days
   2. 2.27 days
   3. 2.46 days
   4. 2.50 days
   5. 2.78 days

59. 
    High Brow Express 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 weighted average delay? Assume that every month has 30 days.
    1. 1.79 days
    2. 1.84 days
    3. 2.00 days
    4. 2.07 days
    5. 2.16 days

60. The Metallurgical Specialty Co. deals strictly with four 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 weighted average delay? Assume each month has 30 days.

1. 1. 1.98 days
   2. 2.04 days
   3. 2.09 days
   4. 2.16 days
   5. 2.23 days

61. On an average day, Goose Down Feathers receives $2,400 in checks from customers. These checks clear the bank in an average of 1.7 days. The applicable daily interest rate is 0.04 percent. What is the present value of the float? Assume each month has 30 days.

A. $115.20

B. $618.40

C. $2,400.00

D. $4,080.00

E. $4,256.50

62. On an average day, Town Center Hardware receives $2,420 in checks from customers. These checks clear the bank in an average of 2.1 days. The applicable daily interest rate is 0.025 percent. What is the maximum amount this store should pay to completely eliminate its collection float? Assume each month has 30 days.

A. $1,152.38

B. $1,288.15

C. $2,109.16

D. $4,637.33

E. $5,082.00

63. On an average day, your firm receives $11,800 in checks from customers. These checks clear the bank in an average of 2.1 days. The applicable daily interest rate is 0.015 percent. What is the highest daily fee your firm should pay to completely eliminate the collection float? Assume each month has 30 days.

A. $3.42

B. $3.72

C. $17.78

D. $34.18

E. $37.20

64. On an average day, Wilson & Wilson receives $7,800 in checks from customers. These checks clear the bank in an average of 1.7 days. The applicable daily interest rate is 0.022 percent. What is the highest daily fee this firm should pay to completely eliminate its collection float? Assume each month has 30 days. A. $1.72

B. $2.92

C. $17.20

D. $24.30

E. $29.17

65. Your average customer is located 4.3 mailing days away from your firm. You have determined that, on average, it is taking your staff 1.5 days to process payments received from customers. In addition, it takes an average of 2.2 days for your funds to be available for use once you have made your bank deposit. What is your firm's collection time?
    1. 2.2 days
    2. 3.7 days
    3. 4.3 days
    4. 5.8 days
    5. 8.0 days

66. It takes your firm 4.5 days to prepare and mail out all the monthly statements to your customers. On average, the mail time between your firm and your customers is 2.6 days. Customer checks take an average of 1.8 days to clear the bank. You have determined that your total average collection time is 6.1 days. How long, on average, does it take your firm to process the payments from customers?
    1. 1.7 days
    2. 2.6 days
    3. 4.4 days
    4. 4.8 days
    5. 6.2 days

67. Currently, your firm requires 2 days to process the checks which customers mail in to pay for their credit purchases. The average mail time associated with these payments is 2.3 days and the check clearing time is 2.1 days. If your firm adopts a lockbox system, the mail time will be cut in half. In addition, if employees are reassigned, checks could be processed the same day they are received. How long will your collection time be if both the lockbox system and the job reassignments are implemented?
    1. 3.85 days
    2. 4.10 days
    3. 4.25 days
    4. 4.40 days
    5. 4.55 days

68. You are considering implementing a lockbox system for your firm. The system is expected to reduce the average collection time by 1.2 days. On an average day, your firm receives 320 checks with an average value of $99 each. The daily interest rate on Treasury bills is 0.014 percent. What is the anticipated amount of the daily savings if this system is implemented?

A. $2.61

B. $3.29

C. $4.45

D. $5.32

E. $5.78

69. Roger's Distributors receives an average of 216 checks a day. The average amount per check is $629. The firm is considering a lockbox system which it anticipates will reduce the average collection time by 1.5 days. The daily interest rate on Treasury bills is 0.011 percent. What is the amount of the expected daily savings of the lockbox system?

A. $2.04

B. $6.92

C. $14.95

D. $18.10

E. $22.42

70. Hand Tools, Inc. receives an average of 611 checks a day. The average amount per check is $425. The firm is considering a lockbox system which it anticipates will reduce the average collection time by 1 day. The bank charges $0.275 a check for this service. The daily interest rate on Treasury bills is 0.013 percent. What is the average daily cost of the lockbox system?

A. $31.16

B. $54.19

C. $168.03

D. $180.11

E. $199.19

71. You are considering implementing a lockbox system for your firm. The system is expected to reduce the average collection time by 1.3 days. On an average day, your firm receives 136 checks with an average value of $219 each. The daily interest rate on Treasury bills is 0.021 percent. The bank charge per check is

$0.22. What is the anticipated daily cost of the lockbox system? A. $3.48

B. $6.25

C. $12.60

D. $29.92

E. $36.17

72. You are considering implementing a lockbox system for your firm. The system is expected to reduce the average collection time by 2.8 days. On an average day, your firm receives 2,419 checks with an average value of $1,287 each. The daily interest rate on Treasury bills is 0.016 percent. The bank charge per check is

$0.30. What is the net present value of this lockbox arrangement? A. -$4,535,625

B. -$2,611,575

C. $187,419

D. $4,181,483

E. $13,252,733

73. Rosewell International receives an average of 268 checks a day with an average amount per check of

$820. The firm is considering a lockbox system which it anticipates will reduce the average collection time by 1.4 days. The bank charges $0.21 a check for this service. The daily interest rate on Treasury bills is 0.02 percent. What is the net present value of this lockbox arrangement?

A. -$61,640

B. -$26,264,

C. $26,264

D. $30,820

E. $61,640

74. The Eliot Co. needs $185,000 a week to pay bills. The standard deviation of the weekly disbursements is $17,600. The firm has established a lower cash balance limit of $75,000. The applicable interest rate is 5.5 percent and the fixed cost of transferring funds is $47. Based on the BAT model, what is the optimal initial cash balance?

A. $90,668

B. $97,515

C. $104,141

D. $128,224

E. $136,509

75. Theo's Bar & Grill needs $147,000 a week to pay bills. The standard deviation of the weekly disbursements is $9,600. The firm has established a lower cash balance limit of $40,000. The applicable interest rate is 3.5 percent and the fixed cost of transferring funds is $45. Based on the BAT model, what is the optimal average cash balance?

A. $36,199

B. $49,568

C. $70,100

D. $99,136

E. $112,400

76. Parkway Express needs $318,000 a week to pay bills. The standard deviation of the weekly disbursements is $31,000. The firm has established a lower cash balance limit of $60,000. The applicable interest rate is 4.5 percent and the fixed cost of transferring funds is $65. Based on the BAT model, what is the opportunity cost of holding cash?

A. $3,873

B. $4,918

C. $5,207

D. $109,283

E. $110,440

77. Penco Supply spends $428,000 a week to pay bills and maintains a lower cash balance limit of

$75,000. The standard deviation of its disbursements is $18,900. The applicable interest rate is 5 percent and the fixed cost of transferring funds is $65. What is the firm's optimal initial cash balance based on the BAT model?

A. $150,600

B. $158,929

C. $170,096

D. $221,506

E. $240,553

78. Your firm spends $54,000 a week to pay bills and maintains a lower cash balance limit of $45,000. The standard deviation of your disbursements is $12,100. The applicable interest rate is 4.5 percent and the fixed cost of transferring funds is $55. What is your opportunity cost of holding cash based on the BAT model?

A. $1,318

B. $1,864

C. $2,204

D. $2,311

E. $3,709

79. Rosie O'Grady's spends $98,000 a week to pay bills and maintains a lower cash balance limit of

$95,000. The standard deviation of the disbursements is $14,600. The applicable interest rate is 4.8 percent and the fixed cost of transferring funds is $50. What is this firm's total cost of holding cash based on the BAT model?

A. $1,431

B. $2,862

C. $3,034

D. $4,912

E. $4,946

80. Your firm spends $346,000 a week to pay bills and maintains a lower cash balance limit of

$150,000. The standard deviation of your disbursements is $28,700. The applicable interest rate is 5 percent and the fixed cost of transferring funds is $60. What is your optimal average cash balance based on the BAT model?

A. $103,900

B. $146,500

C. $182,200

D. $207,800

E. $249,900

81. The Cow Pie Spreader Co. spends $214,000 a week to pay bills and maintains a lower cash balance limit of $175,000. The standard deviation of the disbursements is $16,000. The applicable weekly interest rate is 0.025 percent and the fixed cost of transferring funds is $49. What is the firm's cash balance target based on the Miller-Orr model?

A. $208,511

B. $247,560

C. $251,006

D. $254,545

E. $258,878

82. The Blue Moon Hotel and Spa spends $359,000 a week to pay bills and maintains a lower cash balance limit of $250,000. The standard deviation of the disbursements is $46,800. The applicable weekly interest rate is 0.045 percent and the fixed cost of transferring funds is $60. What is the hotel's optimal upper cash limit based on the Miller-Orr model?

A. $430,836

B. $447,905

C. $528,700

D. $739,459

E. $861,672

83. Donaldson, Inc. spends $94,000 a week to pay bills and maintains a lower cash balance limit of

$50,000. The standard deviation of the disbursements is $13,000. The applicable weekly interest rate is 0.045 percent and the fixed cost of transferring funds is $52. What is your optimal average cash balance based on the Miller-Orr model?

A. $78,778

B. $82,623

C. $231,969

D. $236,334

E. $247,868

84. The Burger Stop spends $52,000 a week to pay bills and maintains a lower cash balance limit of

$60,000. The standard deviation of the disbursements is $7,500. The applicable weekly interest rate is 0.04 percent and the fixed cost of transferring funds is $50. What is your optimal average cash balance based on the Miller-Orr model?

A. $79,116

B. $83,208

C. $110,315

D. $237,348

E. $249,624

85. Your firm spends $48,000 a week to pay bills and maintains a lower cash balance limit of $50,000. The standard deviation of the disbursements is $8,600. The applicable weekly interest rate is 0.054 percent and the fixed cost of transferring funds is $65. What is your cash balance target based on the Miller-Orr model?

A. $48,156

B. $49,990

C. $54,884

D. $68,830

E. $75,726

86. Travel Inn Express spends $109,000 a week to pay bills and maintains a lower cash balance limit of

$125,000. The standard deviation of the disbursements is $14,400. The applicable weekly interest rate is

0.039 percent and the fixed cost of transferring funds is $58. What is the inn's cash balance target based on the Miller-Orr model?

A. $28,492

B. $31,359

C. $153,492

D. $156,359

E. $225,417

87. Explain how a lockbox system operates and why a firm might consider implementing such a system.

88. Explain how the Check Clearing Act for the 21^st Century affects both collection and disbursement float.

89. Explain how the unethical use of uncollected funds has been impacted by the growth of on-line retailing and banking.

90. Float management systems may provide only minimal benefits to a firm. Given that most firms have other projects with higher positive net present values, why should a firm's managers spend time implementing a float management system?

91. Explain what a zero-balance account is, how it is used, and how it affects cash management.

92. Each business day, on average, a company writes checks totaling $26,000 to pay its suppliers. The usual clearing time for the checks is 5 days. Meanwhile, the company is receiving payments from its customers each day, in the form of checks, totaling $40,000. The cash from the payments is available to the firm after 2 days. What is the amount of the firm's average net float?

A. $30,00

B. $50,000

C. $80,000

D. $110,000

E. $130,000

93. Purple Feet Wine, Inc. receives an average of $6,000 in checks per day. The delay in clearing is typically 3 days. The current interest rate is 0.025 percent per day. Assume 30 days per month. What is the highest daily fee the company should be willing to pay to eliminate its float entirely?

A. $1.50

B. $3.00

C. $3.75

D. $4.50

E. $6.00

94. Your neighbor goes to the post office once a month and picks up two checks, one for $18,000 and one for $4,000. The larger check takes 4 days to clear after it is deposited; the smaller one takes 6 days. Assume 30 days per month. What is the weighted average delay?
    1. 4.21 days
    2. 4.36 days
    3. 4.78 days
    4. 5.00 days
    5. 6.00 days

95. Your firm has an average receipt size of $60. A bank has approached you concerning a lockbox service that will decrease your total collection time by 1 day. You typically receive 28,000 checks per day. The daily interest rate is 0.016 percent. What is the NPV of the lockbox project if the bank charges a fee of

$210 per day?

A. $367,500

B. $427,500

C. $903,350

D. $1,412,500

E. $1,680,000

96. A mail-order firm processes 5,000 checks per month. Of these, 55 percent are for $55 and 45 percent are for $65. The $55 checks are delayed 2 days on average; the $65 checks are delayed 5 days on average. Assume each month has 30 days. The interest rate is 6 percent per year. How much should the firm be willing to pay to reduce the weighted average float by 1.4 days?

A. $4,165

B. $13,883

C. $41,650

D. $138,883

E. $416,500

97. 
    Paper Submarine Manufacturing is investigating a lockbox system to reduce its collection time. It has determined the following:

The total collection time will be reduced by 2 days if the lockbox system is adopted. What is the NPV of adopting the lockbox system?

A. $600,000

B. $775,000

C. $975,000

D. $1,200,000

E. $1,425,000

98. Home Roasted Turkeys disburses checks every 4 weeks that average $70,000 and take 5 days to clear. How much interest can the company earn if it delays transfer of funds from an interest-bearing account that pays 0.02 percent per day for these 5 days? Ignore the effects of compound interest. Assume 52 weeks in a year.

A. $36

B. $91

C. $182

D. $364

E. $910

99. Never Again Enterprises has an agreement with The Worth Bank whereby the bank handles $3.12 million in collections a day and requires a $1,000,000 compensating balance. Never Again is contemplating canceling the agreement and dividing its eastern region so that two other banks will handle its business. Banks A and B will each handle $1.56 million of collections a day, and each requires a compensating balance of $1,550,000. Never Again's financial management expects that collections will be accelerated by one day if the eastern region is divided. The T-bill rate is 5 percent annually. What is the amount of the annual net savings if this plan is adopted?

A. $10,200

B. $51,000

C. $76,500

D. $102,000

E. $125,000

100. 
     Mountaintop Inns, a Kentucky company, has determined that a majority of its customers are located in the Pennsylvania area. It therefore is considering using a lockbox system offered by a bank located in Pittsburgh, Pennsylvania. The bank has estimated that use of the system will reduce collection time by one day. In addition to the variable charge shown below, there is also a fixed charge of $4,320 per year for the lockbox system. Assume a year has 365 days. What is the NPV of the lockbox system given the following information?

A. -$156,727

B. -$131,301

C. -$74,208

D. $11,507

E. $26,433