Chapter 19 fundamentals of corporate finance 9th edition test 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.. The Snow Hut has analyzed the ca

Student: _

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?

4 Float is defined as the:

A amount of cash a firm can immediately withdraw from its bank account

B difference between book cash and bank cash

C change in a firm's cash balance from one accounting period to the next

D amount of cash a firm has on hand

E cash balance according to a firm's records

5 A lockbox is a:

A special safe used by a firm for overnight storage of any cash or undeposited checks

B special safe used by a firm that can only be opened at prespecified times of the day

C box located in a bank's vault that is rented by a firm and used to hold unprocessed checks

D.special post office box which can only be opened by prespecified postal inspectors for direct delivery

to the addressee

E 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:

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?

A target cash balance

C cash transfer costs

D cash wire costs

E excess cash costs

11 Why do firms need liquidity?

I to meet compensating balance requirements

II to take advantage of an opportunity that suddenly arises

III to conduct daily business activities

IV to be prepared for a financial emergency

A I and II only

B III and IV only

C I, III, and IV only

D II, III, and IV only

E I, II, III, and IV

12 Cash management primarily involves:

A optimizing a firm's collections and disbursements of cash

B maximizing the income a firm earns on its cash reserves

C reconciling a firm's book balance with its bank balance

D determining the optimal level of liquidity a firm should maintain

E determining the best method of raising capital

13 Disbursements float:

A occurs when a deposit is recorded but the funds are unavailable

B causes the book balance to exceed the bank balance

C has tended to increase since the enactment of the Check Clearing Act for the 21st Century

D is a recommended source of funds for short-term investments

E is eliminated when payments are made electronically

14 Collection float:

A is more desirable to firms than disbursement float

B is totally eliminated by the installation of a lockbox system

C exists when a firm's available balance exceeds its book balance

D can be avoided by collecting payments electronically at the time of sale

E is eliminated by implementing a concentration banking system

15 Which one of the following statements is correct?

A Net float decreases every time a firm issues a check to pay one of its suppliers

B A positive net float indicates that collection float exceeds disbursements float

C Firms prefer a zero net float over a positive net float

D Net float is equal to collection float minus disbursement float

E Net float is equal to a firm's available balance minus its book balance

16 Check kiting is:

A used by most firms as an ethical means of handling its cash reserves

B the process of withdrawing all funds from a bank account as soon as the funds are available

C the central core of a good cash management system

D using uncollected cash to invest in short-term, liquid assets

E increasingly popular due to recent banking law changes

17 Which of the following will reduce collection time?

I billing customers electronically rather than by mail

II accepting debit cards but not checks as payment for a sale

III offering cash discounts for early payment

IV reducing the processing delay by one day

A I and II only

B I and III only

C I, II, and III only

D II, III, and IV only

E I, II, III, and IV

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

I opening a post office box so mail can be received earlier in the morning

II assigning additional staff in the morning to process incoming payments

III providing a discount for customers who pay electronically

IV establishing preauthorized payments from customers

A I and II only

B III and IV only

C II, III, and IV only

D I, II, and IV only

E I, II, III, and IV

19 Which one of the following collection times is correctly described?

A.The processing delay starts when a firm mails out a billing statement and ends when the payment is received from a customer

B Mailing time begins when a firm mails out a billing statement and ends when the payment is received.C

C is used to reduce the disbursement float of a firm

D is efficient regardless of the locations selected for lockbox destinations

E.automatically records payments to a customer's account when the customer's check is received at the lockbox location

21 Lockboxes:

A should be geographically located close to a firm's primary customers

B should be located in remote locations to increase the net disbursement float

C.offer no additional benefit to a firm now that the Check Clearing Act for the 21st Century has been enacted

D tend to be negative net present value projects for firms with a large number of sizeable transactions

E tend to also be used as concentration accounts

22 Cash concentration accounts:

A tend to increase the funds available for short-term investing

B tend to increase the complexity of a firm's cash management system

C that utilize wire transfers rather than automated clearing house transfers are less expensive to maintain

D receive checks directly from all of a firm's customers

E are all zero-balance accounts

23 Which one of the following statements is correct?

A Funds received via automated clearinghouse transfers are available that day

B.A depository transfer check is the most costly means of transferring funds into a cash concentration account

C.The means selected to transfer funds into a concentration account depends primarily upon the size of the transfers

D Concentration accounts are used to transfer funds to lockbox locations as needed

E The most expedient means of transferring funds into a concentration account is a wire transfer

24 A cash concentration account:

A is frequently used as a source of funds for short-term investments

B cannot be used to cover a compensating balance requirement

C cannot be used to transfer funds into zero-balance accounts

D is generally the only bank account a firm needs to efficiently manage its cash

E is another name for a controlled disbursement account

25 The main purpose of a cash concentration account is to:

A decrease collection float

B decrease disbursement float

C consolidate funds

D replace a lockbox system

E 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?

A All customer payments must be submitted to a lockbox

B.The party which collects the checks from the lockbox is responsible for recording the payment on the customer's account

C Payments received in a lockbox are transferred immediately to the concentration account

D The firm's cash manager determines how the funds in the concentration account are disbursed

E The concentration account must be zeroed out on a daily basis

27 A zero-balance account:

A is used to cover the compensating balance requirement of a line of credit agreement

B is only used to deposit funds received at local lockboxes

C is funded on an as-needed basis only

D is limited to handling payroll disbursements

E requires a compensating balance

28 Which one of the following statements is correct concerning zero-balance accounts?

A Each zero-balance account is offset by a compensating balance account

B Zero-balance accounts are used for depositing incoming funds

C A master account must be used in conjunction with a zero-balance account

D Zero-balance accounts are used solely in conjunction with a lockbox system

E Zero-balance accounts are still required to maintain a minimal balance

29 Which one of the following statements is correct?

A The money market refers to securities that mature in two years or less

B Banks are prohibited from investing cash surpluses on behalf of their customers on a short-term basis

C Short-term securities tend to have a high degree of interest rate risk

D A cyclical firm may purchase marketable securities as part of its short-term financing plan

E.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?

I cyclical activities

II desire to invest funds

III daily operations

IV fixed asset purchases

A I and III only

B II and IV only

C I and II only

D III and IV only

E I and IV only

31 Which one of the following statements is correct?

A Money market accounts are low-risk, high-return investments

B The rate of return earned on short-term securities tends to exceed that earned on long-term securities

C U.S Treasury bills are well suited for short-term investments

D The income earned on U.S Treasury bills is exempt from all taxation

E Short-term investments tend to have high levels of default risk

32 Municipal bonds:

A are less liquid than U.S Treasury bills

B produce income that is subject to federal income taxation

C generally pay a higher coupon than corporate bonds

D are also referred to as commercial paper

E are issued by the federal government

33 Money market securities have which of the following characteristics?

I long maturities

II low default risk

III high degree of liquidity

IV low rates of return

A I and III only

B II and III only

C I and IV only

D II, III, and IV only

E I, II, III, and IV

34 A jumbo CD:

A is issued by the federal government

B generally matures between 2 and 5 years

C is a loan of $100,000 or more to a municipality

D is a loan of $1 million or more on a short-term basis

E 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:

A commercial paper transaction

B repurchase agreement

C private certificate of deposit

D revenue anticipation note

E bill anticipation note

36 A repurchase agreement generally has a maximum life of:

A 1 day

B a few days

C one month

D one to three months

E three to six months

37 A money market preferred stock:

A has a floating dividend

B is sold only under a repurchase agreement

C is a special form of commercial paper

D has more price volatility than an ordinary preferred

E 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?

A opportunity costs

B trading costs

C total costs

D both trading and opportunity costs

E trading costs, opportunity costs, and total costs

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

I The BAT model is used to determine the target cash balance for a firm

II The BAT model is rarely used in business due to its complex nature

III The BAT model is a model that helps eliminate a firm's collection float

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

A I and II only

B III and IV only

C II and III only

D I and III only

E I and IV only

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

I upper cash limit

II interest rate on marketable securities

III opportunity cost of holding cash

IV fixed cost of each securities trade

A II only

B I and III only

C II and IV only

D II, III, and IV only

E I, III, and IV only

41 The BAT model is used to:

A maximize the benefits of leverage

B determine the optimal cash position of a firm

C eliminate all daily cash surpluses

D analyze the cash balance given fluctuating cash inflows and outflows

E maximize the opportunity costs of holding cash

42 The Miller-Orr model assumes that:

A the cash balance is depleted at regular intervals

B all cash flows are known with certainty

C the average change in the daily cash flows is positive

D management will set both the lower and the upper desired levels of cash

E the cash balance fluctuates in a random manner

43 The Miller-Orr model:

A recommends selling securities in an amount equal to (U* - C) when the cash balance reaches L

B requires that marketable securities be sold whenever the cash balance falls below the target level

C bases the optimal level of cash solely on the opportunity costs of holding cash

D supports the argument that the target cash balance declines as order costs increase

E.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?

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

B The cost of borrowing affects the target cash balance of a firm

C Management's desire to maintain a low cash balance has no effect on the borrowing needs of a firm

D The target cash balance increases as the interest rate rises

E 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?

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 net collection float of $1,180

B net collection float of $2,480

C net float of $6,731

D net disbursement float of $1,300

E 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?

A net collection float of $8,138

B net collection float of $2,043

C net collection float of $13,450

D net disbursement float of $3,268

E 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.

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?

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.

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

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