Question 1

Which of the following is correct for a firm that places orders for an item in amounts greater than the economic order quantity?

Accepted Answer

A)  the marginal reduction in order cost exceeds the marginal carrying cost per item 
B)  the marginal carrying cost per item exceeds the marginal reduction in order cost 
C)  total order costs exceed total carrying costs 
D)  total cost of ordering and carrying has been maximized 
A)  the marginal reduction in order cost exceeds the marginal carrying cost per item 
B)  the marginal carrying cost per item exceeds the marginal reduction in order cost 
C)  total order costs exceed total carrying costs 
D)  total cost of ordering and carrying has been maximized

Question 2

What is the opportunity cost of keeping a cash balance of $2.5 million,if the daily interest rate is 0.025 percent and the average transaction cost of investing money overnight is $50?

Accepted Answer

A)  $121 
B)  $171 
C)  $575 
D)  $675 
A)  $121 
B)  $171 
C)  $575 
D)  $675

Question 3

What is the economic order quantity for an automobile dealer selling 2,000 cars per year,at a cost of $750 per order,and a carrying cost of $300 per automobile?

Accepted Answer

A)  40 cars 
B)  71 cars 
C)  100 cars 
D)  126 cars 
A)  40 cars 
B)  71 cars 
C)  100 cars 
D)  126 cars

Question 4

In concentration banking,a firm directs customers to make payments to a local branch office of a bank.

Accepted Answer

A) True 
 B)False

Question 5

What is the payment float?

Accepted Answer

Payment float is $80

Question 6

What are the minimum total costs of carrying and ordering inventory for a firm that sells 1,500 units with a carrying cost of $2 per unit and places orders in lots of 100?

Accepted Answer

A)  $100 
B)  $200 
C)  $400 
D)  $430 
A)  $100 
B)  $200 
C)  $400 
D)  $430

Question 7

ABC Corp.shows a ledger balance of $50,000 prior to writing a cheque for $5,000 and depositing $1,000 in cheques.What is the amount of their net float?

Accepted Answer

A)  $1,000 
B)  $4,000 
C)  $5,000 
D)  $6,000 
A)  $1,000 
B)  $4,000 
C)  $5,000 
D)  $6,000

Question 8

A primary purpose of restricting the investment of idle cash balances to money market instruments is to:

Accepted Answer

A)  obtain government guarantees on the investment. 
B)  minimize transaction costs. 
C)  carry a minimal amount of interest-rate risk. 
D)  have a continual market for selling the investment. 
A)  obtain government guarantees on the investment. 
B)  minimize transaction costs. 
C)  carry a minimal amount of interest-rate risk. 
D)  have a continual market for selling the investment.

Question 9

A firm using Baumol's model will do one of the following if the interest rate on short-term securities went up.

Accepted Answer

A)  increase the average cash balance 
B)  increase the collection period 
C)  decrease the collection period 
D)  decrease the average cash balance 
A)  increase the average cash balance 
B)  increase the collection period 
C)  decrease the collection period 
D)  decrease the average cash balance

Question 10

With rates of return so low on money market instruments,does it actually benefit a firm to pay close attention to cash balances?

Accepted Answer

Opportunity costs are typically lower on

Question 11

Short-term securities are safe to keep idle cash balance.Choose from the following,one appropriate reason for this.

Accepted Answer

A)  low interest-rate risk 
B)  high returns 
C)  high net present value 
D)  ease of receiving interest payments 
A)  low interest-rate risk 
B)  high returns 
C)  high net present value 
D)  ease of receiving interest payments

Question 12

Which of the following would not be considered a money market instrument?

Accepted Answer

A)  Canadian Treasury bill with 91 days until maturity 
B)  Commercial paper with 180 days until maturity 
C)  Certificate of deposit with 15 months until maturity 
D)  A repurchase agreement, backed by U.S. government securities, with less than one week until maturity 
A)  Canadian Treasury bill with 91 days until maturity 
B)  Commercial paper with 180 days until maturity 
C)  Certificate of deposit with 15 months until maturity 
D)  A repurchase agreement, backed by U.S. government securities, with less than one week until maturity

Question 13

What is the economic order quantity for firm that sells 30,000 units annually,each unit has a $6 carrying cost,and the fixed cost of placing an order is $100?

Accepted Answer

A)  100 units 
B)  122 units 
C)  707 units 
D)  1,000 units 
A)  100 units 
B)  122 units 
C)  707 units 
D)  1,000 units

Question 14

What is the ledger balance on your account?

Accepted Answer

$1,880 + $

Question 15

If there is an increase in interest rates,a firm which uses Baumol's model should reduce the funds held in cash and reduce the holding of interest-bearing securities.

Accepted Answer

A) True 
 B)False

Question 16

Your corporate financial manager has decided to liquidate securities to provide for cash needs in units of $50,000.Is that amount of cash consistent with annual cash needs of $2,500,000,costs per sale of $30,and annual T-bill rate of 6 percent?

Accepted Answer

A)  yes, that amount is appropriate 
B)  no, sales amount should be increased to $60,000 
C)  no, sales amount should be decreased to $35,000 
D)  no, sales amount should be decreased to $5,000 
A)  yes, that amount is appropriate 
B)  no, sales amount should be increased to $60,000 
C)  no, sales amount should be decreased to $35,000 
D)  no, sales amount should be decreased to $5,000

Question 17

Baumol's model is not very useful in practical applications,because it does not allow for uncertain cash flows.

Accepted Answer

A) True 
 B)False

Question 18

What are the expected annual savings from a lock-box system that collects 150 cheques per day averaging $500 each,and reduces mailing and processing times by 2.5 and 1.5 days respectively,if the annual interest rate is 7 percent?

Accepted Answer

A)  $5,250 
B)  $13,125 
C)  $21,000 
D)  $300,000 
A)  $5,250 
B)  $13,125 
C)  $21,000 
D)  $300,000

Question 19

ABC Corp.disburses $4 million annually and keeps idle funds in Treasury bills which earn an average of 5 percent and incur a fixed cost of $35 each time a cash conversion is made.What is the average amount of cash that ABC Corp.should have on hand?

Accepted Answer

A)  $16,733 
B)  $33,466 
C)  $37,417 
D)  $74,833 
A)  $16,733 
B)  $33,466 
C)  $37,417 
D)  $74,833

Question 20

What is the total carrying cost for an inventory of 200 widgets if the per-widget carrying cost is $4,the cost per order is $14,and there are 5 orders per year?

Accepted Answer

A)  $400 
B)  $470 
C)  $800 
D)  $870 
A)  $400 
B)  $470 
C)  $800 
D)  $870

Exam 21: Cash and Inventory Management

Which of the following is correct for a firm that places orders for an item in amounts greater than the economic order quantity?

What is the opportunity cost of keeping a cash balance of $2.5 million,if the daily interest rate is 0.025 percent and the average transaction cost of investing money overnight is $50?

What is the economic order quantity for an automobile dealer selling 2,000 cars per year,at a cost of $750 per order,and a carrying cost of $300 per automobile?

In concentration banking,a firm directs customers to make payments to a local branch office of a bank.

What is the payment float?

What are the minimum total costs of carrying and ordering inventory for a firm that sells 1,500 units with a carrying cost of $2 per unit and places orders in lots of 100?

ABC Corp.shows a ledger balance of $50,000 prior to writing a cheque for $5,000 and depositing $1,000 in cheques.What is the amount of their net float?

A primary purpose of restricting the investment of idle cash balances to money market instruments is to:

A firm using Baumol's model will do one of the following if the interest rate on short-term securities went up.

With rates of return so low on money market instruments,does it actually benefit a firm to pay close attention to cash balances?

Short-term securities are safe to keep idle cash balance.Choose from the following,one appropriate reason for this.

Which of the following would not be considered a money market instrument?

What is the economic order quantity for firm that sells 30,000 units annually,each unit has a $6 carrying cost,and the fixed cost of placing an order is $100?

What is the ledger balance on your account?

If there is an increase in interest rates,a firm which uses Baumol's model should reduce the funds held in cash and reduce the holding of interest-bearing securities.

Your corporate financial manager has decided to liquidate securities to provide for cash needs in units of $50,000.Is that amount of cash consistent with annual cash needs of $2,500,000,costs per sale of $30,and annual T-bill rate of 6 percent?

Baumol's model is not very useful in practical applications,because it does not allow for uncertain cash flows.

What are the expected annual savings from a lock-box system that collects 150 cheques per day averaging $500 each,and reduces mailing and processing times by 2.5 and 1.5 days respectively,if the annual interest rate is 7 percent?

ABC Corp.disburses $4 million annually and keeps idle funds in Treasury bills which earn an average of 5 percent and incur a fixed cost of $35 each time a cash conversion is made.What is the average amount of cash that ABC Corp.should have on hand?

What is the total carrying cost for an inventory of 200 widgets if the per-widget carrying cost is $4,the cost per order is $14,and there are 5 orders per year?

Goals and Governance of the Firm

Financial Markets and Institutions

Accounting and Finance

Measuring Corporate Performance

The Time Value of Money

Valuing Bonds

Valuing Stocks

Net Present Value and Other Investment Criteria

Using Discounted Cash Flow Analysis to Make Investment Decisions

Project Analysis

Introduction to Risk, Return, and the Opportunity Cost of Capital

Risk, Return, and Capital Budgeting

The Weighted-Average Cost of Capital and Company Valuation

Introduction to Corporate Financing and Governance

Venture Capital, IPOs, and Seasoned Offerings

Debt and Payout Policy

Leasing

Payout Policy

Long-Term Financial Planning

Short-Term Financial Planning

Credit Management and Collection

Mergers, Acquisitions, and Corporate Control

International Financial Management

Options

Risk Management

Filters