Question 1

If the marginal reduction in order costs exceeds the marginal carrying cost of inventory, then:

Accepted Answer

A) The firm has minimized its total carrying costs 
B) The firm should increase its order size 
C) The firm should decrease its order size 
D) The firm has maximized its order costs 
A) The firm has minimized its total carrying costs 
B) The firm should increase its order size 
C) The firm should decrease its order size 
D) The firm has maximized its order costs

Question 2

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 3

The economic order quantity does not account for delivery lags in its reorder points.

Accepted Answer

A) True 
 B)False

Question 4

Calculate the company's availability float given the following information:

Accepted Answer

A) $275,000 
B) $50,000 
C) $675,000 
D) $900,000 
A) $275,000 
B) $50,000 
C) $675,000 
D) $900,000

Question 5

How much money can be saved annually by setting up a lock-box system that will process 500 cheques per day at a cost of $0.20 per cheque if each cheque averages $220, collection float is reduced by three days, and the annual interest rate is 8 percent?

Accepted Answer

A) ($27,700) 
B) ($10,100) 
C) $10,000 
D) $16,400 reduced collection float:
= 500 cheques daily x $220 per cheque x 3 days
= $330,000
Daily return = $330,000 x .08/365 = $72.33
Daily bank charges = 500 x $0.20 = $100,000 
A) ($27,700) 
B) ($10,100) 
C) $10,000 
D) $16,400 reduced collection float:
= 500 cheques daily x $220 per cheque x 3 days
= $330,000
Daily return = $330,000 x .08/365 = $72.33
Daily bank charges = 500 x $0.20 = $100,000

Question 6

Which of the following conditions would make a lock-box system potentially more attractive to a firm?

Accepted Answer

A) The interest rate declines 
B) Mail time saved is lower 
C) Payment size is higher 
D) Processing time saved is lower 
A) The interest rate declines 
B) Mail time saved is lower 
C) Payment size is higher 
D) Processing time saved is lower

Question 7

Which of the following statements is true regarding repurchase agreements?

Accepted Answer

A) Their maturity is greater than one year 
B) They are an unsecured form of borrowing 
C) Treasury bills serve as their collateral 
D) They make explicit, rather than implicit, interest payments 
A) Their maturity is greater than one year 
B) They are an unsecured form of borrowing 
C) Treasury bills serve as their collateral 
D) They make explicit, rather than implicit, interest payments

Question 8

Your cash manager is currently using wire transfer to obtain collections from distant locations each time that the cash accumulates to $50,000.Evaluate the financial logic of this policy if the wire transfer costs $20, saves three days of mail time, and interest rates average 7 percent annually.

Accepted Answer

A) Stop the policy; $8.77 is lost with each transfer 
B) Stop the policy unless the transfer amount is increased to approximately $65,200 
C) Continue the policy at the current transfer amount 
D) Improve policy by reducing transfer amount to $34,800 break-even wire transfer = 3 days x (7%/365) x $50,000 = $28.77
$28)77 > $20 
A) Stop the policy; $8.77 is lost with each transfer 
B) Stop the policy unless the transfer amount is increased to approximately $65,200 
C) Continue the policy at the current transfer amount 
D) Improve policy by reducing transfer amount to $34,800 break-even wire transfer = 3 days x (7%/365) x $50,000 = $28.77
$28)77 > $20

Question 9

Shamba Corporation writes cheques that average $90,000 and take on average 5 days to clear.Cheques are received with an average value of $45,000 and take 9 days to clear.Determine the net float.

Accepted Answer

A) $45,000 
B) $60,000 
C) $855,000 
D) $135,000 
A) $45,000 
B) $60,000 
C) $855,000 
D) $135,000

Question 10

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 11

Lock-box systems allow local banks to collect and process the firm's remittance from that area.

Accepted Answer

A) True 
 B)False

Question 12

An East Coast firm should establish a lock-box service on the West Coast:

Accepted Answer

A) If the firm has a large number of customers 
B) If it has banking facilities in West Coast 
C) If West Coast customers are currently mailing their cheques to an East Coast address 
D) If West Coast banks are more efficient 
A) If the firm has a large number of customers 
B) If it has banking facilities in West Coast 
C) If West Coast customers are currently mailing their cheques to an East Coast address 
D) If West Coast banks are more efficient

Question 13

Average daily collection of cheques for a firm is $50,000.The firm also writes on the average $35,000 of cheques daily.If the collection period for cheques is 5 days, calculate the net float.

Accepted Answer

A) -$75,000 
B) $75,000 
C) ($425,000) 
D) $425,000 Payment float = 35,000 x 5 = 175,000
Availability float = 50,000 x 5 = 250,000 
A) -$75,000 
B) $75,000 
C) ($425,000) 
D) $425,000 Payment float = 35,000 x 5 = 175,000
Availability float = 50,000 x 5 = 250,000

Question 14

Assuming that the firm can either hold cash paying no interest or invest in marketable securities, which of the following might induce the manager to hold higher cash balances?

Accepted Answer

A) The cost of borrowing is high relative to interest rates on marketable securities 
B) Future cash flows are relatively predictable 
C) The cost of cash balances is relatively high 
D) Bank interest rates are expected to increase 
A) The cost of borrowing is high relative to interest rates on marketable securities 
B) Future cash flows are relatively predictable 
C) The cost of cash balances is relatively high 
D) Bank interest rates are expected to increase

Question 15

What is the availability float?

Accepted Answer

Availability float i

Question 16

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 17

The rationale behind a zero-balance account is that:

Accepted Answer

A) Float increases when suppliers wait for their funds 
B) Creditors will not be informed of cash balances 
C) No unnecessary funds are tied up 
D) Budgeting is easier to conduct 
A) Float increases when suppliers wait for their funds 
B) Creditors will not be informed of cash balances 
C) No unnecessary funds are tied up 
D) Budgeting is easier to conduct

Question 18

If cash flows change unpredictably, then management should allow the cash balance to move within limits.What three factors determine how far apart these limits? How far should the firm adjust its cash balance when it reaches this upper or lower limit?

Accepted Answer

Factors that determine these limits are

Question 19

Penny Pinchers Inc.is attempting to implement a Baumol model for cash management.Given that Treasury bills offer a 7.5 percent return, that each sale of bills involves a fixed cost of $30, and that Pinchers disburses $6.5 million annually, determine the optimum amount of bills to sell each time.What will be the average cash balance under these assumptions?

Accepted Answer

Q* =
= $72,111.03
Av

Question 20

Which of the following is not an accepted method of attempting to increase a firm's net float?

Accepted Answer

A) Remote bank locations 
B) Lock-box systems 
C) Cheque kiting 
D) Concentration banking 
A) Remote bank locations 
B) Lock-box systems 
C) Cheque kiting 
D) Concentration banking

Exam 21: Mergers, Acquisitions, and Corporate Control

If the marginal reduction in order costs exceeds the marginal carrying cost of inventory, then:

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

The economic order quantity does not account for delivery lags in its reorder points.

Calculate the company's availability float given the following information:

How much money can be saved annually by setting up a lock-box system that will process 500 cheques per day at a cost of $0.20 per cheque if each cheque averages $220, collection float is reduced by three days, and the annual interest rate is 8 percent?

Which of the following conditions would make a lock-box system potentially more attractive to a firm?

Which of the following statements is true regarding repurchase agreements?

Your cash manager is currently using wire transfer to obtain collections from distant locations each time that the cash accumulates to $50,000.Evaluate the financial logic of this policy if the wire transfer costs $20, saves three days of mail time, and interest rates average 7 percent annually.

Shamba Corporation writes cheques that average $90,000 and take on average 5 days to clear.Cheques are received with an average value of $45,000 and take 9 days to clear.Determine the net float.

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?

Lock-box systems allow local banks to collect and process the firm's remittance from that area.

An East Coast firm should establish a lock-box service on the West Coast:

Average daily collection of cheques for a firm is $50,000.The firm also writes on the average $35,000 of cheques daily.If the collection period for cheques is 5 days, calculate the net float.

Assuming that the firm can either hold cash paying no interest or invest in marketable securities, which of the following might induce the manager to hold higher cash balances?

What is the availability float?

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

The rationale behind a zero-balance account is that:

If cash flows change unpredictably, then management should allow the cash balance to move within limits.What three factors determine how far apart these limits? How far should the firm adjust its cash balance when it reaches this upper or lower limit?

Which of the following is not an accepted method of attempting to increase a firm's net float?

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 Policy

Payout Policy

Long-Term Financial Planning

Short-Term Financial Planning

Working Capital Management

International Financial Management

Options

Risk Management

Conclusion

What We Do and Do Not Know About Finance

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