Question 1

For many industries accounts receivable comprise as much as 25 percent of total assets.

Accepted Answer

A) True 
 B)False

Question 2

One method used to monitor the collections of accounts receivable is aging.

Accepted Answer

A) True 
 B)False

Question 3

Inflation affects the EOQ model in all of the following ways except:

Accepted Answer

A)  changing the investment in accounts receivable. 
B)  encourages anticipatory buying. 
C)  increased carrying costs. 
D)  encourages buying early to avoid price increases. 
A)  changing the investment in accounts receivable. 
B)  encourages anticipatory buying. 
C)  increased carrying costs. 
D)  encourages buying early to avoid price increases.

Question 4

One advantage of zero balance accounts is an increase in disbursing float.

Accepted Answer

A) True 
 B)False

Question 5

Terms of sale are frequently changed by the financial manager in order to increase sales.

Accepted Answer

A) True 
 B)False

Question 6

Managing a firm's cash outflows through use of a "zero balance account" system offers all but which of the following benefits?

Accepted Answer

A)  centralized control over disbursements 
B)  reduction of management time spent on superficial cash management activities 
C)  higher rate of return on invested funds 
D)  reduction of excess balances in outlying accounts 
A)  centralized control over disbursements 
B)  reduction of management time spent on superficial cash management activities 
C)  higher rate of return on invested funds 
D)  reduction of excess balances in outlying accounts

Question 7

Marketable securities are near-cash assets because they can be converted into cash quickly.

Accepted Answer

A) True 
 B)False

Question 8

A trade credit discount such as 3/10 net 40 means

Accepted Answer

A)  a 3 percent penalty is due after 40 days. 
B)  a 3 percent discount if payment is made within 10 days, otherwise, the total amount is due in 40 days. 
C)  a 3 percent discount for payment within 10 days, and a 3 percent penalty if payment is made after 40 days. 
D)  10 percent discount for cash on delivery and a 3 percent discount for payment within 40 days. 
A)  a 3 percent penalty is due after 40 days. 
B)  a 3 percent discount if payment is made within 10 days, otherwise, the total amount is due in 40 days. 
C)  a 3 percent discount for payment within 10 days, and a 3 percent penalty if payment is made after 40 days. 
D)  10 percent discount for cash on delivery and a 3 percent discount for payment within 40 days.

Question 9

Martin Inc.is considering a lockbox system that will increase its check processing cost by $.15 per check.The company estimates an average check size of $1,700 and expects the lockbox to reduce check collection time by 3 days.What annual before-tax yield must Martin Inc.earn on its marketable securities for the lockbox system to be beneficial?

Accepted Answer

A)  1.825% 
B)  1.118% 
C)  1.074% 
D)  0.735% 
A)  1.825% 
B)  1.118% 
C)  1.074% 
D)  0.735%

Question 10

EOQ model recommendations may be replaced by anticipatory buying during periods of high inflation.

Accepted Answer

A) True 
 B)False

Question 11

Compare the risk of a 90-day unsecured promissory note issued by Southwest Airlines to a 20-year U.S.Government Treasury Bond.

Accepted Answer

A)  The Treasury Bond has a lower financial risk, but a higher interest rate risk. 
B)  The Treasury Bond has a lower financial risk and a lower interest rate risk. 
C)  The Treasury Bond has a lower interest rate risk, but higher financial risk. 
D)  The Treasury Bond has a higher interest rate risk, and a higher financial risk. 
A)  The Treasury Bond has a lower financial risk, but a higher interest rate risk. 
B)  The Treasury Bond has a lower financial risk and a lower interest rate risk. 
C)  The Treasury Bond has a lower interest rate risk, but higher financial risk. 
D)  The Treasury Bond has a higher interest rate risk, and a higher financial risk.

Question 12

The economic order quantity (EOQ)model is well accepted.However,there are weaknesses associated with several of its assumptions.What are these weaknesses?

Accepted Answer

Weakness associated with the EOQ model a

Question 13

The corporate treasurer of Wooden Furniture Inc.is considering the purchase of either a municipal obligation with a 6.1% coupon or a corporate bond with a 9.5% return.Both bonds have a $1,000 par value.The company is currently in the 35% marginal tax bracket.Which security should the treasurer recommend?

Accepted Answer

The after-tax yield to Wooden Furniture

Question 14

Lockbox arrangement benefits include

Accepted Answer

A)  increased working capital from shorter receivables/cash transformation time. 
B)  elimination of bank charges for handling and audit functions. 
C)  increased cash flows from delays in uncollectible check processing. 
D)  all of the above are benefits from this arrangement. 
A)  increased working capital from shorter receivables/cash transformation time. 
B)  elimination of bank charges for handling and audit functions. 
C)  increased cash flows from delays in uncollectible check processing. 
D)  all of the above are benefits from this arrangement.

Question 15

The selection of a proper marketable-securities mix involves evaluation of certain criteria.What are these criteria and why are they important?

Accepted Answer

Financial risk,interest rate risk,liquid

Question 16

If current interest rates are low,and therefore expected to increase in the future,a firm wanting to reduce its interest rate risk would hold debt with longer maturities.

Accepted Answer

A) True 
 B)False

Question 17

The benefits of a lockbox system include all of the following except:

Accepted Answer

A)  increased working cash. 
B)  elimination of clerical functions. 
C)  increase in total float. 
D)  early knowledge of dishonored checks. 
A)  increased working cash. 
B)  elimination of clerical functions. 
C)  increase in total float. 
D)  early knowledge of dishonored checks.

Question 18

Fast Delivery Service has received a proposal from its bank to establish a lock-box system to accelerate the receipt of $600 million annually on 900,000 checks.By its own analysis Fast Delivery believes such a system would decrease total float by 3.5 days.If Fast Delivery Service can earn 7 percent before taxes on the released funds,what is the maximum that Fast Delivery Service should be willing to pay the bank per check for the service?
 Use a 365-day year.

Accepted Answer

P = (3.5)($600 milli

Question 19

The risk-return tradeoff leads to two objectives:
 (1)keep enough cash on hand to make necessary payments,and (2)reduce investments in idle cash to a minimum.

Accepted Answer

A) True 
 B)False

Question 20

Baker Coat Company is a national distributor of women's apparel.The company expects to receive 95,000 checks during the coming year totaling $78 million.A large bank has offered to install a lock-box system at a charge of $0.45 per processed check.If Baker Coat Company is able to earn 5 percent before tax on additional funds,what is the minimum amount of total float days that must be saved to make the system worthwhile?
 Use a 365-day year.

Accepted Answer

0.45 = D × ($78 mill

For many industries accounts receivable comprise as much as 25 percent of total assets.

One method used to monitor the collections of accounts receivable is aging.

Inflation affects the EOQ model in all of the following ways except:

One advantage of zero balance accounts is an increase in disbursing float.

Terms of sale are frequently changed by the financial manager in order to increase sales.

Managing a firm's cash outflows through use of a "zero balance account" system offers all but which of the following benefits?

Marketable securities are near-cash assets because they can be converted into cash quickly.

A trade credit discount such as 3/10 net 40 means

EOQ model recommendations may be replaced by anticipatory buying during periods of high inflation.

Compare the risk of a 90-day unsecured promissory note issued by Southwest Airlines to a 20-year U.S.Government Treasury Bond.

The economic order quantity (EOQ)model is well accepted.However,there are weaknesses associated with several of its assumptions.What are these weaknesses?

Lockbox arrangement benefits include

The selection of a proper marketable-securities mix involves evaluation of certain criteria.What are these criteria and why are they important?

If current interest rates are low,and therefore expected to increase in the future,a firm wanting to reduce its interest rate risk would hold debt with longer maturities.

The benefits of a lockbox system include all of the following except:

The risk-return tradeoff leads to two objectives: (1)keep enough cash on hand to make necessary payments,and (2)reduce investments in idle cash to a minimum.

An Introduction to the Foundations of Financial Management

The Financial Markets and Interest Rates

Understanding Financial Statements and Cash Flows

Evaluating a Firms Financial Performance

The Time Value of Money

The Meaning and Measurement of Risk and Return

The Valuation and Characteristics of Bonds

The Valuation and Characteristics of Stock

The Cost of Capital

Capital-Budgeting Techniques and Practice

Cash Flows and Other Topics in Capital Budgeting

Determining the Financing Mix

Dividend Policy and Internal Financing

Short-Term Financial Planning

Working-Capital Management

International Business Finance

Filters

Exam 16: Current Asset Management

For many industries accounts receivable comprise as much as 25 percent of total assets.

One method used to monitor the collections of accounts receivable is aging.

Inflation affects the EOQ model in all of the following ways except:

One advantage of zero balance accounts is an increase in disbursing float.

Terms of sale are frequently changed by the financial manager in order to increase sales.

Managing a firm's cash outflows through use of a "zero balance account" system offers all but which of the following benefits?

Marketable securities are near-cash assets because they can be converted into cash quickly.

A trade credit discount such as 3/10 net 40 means

EOQ model recommendations may be replaced by anticipatory buying during periods of high inflation.

Compare the risk of a 90-day unsecured promissory note issued by Southwest Airlines to a 20-year U.S.Government Treasury Bond.

The economic order quantity (EOQ)model is well accepted.However,there are weaknesses associated with several of its assumptions.What are these weaknesses?

Lockbox arrangement benefits include

The selection of a proper marketable-securities mix involves evaluation of certain criteria.What are these criteria and why are they important?

If current interest rates are low,and therefore expected to increase in the future,a firm wanting to reduce its interest rate risk would hold debt with longer maturities.

The benefits of a lockbox system include all of the following except:

The risk-return tradeoff leads to two objectives: (1)keep enough cash on hand to make necessary payments,and (2)reduce investments in idle cash to a minimum.

An Introduction to the Foundations of Financial Management

The Financial Markets and Interest Rates

Understanding Financial Statements and Cash Flows

Evaluating a Firms Financial Performance

The Time Value of Money

The Meaning and Measurement of Risk and Return

The Valuation and Characteristics of Bonds

The Valuation and Characteristics of Stock

The Cost of Capital

Capital-Budgeting Techniques and Practice

Cash Flows and Other Topics in Capital Budgeting

Determining the Financing Mix

Dividend Policy and Internal Financing

Short-Term Financial Planning

Working-Capital Management

International Business Finance

Filters