Question 1

Availability float

Accepted Answer

Availability float refers to the time difference between when a deposit is made into a bank account and when the funds actually become available for use. It is essentially the period during which a check or other deposit is in the process of clearing and being verified by the banking system, but the funds are not yet accessible to the account holder.

When a check is deposited into a bank account, the bank needs to ensure that the check is valid and that the payer's account has sufficient funds to cover the amount. During this time, the bank will place a hold on the deposited funds, and they will not be included in the account holder's available balance. The duration of this hold can vary depending on the bank's policies, the amount of the check, the type of deposit, and whether the check is drawn from an account at the same bank or a different bank.

The availability float can impact individuals and businesses by temporarily reducing their available cash flow. For example, if a business deposits a customer's check on Monday and the funds do not become available until Wednesday, the business experiences a two-day availability float. During this time, the business may not be able to use those funds to pay bills, make purchases, or invest in opportunities.

Banks are required by regulation to disclose their funds availability policies to customers, including the typical time frames for different types of deposits. In the United States, the Expedited Funds Availability Act (EFAA) and Regulation CC govern the maximum amount of time a bank can hold a deposit before making the funds available to the customer.

To minimize the impact of availability float, individuals and businesses can use electronic payments, which typically clear faster than paper checks. Direct deposits, wire transfers, and electronic funds transfers (EFTs) can reduce or eliminate the float time, making funds available more quickly.

Question 2

Firms hold cash to satisfy the transaction motive.This means that cash is held to:

Accepted Answer

A) meet disbursements for normal operations. 
B) balance the flow between cash inflows and outflows. 
C) meet unexpected emergency cash needs. 
D) meet disbursements for normal operations and to balance the flow between cash inflows and outflows. 
E) offset fees that would otherwise be charged by the firm's bank. 
A) meet disbursements for normal operations. 
B) balance the flow between cash inflows and outflows. 
C) meet unexpected emergency cash needs. 
D) meet disbursements for normal operations and to balance the flow between cash inflows and outflows. 
E) offset fees that would otherwise be charged by the firm's bank. D

Question 3

Baker's Confectionery just received a check from a customer for $1,289 that it has recorded in its checkbook but has not yet deposited this check into the bank.After recording this check,the firm has a bank balance of $16,218 and a book balance of $16,309.All the firm's other deposits have cleared and those funds are currently available.What is the amount of the disbursement float?

Accepted Answer

A) $91 
B) $246 
C) $1,198 
D) $2,487 
E) $1,807 
A) $91 
B) $246 
C) $1,198 
D) $2,487 
E) $1,807 C

Question 4

The Mesa Bank is offering your firm the free use of their lockbox services.They estimate that you can reduce your average mail time by 2 days and they can save you a combined clearing and processing time of 1.5 days by putting the checks into the clearing system sooner.Your firm receives 320 checks a day with an average value of $2,500 each.The current T-Bill rate is .015 percent per day.Assume a 365-day year.What is the annual amount of income your firm can earn if it installs this service?

Accepted Answer

A) $15,300 
B) $14,800 
C) $16,400 
D) $153,300 
E) $148,700 
A) $15,300 
B) $14,800 
C) $16,400 
D) $153,300 
E) $148,700

Question 5

Processing float; time it takes the receiving firm to process incoming mail,prepare the bank deposit,and take the deposit to the bank

Accepted Answer

The term "processing float" refers to th

Question 6

When a firm writes a check,there is an immediate decrease in the ________ balance,but no immediate change in the ________ balance.

Accepted Answer

A) bank; collected 
B) ledger; book 
C) bank; ledger 
D) book; bank 
E) available; book 
A) bank; collected 
B) ledger; book 
C) bank; ledger 
D) book; bank 
E) available; book

Question 7

Average daily float can be calculated as:

Accepted Answer

A) Average daily receipts/Weighted average delay. 
B) Annual sales/365. 
C) Total receipts/Total days. 
D) Total float × Total days. 
E) Average daily receipts × Weighted average delay. 
A) Average daily receipts/Weighted average delay. 
B) Annual sales/365. 
C) Total receipts/Total days. 
D) Total float × Total days. 
E) Average daily receipts × Weighted average delay.

Question 8

Which one of these statements correctly applies to a lockbox system of cash collections?

Accepted Answer

A) Mailing time is reduced while the collection time remains constant. 
B) Electronic lockboxes have totally replaced traditional lockbox systems. 
C) Checks can be deposited prior to the payments being applied to the customers' accounts. 
D) Mailing time is reduced but the processing delay is increased. 
E) Checks are held by the bank until the payee firm approves them to start the check-clearing process. 
A) Mailing time is reduced while the collection time remains constant. 
B) Electronic lockboxes have totally replaced traditional lockbox systems. 
C) Checks can be deposited prior to the payments being applied to the customers' accounts. 
D) Mailing time is reduced but the processing delay is increased. 
E) Checks are held by the bank until the payee firm approves them to start the check-clearing process.

Question 9

Determining the appropriate cash balance involves assessing the trade-off between:

Accepted Answer

A) income and diversification. 
B) the benefits and costs of liquidity. 
C) balance sheet strength and transaction needs. 
D) short-term and long-term investment returns. 
E) cash needs and cash preferences. 
A) income and diversification. 
B) the benefits and costs of liquidity. 
C) balance sheet strength and transaction needs. 
D) short-term and long-term investment returns. 
E) cash needs and cash preferences.

Question 10

Which one of these money market securities generally has the shortest life?

Accepted Answer

A) Repurchase agreements 
B) Jumbo certificates of deposit 
C) Money market preferred stock 
D) Commercial paper 
E) U.S.Treasury bills 
A) Repurchase agreements 
B) Jumbo certificates of deposit 
C) Money market preferred stock 
D) Commercial paper 
E) U.S.Treasury bills

Question 11

Which one of the following is a money-market security that has limited marketability?

Accepted Answer

A) Jumbo certificates of deposit (CD's) 
B) Commercial paper 
C) Common stock 
D) U.S.Treasury bills 
E) Ordinary preferred stock 
A) Jumbo certificates of deposit (CD's) 
B) Commercial paper 
C) Common stock 
D) U.S.Treasury bills 
E) Ordinary preferred stock

Question 12

Downtown Bank provides lockbox services.They estimate that you can reduce your average mail time by 1.6 days and your combined clearing and processing time by .5 days by implementing their system.Your firm receives 654 checks a day with an average value of $975 each.The current T-Bill rate is .009 percent per day.Assume a 365-day year.The bank will charge your firm $.17 per check.What is the net present value from installing this system?

Accepted Answer

A) $105,215.84 
B) $100,022.15 
C) $98,548.32 
D) $103,731.67 
E) $102,718.28 
A) $105,215.84 
B) $100,022.15 
C) $98,548.32 
D) $103,731.67 
E) $102,718.28

Question 13

Metal Manufacturers receives three checks per month.The first check is for $194,000 and takes two days to clear.The second check is for $318,000 and clears in one day.The third check is for $38,000 and clears in 2.5 days.What is the weighted average delay,the average daily receipts,and the average daily float? Assume a 30-day month.

Accepted Answer

A) 1.83 days; $16,667; $23,333 
B) 1.46 days; $18,667; $27,333 
C) 1.83 days; $18,447; $26,700 
D) 1.46 days; $18,333; $26,700 
E) 1.51 days; $18,447; $27,800 
A) 1.83 days; $16,667; $23,333 
B) 1.46 days; $18,667; $27,333 
C) 1.83 days; $18,447; $26,700 
D) 1.46 days; $18,333; $26,700 
E) 1.51 days; $18,447; $27,800

Question 14

Mail float; time that elapses while a payment is in the mail system

Accepted Answer

Mail float refers to the time period bet

Question 15

The net float of a firm is made up of disbursement float and collection float.Identify and describe the components of both disbursement and collection float.

Accepted Answer

There are

Question 16

Firms hold cash,in part,to satisfy compensating balance requirements.Compensating balances are cash balances held at:

Accepted Answer

A) the firm in excess of its transactions needs. 
B) the firm that are below that of its transactions needs. 
C) the firm in excess of its cash inflows. 
D) commercial banks to pay implicitly for bank services. 
E) commercial banks as emergency funds. 
A) the firm in excess of its transactions needs. 
B) the firm that are below that of its transactions needs. 
C) the firm in excess of its cash inflows. 
D) commercial banks to pay implicitly for bank services. 
E) commercial banks as emergency funds.

Question 17

U.S.Treasury bills:

Accepted Answer

A) are subject to the same risks as short-term tax exempts. 
B) all have initial maturities of 90 days or less. 
C) are issued for time periods as short as one week. 
D) must be held to maturity and not resold. 
E) are sold at weekly auctions. 
A) are subject to the same risks as short-term tax exempts. 
B) all have initial maturities of 90 days or less. 
C) are issued for time periods as short as one week. 
D) must be held to maturity and not resold. 
E) are sold at weekly auctions.

Question 18

Short-term marketable securities generally have:

Accepted Answer

A) high maturity risk. 
B) little,if any,marketability. 
C) significant default risk. 
D) a high level of liquidity. 
E) maturities between one and two years. 
A) high maturity risk. 
B) little,if any,marketability. 
C) significant default risk. 
D) a high level of liquidity. 
E) maturities between one and two years.

Question 19

If a firm has seasonal sales,then it is highly likely the firm will:

Accepted Answer

A) hold extra excess cash throughout the year. 
B) borrow short term for part of the year and invest in marketable securities the rest of the year. 
C) never be able to invest any excess funds. 
D) continually have short-term loans outstanding. 
E) have less volatile cash flows than a comparable firm with constant sales. 
A) hold extra excess cash throughout the year. 
B) borrow short term for part of the year and invest in marketable securities the rest of the year. 
C) never be able to invest any excess funds. 
D) continually have short-term loans outstanding. 
E) have less volatile cash flows than a comparable firm with constant sales.

Question 20

KN Florals receives the same checks each month.Of these monthly checks,48 are for $82.60 each,15 are for $71.50 each,and 9 are for $40.70 each.The delay for the $82.60 checks is 1.8 days,for the $71.50 checks 1.1 days,and for the $40.70 checks 1.3 days.Calculate the average daily float.Assume a 30-day month.

Accepted Answer

A) $293.09 
B) $287.46 
C) $309.10 
D) $299.47 
E) $358.02 
A) $293.09 
B) $287.46 
C) $309.10 
D) $299.47 
E) $358.02

Exam 27: Cash Management

Availability float

Firms hold cash to satisfy the transaction motive.This means that cash is held to:

Processing float; time it takes the receiving firm to process incoming mail,prepare the bank deposit,and take the deposit to the bank

When a firm writes a check,there is an immediate decrease in the ________ balance,but no immediate change in the ________ balance.

Average daily float can be calculated as:

Which one of these statements correctly applies to a lockbox system of cash collections?

Determining the appropriate cash balance involves assessing the trade-off between:

Which one of these money market securities generally has the shortest life?

Which one of the following is a money-market security that has limited marketability?

Mail float; time that elapses while a payment is in the mail system

The net float of a firm is made up of disbursement float and collection float.Identify and describe the components of both disbursement and collection float.

Firms hold cash,in part,to satisfy compensating balance requirements.Compensating balances are cash balances held at:

U.S.Treasury bills:

Short-term marketable securities generally have:

If a firm has seasonal sales,then it is highly likely the firm will:

Introduction to Corporate Finance

Financial Statements and Cash Flow

Financial Statements and Cash Flow

Discounted Cash Flow Valuation

Net Present Value and Other Investment Rules

Making Capital Investment Decisions

Risk Analysis, real Options, and Capital Budgeting

Interest Rates and Bond Valuation

Stock Valuation

Lessons From Market History

Return, risk, and the Capital Asset Pricing Model Capm

An Alternative View of Risk and Return: the Arbitrage Pricing Theory

Risk, cost of Capital, and Valuation

Efficient Capital Markets and Behavioral Challenges

Long-Term Financing

Capital Structure: Basic Concepts

Capital Structure: Limits to the Use of Debt

Valuation and Capital Budgeting for the Levered Firm

Dividends and Other Payouts

Raising Capital

Leasing

Options and Corporate Finance

Options and Corporate Finance: Extensions and Applications

Warrants and Convertibles

Derivatives and Hedging Risk

Short-Term Finance and Planning

Credit and Inventory Management

Mergers,acquisitions,and Divestitures

Financial Distress

International Corporate Finance

Filters

When a firm writes a check,there is an immediate decrease in the balance,but no immediate change in the balance.