Question 1

On an average day, Towne Hardware receives $3,028 in checks from customers. These checks clear the bank in an average of 1.84 days. The applicable daily interest rate is .021 percent. What is the maximum amount this store should pay to completely eliminate its collection float? Assume each month has 30 days.

Accepted Answer

A)  $421 
B)  $1,288 
C)  $2,109 
D)  $4,637 
E)  $5,572

Question 2

The BAT model:

Accepted Answer

A)  maximizes the benefits of leverage. 
B)  assumes net cash outflows are consistent over time. 
C)  eliminates all daily cash surpluses. 
D)  analyzes the cash balance given fluctuating cash outflows. 
E)  maximizes the opportunity costs of holding cash.

Question 3

The Tire Shop spends $47,200 a week to pay bills and maintains a lower cash balance limit of $12,000. The standard deviation of the disbursements is $3,800. The applicable weekly interest rate is .047 percent and the fixed cost of transferring funds is $49. What is the cash balance target based on the Miller-Orr model?

Accepted Answer

A)  $48,152 
B)  $18,731 
C)  $38,909 
D)  $22,413 
E)  $47,726

Question 4

Which one of the following will increase collection time?

Accepted Answer

A)  Offering cash discounts for early payment 
B)  Billing customers electronically rather than by mail 
C)  Reducing the processing delay by one day 
D)  Accepting debit cards but not checks as payment for a sale 
E)  Requiring all nationwide payments be mailed to the home office rather than to lockboxes

Question 5

The Cow Pie Spreader Co. spends $238,700 a week to pay bills and maintains a lower cash balance limit of $67,000. The standard deviation of the disbursements is $22,400. The applicable weekly interest rate is 0.052 percent and the fixed cost of transferring funds is $46. What is the target cash balance based on the Miller-Orr model?

Accepted Answer

A)  $99,169 
B)  $93,405 
C)  $122,038 
D)  $100,406 
E)  $118,922

Question 6

Which of the following costs related to holding cash are minimized when the level of cash held is optimized?

Accepted Answer

A)  Opportunity costs 
B)  Trading costs 
C)  Total costs 
D)  Both trading and opportunity costs 
E)  None of the above

Question 7

The BAT model:

Accepted Answer

A)  computes the fixed costs of securities trading based on the current U.S. Treasury bill rate. 
B)  accounts for daily fluctuations in cash outflows. 
C)  assumes cash is replenished when the cash level falls to its average balance. 
D)  ignores the opportunity costs of holding cash. 
E)  can be used to determine the target cash balance for a firm.

Question 8

The Burger Stop spends $36,800 a week to pay bills and maintains a lower cash balance limit of $15,000. The standard deviation of the disbursements is $5,400. The applicable weekly interest rate is .046 percent and the fixed cost of transferring funds is $55. What is the optimal average cash balance based on the Miller-Orr model?

Accepted Answer

A)  $28,906 
B)  $33,369 
C)  $38,211 
D)  $24,700 
E)  $31,764

Question 9

A lockbox is a:

Accepted Answer

A)  special safe used for overnight storage of any cash or undeposited checks. 
B)  special safe used that can only be opened at pre-specified times of the day. 
C)  box located in a bank's vault that is rented and used to hold unprocessed checks. 
D)  special post office box which can only be opened by pre-specified postal inspectors for direct delivery to the addressee. 
E)  post office box strategically located so that a company's receivables can be collected faster.

Question 10

Donaldson Inc. spends $87,000 a week to pay bills and maintains a lower cash balance limit of $40,000. The standard deviation of the disbursements is $12,900. The applicable weekly interest rate is .042 percent and the fixed cost of transferring funds is $57. What is your optimal average cash balance based on the Miller-Orr model?

Accepted Answer

A)  $78,333 
B)  $74,242 
C)  $66,667 
D)  $77,480 
E)  $72,560

Question 11

On an average day, WW Co. receives $329,418 in checks from customers. These checks clear the bank in an average of 1.46 days. The applicable daily interest rate is .019 percent. What is the highest daily fee that should be paid to completely eliminate the collection float? Assume each month has 30 days.

Accepted Answer

A)  $110.72 
B)  $91.38 
C)  $97.20 
D)  $62.59 
E)  $99.17

Question 12

Disbursements float:

Accepted Answer

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.

Question 13

High Brow Express deals strictly with two customers. The payment from Customer A averages $537,400 and has a collection delay of three days. Customer B's average payment is $737,500 and has a one-day delay. What is the weighted average delay assuming every month has 30 days?

Accepted Answer

A)  1.79 days 
B)  1.62 days 
C)  2.02 days 
D)  2.07 days 
E)  1.84 days

Question 14

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

Accepted Answer

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.

Question 15

The Moon Hotel spends $157,300 a week to pay bills and maintains a lower cash balance limit of $50,000. The standard deviation of the disbursements is $11,307. The applicable weekly interest rate is 0.043 percent and the fixed cost of transferring funds is $44. What is the optimal upper cash limit based on the Miller-Orr model?

Accepted Answer

A)  $114,225 
B)  $107,905 
C)  $92,748 
D)  $123,825 
E)  $99,309

Question 16

Theo's Bar & Grill needs $49,500 a week to pay bills and has established a lower cash balance limit of $40,000. The applicable interest rate is 3.26 percent and the fixed cost of transferring funds is $41. Based on the BAT model, what is the optimal average cash balance?

Accepted Answer

A)  $36,199. 
B)  $49,568 
C)  $40,232 
D)  $43,136 
E)  $38,927

Question 17

Which of the following statements is correct?

Accepted Answer

A)  There is a greater likelihood of needing an unexpected loan when cash flows are relatively constant over time. 
B)  The cost of borrowing affects the target cash balance. 
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.

Question 18

Assume a check for $127,000 has a collection delay of 1.8 days while a check for $218,900 has a collection delay of 1.5 days. If these are the only two checks received in a 30-day period, what is the weighted average delay?

Accepted Answer

A)  1.63 days 
B)  1.61 days 
C)  1.56 days 
D)  1.58 days 
E)  1.65 days

Question 19

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:

Accepted Answer

A)  commercial paper transaction. 
B)  repurchase agreement. 
C)  private certificate of deposit. 
D)  revenue anticipation note. 
E)  bill anticipation note.

Question 20

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

Accepted Answer

A)  Fixed costs, upper cash limit, target cash limit 
B)  Total transaction need, upper limit, and lower limit 
C)  Target cash limit, upper limit, and lower limit 
D)  Rate of return on market securities, fixed costs, and total transaction need 
E)  Target cash limit, total transaction need, rate of return on market securities

Exam 19: Cash and Liquidity Management

The BAT model:

Which one of the following will increase collection time?

Which of the following costs related to holding cash are minimized when the level of cash held is optimized?

The BAT model:

A lockbox is a:

Disbursements float:

High Brow Express deals strictly with two customers. The payment from Customer A averages $537,400 and has a collection delay of three days. Customer B's average payment is $737,500 and has a one-day delay. What is the weighted average delay assuming every month has 30 days?

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

Theo's Bar & Grill needs $49,500 a week to pay bills and has established a lower cash balance limit of $40,000. The applicable interest rate is 3.26 percent and the fixed cost of transferring funds is $41. Based on the BAT model, what is the optimal average cash balance?

Which of the following statements is correct?

Assume a check for $127,000 has a collection delay of 1.8 days while a check for $218,900 has a collection delay of 1.5 days. If these are the only two checks received in a 30-day period, what is the weighted average delay?

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:

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