978-0134083285 Chapter 17 Part 2

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58) A company is technically insolvent when

A) cash outflows in a given period are greater than cash inflows.

B) earnings before interest payments are less than the interest payments.

C) it lacks the necessary liquidity to promptly pay its current debt obligations.

D) current ratio is less than 1.0.

Keywords: Insolvency

Learning Obj.: L.O. 17.1

AACSB: Analytical Thinking

59) Which of the following is NOT a motive for a corporation to hold cash balances?

A) transactions

B) float

C) precautionary

D) speculative

Keywords: Transactions Motive, Precautionary Motive, Speculative Motive, Cash

Learning Obj.: L.O. 17.1

AACSB: Reflective Thinking

60) When a corporation designs an investment strategy for investing temporary excess cash balances in

marketable securities, it must consider a variety of factors. Which of the following is the least important?

A) liquidity

B) financial risk

C) achieving the highest yield

D) maintaining the safety of principal

Keywords: Cash Management, Temporary Excess Cash

Learning Obj.: L.O. 17.1

AACSB: Reflective Thinking

61) When a corporation designs an investment strategy for investing temporary excess cash balances in

marketable securities, it must consider a variety of factors. Which of the following is the most important?

A) maintaining the safety of principal

B) maintaining the greatest float

C) achieving the highest yield

D) illiquidity

Keywords: Cash Management, Temporary Excess Cash

Learning Obj.: L.O. 17.1

AACSB: Reflective Thinking

62) What is the greatest risk associated with cash management?

A) yields

B) insolvency

C) holding too much cash

D) managing float

Keywords: Cash Management, Insolvency

Learning Obj.: L.O. 17.1

AACSB: Reflective Thinking

63) Cash management system objectives include

A) maintaining sufficient cash to meet disbursal needs.

B) maintaining idle cash balances at “doomsday event” levels.

C) maintaining accounts payable balances at zero by early bill payment.

D) All of the above are objectives of the system.

Keywords: Cash Management

Learning Obj.: L.O. 17.1

AACSB: Reflective Thinking

64) A lockbox system can reduce all of the following elements of float EXCEPT

A) mail float.

B) processing float.

C) transit float.

D) disbursing float.

Keywords: Lockbox, Mail Float, Processing Float, Transit Float, Disbursing Float

Learning Obj.: L.O. 17.1

AACSB: Reflective Thinking

65) The benefits of a lockbox system include all of the following EXCEPT

A) increased working cash.

B) elimination of clerical functions.

C) increase in total float.

D) early knowledge of dishonored checks.

Keywords: Lockbox, Float

Learning Obj.: L.O. 17.1

AACSB: Reflective Thinking

66) Which of the following is used to manage a firm‘s cash disbursements?

A) lockbox system

B) bankers‘ acceptances

C) repurchase agreements

D) zero balance accounts

Keywords: Cash Disbursements, Zero Balance Account

Learning Obj.: L.O. 17.1

AACSB: Reflective Thinking

67) A company with national sales but only one large manufacturing operation and one administrative

headquarters located in the same large northeastern city would most likely use which of the following

techniques for cash management?

A) lockbox system

B) zero balance accounts

C) payable-through drafts

D) bankers’ acceptances

Keywords: Lockbox, Zero Balance Accounts, Payable-through Drafts, Bankers’ Acceptances

Learning Obj.: L.O. 17.1

AACSB: Reflective Thinking

68) Centralized control over disbursements is assisted by which of the following cash management

techniques?

A) lockbox system

B) zero balance accounts

C) payable-through drafts

D) both B and C

Keywords: Zero Balance Accounts, Payable-through Drafts, Centralized Disbursement Control

Learning Obj.: L.O. 17.1

AACSB: Reflective Thinking

69) Flashbinder Guitars, 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 Flashbinder Guitars, Inc. earn

on its marketable securities for the lockbox system to be beneficial?

A) 1.825%

B) 1.118%

C) 1.074%

D) 0.735%

Keywords: Lockbox, Cost/Benefit Analysis

Learning Obj.: L.O. 17.1

AACSB: Analytical Thinking

70) Flashbinder Guitars, Inc. is negotiating with the bank for a lockbox system that is expected to reduce

check collection time by 4 days. Flashbinder Guitars’ average check size is $1,200 and any funds freed up

by the new system will be invested in a money-market account that is currently paying 2.5% annually.

What is the most Flashbinder Guitars should be willing to pay the bank for the lockbox service, assuming

the bank charges a per-check processing fee?

A) 20.500 cents

B) 29.767 cents

C) 30.726 cents

D) 32.877 cents

Keywords: Lockbox, Cost/Benefit Analysis

Learning Obj.: L.O. 17.1

AACSB: Analytical Thinking

71) Flashbinder Guitars, Inc. is considering a lockbox system that will increase its check processing cost

by $.20 per check. The company estimates an average check size of $900 and expects any funds freed up

by the new lockbox system can be invested in an account that earns 4% per year before taxes. What

reduction in collection time is necessary for the lockbox to be beneficial to Flashbinder Guitars, Inc.?

A) 1.96 days

B) 2.03 days

C) 1.73 days

D) 2.15 days

Keywords: Lockbox, Cost/Benefit Analysis

Learning Obj.: L.O. 17.1

AACSB: Analytical Thinking

72) Transit float is caused by

A) the time necessary for a deposited check to clear the banking system and become usable funds to the

company.

B) the time funds are not available, through the company’s bank account, until its payment check has

cleared the banking system.

C) the elapsed time from the moment a customer mails his remittance check until the firm begins to

process it.

D) the time required for the firm to process remittance checks.

Keywords: Transit Float

Learning Obj.: L.O. 17.1

AACSB: Reflective Thinking

73) Assume that liquid funds can be invested to yield 4.5 percent. If annual remittance checks total $2

billion, what is it worth for the firm to reduce float by 1 day?

A) $388,349

B) $246,575

C) $257,534

D) $24,658

Keywords: Float

Learning Obj.: L.O. 17.1

AACSB: Analytical Thinking

74) Payable-through drafts

A) provide for effective control over field payments.

B) are not legal instruments.

C) cannot be cleared through the banking system.

D) are a form of commercial paper.

Keywords: Payable-Through Drafts

Learning Obj.: L.O. 17.1

AACSB: Reflective Thinking

75) A lock-box system reduces

A) mail float.

B) transit float.

C) disbursing float.

D) A and B

Keywords: Lockbox System, Mail Float, Transit Float

Learning Obj.: L.O. 17.1

AACSB: Reflective Thinking

76) A company trying to optimize the use of float will try to

A) increase its disbursing float.

B) decrease its disbursing float.

C) decrease processing float.

D) Both A and C

Keywords: Disbursing Float, Processing Float

Learning Obj.: L.O. 17.1

AACSB: Analytical Thinking

77) The time necessary for a deposited check to clear through the commercial banking system causes

which of the following types of floats?

A) mail

B) processing

C) transit

D) disbursing

Keywords: Transit Float

Learning Obj.: L.O. 17.1

AACSB: Reflective Thinking

78) SteelCo Production, Inc. is considering the use of a lock-box collection system. SteelCo’s average check

receipt is $1,350. The company invests excess cash in money-market certificates and receives an average

of 3.5% annual interest. The lock-box system will speed up SteelCo’s collections by 2.5 days. What is the

maximum per check processing cost that SteelCo should be willing to pay for the lock–box system?

A) $0.1871

B) $0.2987

C) $0.3236

D) $0.4519

Keywords: Lockbox System, Cost/Benefit Analysis

Learning Obj.: L.O. 17.1

AACSB: Analytical Thinking

79) The PMI, Inc. processes an estimated 200,000 checks per year from its customers. Total revenue

collected by check is $40,000,000. The average float time until the funds are credited to PMI’s checking

account is 6 days. For an extra cost of $ .06/check, PMI’s bank will install a lock-box system that will

reduce float time from 6 days to 2.5 days. If PMI earns 3.5% on its checking account, how much per check

will PMI make if it uses the lock-box system?

A) $.005

B) $.006

C) $.007

D) $.008

Keywords: Lockbox System, Float, Cost/Benefit Analysis

Learning Obj.: L.O. 17.1

AACSB: Analytical Thinking

80) The Siskiyou Manufacturing Company will collect an estimated $12,000,000 next year; and it will

receive an estimated 20,000 checks. Siskiyou’s bank has offered to set up a lock–box system that will

reduce float time by 4.5 days. The cost of the system will be $.15 per check. What is the minimum annual

interest rate on its cash balance that Siskiyou should receive before it would be willing to adopt the lock-

box system?

A) 3.25%

B) 2.03%

C) 1.82%

D) 1.07%

Keywords: Float, Lockbox System

Learning Obj.: L.O. 17.1

AACSB: Analytical Thinking

81) Funds that are available in a company‘s bank account until its payment check has cleared refers to

A) mail float.

B) processing float.

C) transit float.

D) disbursing float.

Keywords: Disbursing Float

Learning Obj.: L.O. 17.1

AACSB: Reflective Thinking

82) Salamander Insurance Company tries to settle claims as quickly as possible. In certain cases, agents

can present payments to claimants which are cleared through the banking system like a check, but must

be passed through the Insurance Company for approved prior to payment. This is an example of a(n)

A) zero balance account.

B) payable-through draft.

C) insurance float voucher.

D) post-dated check.

Keywords: Payable-Through Drafts

Learning Obj.: L.O. 17.1

AACSB: Reflective Thinking

83) A way of managing a firm’s cash disbursements would be through

A) zero balance accounts.

B) accounts receivable factoring.

C) lockbox system.

D) floating lien.

Keywords: Zero Balance Accounts

Learning Obj.: L.O. 17.1

AACSB: Reflective Thinking

84) Float is best described by which of the below?

A) investing excess cash balances

B) the time required for a deposited check to clear through the commercial banking system and be

available for payment

C) the term used to describe payment for the purchase of raw materials that are needed to complete

production of a luxury liner

D) the time that is required to receive payment on a zero balance account

Keywords: Float

Learning Obj.: L.O. 17.1

AACSB: Reflective Thinking

85) Assume that Federated Stores, whose credit card billings total $120 billion per year, were to

implement a lockbox arrangement that would speed up the collection of its credit card billings by 2 full

days. If Federated could earn 3.5% on its marketable securities, how much would the firm earn per year

from such a lockbox arrangement? Assume a 365–day year.

A) $316.99 million

B) $244.58 million

C) $230.14 million

D) $183.50 million

Keywords: Lockbox System, Cost/Benefit Analysis

Learning Obj.: L.O. 17.1

AACSB: Analytical Thinking

86) Managing a firm‘s cash outflows through use of a “zero balance account” system offers all but which

of the following benefits?

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

Keywords: Zero Balance Accounts

Learning Obj.: L.O. 17.1

AACSB: Reflective Thinking

87) All of the following are false EXCEPT

A) the mail float is caused by the time lapse from the moment a firm receives the check and begins to

process it.

B) the processing float is caused by the time necessary for a bank to process the check.

C) the transit float is caused by the time lapse from the moment a customer mails a check until the firm

begins to process it.

D) the disbursing float derives from the fact that funds remain in a firm’s bank account until its payment

check is cleared through the banking system.

Keywords: Mail Float, Processing Float, Transit Float, Disbursing Float

Learning Obj.: L.O. 17.1

AACSB: Reflective Thinking

88) Lockbox arrangement benefits include

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.

Keywords: Lockbox Arrangements

Learning Obj.: L.O. 17.1

AACSB: Reflective Thinking

89) The objectives of a zero balance account system for the firm include

A) reduce disbursing float.

B) achieve better control over its cash payments.

C) increase cash balances in regional rather than national banks.

D) All of the above are correct.

Keywords: Zero Balance Accounts

Learning Obj.: L.O. 17.1

AACSB: Reflective Thinking

90) Compare the risk of a 90-day unsecured promissory note issued by Southwest Airlines to a 20-year

U.S. Government Treasury bond.

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.

Keywords: Financial Risk, Interest Rate Risk

Learning Obj.: L.O. 17.1

AACSB: Reflective Thinking

91) Which of the following has the highest interest rate risk?

A) a 20-year U.S. Treasury bond

B) Bendix Corporation six–month commercial paper

C) a six-month money-market certificate at a federally issued bank

D) a Southwest Airlines bond maturing in four years

Keywords: Interest Rate Risk

Learning Obj.: L.O. 17.1

AACSB: Reflective Thinking

92) Which of the following has the least interest rate risk?

A) a six-month unsecured promissory note from International Harvester

B) an eight-year investment certificate from a federally insured bank

C) a 15-year U.S. Treasury bond

D) an AT&T bond maturing in 15 years

Keywords: Interest Rate Risk

Learning Obj.: L.O. 17.1

AACSB: Reflective Thinking

93) If you compare the yield of a municipal bond with that of a negotiable certificate of deposit, what is

the equivalent before-tax yield of the certificate of deposit if the municipal bond has a yield of 8% per

year and the investor has a marginal tax rate of 28%?

A) 8.28%

B) 9.30%

C) 10.24%

D) 11.11%

Keywords: Municipal Bond, After-Tax Yield

Learning Obj.: L.O. 17.1

AACSB: Analytical Thinking

94) Which of the following are short-term, unsecured promissory notes sold by large businesses?

A) negotiable certificates of deposit

B) repurchase agreements

C) money-market mutual funds

D) commercial paper

Keywords: Commercial Paper

Learning Obj.: L.O. 17.1

AACSB: Reflective Thinking