978-0134083285 Chapter 17 Part 3

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95) Which of the following is the least liquid?

A) U.S. Treasury bills

B) commercial paper

C) money-market mutual funds

D) federal agency securities

Keywords: Commercial Paper, Liquidity

Learning Obj.: L.O. 17.1

AACSB: Reflective Thinking

96) The financial manager is concerned with

A) striking a balance between holding too much and too little cash.

B) maintaining high levels of profitability.

C) minimizing the chance of insolvency.

D) all of the above

Keywords: Working Capital Management

Learning Obj.: L.O. 17.1

AACSB: Reflective Thinking

97) Banker’s acceptances have the following characteristics EXCEPT

A) typical maturities of 1 to 5 years.

B) fully taxable at the federal, state, and local levels.

C) are sold on a discount basis and payable to the bearer.

D) are not “issued” in predetermined denominations.

Keywords: Banker’s Acceptances

Learning Obj.: L.O. 17.1

AACSB: Reflective Thinking

98) If you were a treasurer for a Fortune 1,000 corporation who has responsibility for investing “excess

cash balances,” which of the following alternatives would you be least likely to select?

A) commercial paper

B) common stock

C) bankers’ acceptances

D) U.S. Treasury bills

Keywords: Excess Cash, Marketable Securities

Learning Obj.: L.O. 17.1

AACSB: Reflective Thinking

99) ________ is a short-term promissory note sold by large corporations to raise cash.

A) Repurchase agreement

B) Money-market mutual fund

C) Commercial paper

D) U.S. Treasury bill

Keywords: Commercial Paper

Learning Obj.: L.O. 17.1

AACSB: Reflective Thinking

100) Considerations in the selection of a proper marketable-securities mix include all of the following

EXCEPT

A) financial risk.

B) interest rate risk.

C) maturity.

D) liquidity.

Keywords: Marketable Securities Mix

Learning Obj.: L.O. 17.1

AACSB: Reflective Thinking

101) Total float consists of each of the following elements EXCEPT

A) mail float.

B) processing float.

C) transit float.

D) audit float.

Keywords: Total Float, Mail Float, Processing Float, Transit Float

Learning Obj.: L.O. 17.1

AACSB: Reflective Thinking

102) A retailer sells most of its merchandise on credit and bills clients monthly. Which of the following

elements of float does the retailer have the most control over?

A) mail float

B) processing float

C) transit float

D) disbursing float

Keywords: Processing Float

Learning Obj.: L.O. 17.1

AACSB: Analytical Thinking

103) A large corporation has annual sales revenues of $6 billion. The corporation currently earns 2.25% on

its money-market account. If the corporation can reduce its float by three days by making its billing and

collection functions more efficient, the company‘s operating profits will increase by approximately

A) $3,069,863.

B) $2,196,500.

C) $1,350,000.

D) $1,109,589.

Keywords: Float

Learning Obj.: L.O. 17.1

AACSB: Analytical Thinking

104) Given that short-term interest rates typically fluctuate less than long-term rates, interest rate risk is

least for

A) treasury bills.

B) common stock.

C) long-term government bonds.

D) medium-term corporate bonds.

Keywords: U.S. Treasury Bills, Interest Rate Risk

Learning Obj.: L.O. 17.1

AACSB: Analytical Thinking

105) Money-market funds

A) are tax exempt.

B) typically invest in a diversified portfolio of short-term, high-grade debt instruments.

C) are generally very profitable but fail to provide liquidity to the small investor.

D) typically sell shares to the public in $25,000 denominations.

Keywords: Money-Market Mutual Funds

Learning Obj.: L.O. 17.1

AACSB: Reflective Thinking

106) Brett‘s, Inc. 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, Brett’s, Inc. believes such a system

would decrease total float by 3.5 days. If Brett’s, Inc. can earn 7 percent before taxes on the released funds,

what is the maximum that Brett’s, Inc. should be willing to pay the bank per check for the service? Use a

365-day year.

Keywords: Lockbox Arrangement, Cost/Benefit Analysis

Learning Obj.: L.O. 17.1

AACSB: Analytical Thinking

107) Brett‘s, Inc. 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 Brett’s, Inc. 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.

Keywords: Float, Lockbox Arrangement

Learning Obj.: L.O. 17.1

AACSB: Analytical Thinking

108) Brett‘s, Inc. expects to have $35 million in credit sales during the coming year. In spite of a national

distributing system, all remittances are sent to the home office. A proposed system can eliminate 3 days

of float, releasing funds which, when invested, will earn 6.5 percent. What annual savings can Brett’s, Inc.

expect if the system is implemented? Use a 365-day year.

Keywords: Float, Working Capital Management, Cost/Benefit Analysis

Learning Obj.: L.O. 17.1

AACSB: Analytical Thinking

109) Jay‘s Lumber Supplies earns 2.5 percent on its investment in marketable securities. A draft

disbursing system has been proposed that will increase disbursement float by 4 days. Purchases next year

are expected to total $18 million. Individual payments average $1,000. Use a 365-day year.

a. If the draft system is adopted, what amount of funds can the firm expect to release during the year?

b. If each issue draft costs the firm $0.30, should the draft system be adopted?

c. Should the firm consider any other factors?

Keywords: Draft System

Learning Obj.: L.O. 17.1

AACSB: Analytical Thinking

110) Howton Mining expects to have credit sales of $8,000,000 this year. First National Bank is offering

Howton Mining a lock-box system for $1,200 per month. Howton Mining estimates that the new lock-box

system will reduce float by 4.5 days. What rate of return must Howton Mining earn on its marketable

securities to make it worthwhile for the company to institute this lock–box system? Use a 365-day year.

Keywords: Lockbox System, Rate of Return, Cost/Benefit Analysis

Learning Obj.: L.O. 17.1

AACSB: Analytical Thinking

111) Crimson Plumbing Supplies expects total sales of $9,000,000 this year. Ten percent of the company‘s

sales are paid in cash; credit sales are usually paid by check. The average check size is $3,000. Second

National Bank is offering the company a lock-box system. The fees are $800 per month plus $.60 per

check. Short-term marketable securities are currently earning 8 percent per year. What reduction in check

collection time is necessary for Carrollton Plumbing Supplies to be neither better nor worse off from

adopting the proposed system? Use a 365-day year.

Keywords: Float, Cost/Benefit Analysis, Lockbox System

Learning Obj.: L.O. 17.1

AACSB: Analytical Thinking

112) Premium Seed Sales, Inc. expects to generate sales of $22,000,000 in the coming year. All sales are

done on a credit basis, net 45 days. Premium Seed has estimated that it takes an average of three days for

payments to reach their central office and an additional two days to process the payments. What is the

opportunity cost of the funds tied up in the mail and processing? Premium Seed uses a 360-day year in all

calculations and can invest free funds at 6.5%.

Keywords: Opportunity Cost, Float

Learning Obj.: L.O. 17.1

AACSB: Analytical Thinking

113) You have a choice between investing in a corporate bond or a municipal bond. The corporate bond

has an annual yield of 10 percent, while the municipal bond has an annual yield of 7 percent. At what tax

rate would you be indifferent between buying the corporate bond or the municipal bond?

Keywords: Municipal Bond, Taxes

Learning Obj.: L.O. 17.1

AACSB: Analytical Thinking

114) 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?

Keywords: Municipal Bond, After-Tax Yield

Learning Obj.: L.O. 17.1

AACSB: Reflective Thinking

115) The selection of a proper marketable-securities mix involves evaluation of certain criteria. What are

these criteria and why are they important?

Keywords: Marketable Securities, Financial Risk, Interest Rate Risk, Liquidity, Taxability, Yields

Learning Obj.: L.O. 17.1

AACSB: Reflective Thinking

116) What are the three motives for holding cash?

Keywords: Cash Management Program, Precautionary Motive, Cash Flow Forecasting

Learning Obj.: L.O. 17.1

AACSB: Reflective Thinking

117) Describe the relationship between the firm‘s cash management program and the firm‘s risk of

insolvency.

Keywords: Cash Management, Insolvency

Learning Obj.: L.O. 17.1

AACSB: Reflective Thinking

118) Define float and its origins in the cash management process (that is, mail processing and transit).

Keywords: Float

Learning Obj.: L.O. 17.1

AACSB: Reflective Thinking

119) What is a lockbox arrangement, and how does its use reduce a firm’s float?

Keywords: Lock-Box Arrangement

Learning Obj.: L.O. 17.1

AACSB: Reflective Thinking

Learning Objective 17.2

1) Accounts receivable is an asset representing sales made on credit.

Keywords: Accounts Receivable

Learning Obj.: L.O. 17.2

AACSB: Reflective Thinking

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

Keywords: Accounts Receivable

Learning Obj.: L.O. 17.2

AACSB: Reflective Thinking

3) Accounts receivable variables under control of the financial manager include the terms of credit sales

and the quality of credit customers.

Keywords: Accounts Receivable, Credit Terms, Credit Quality

Learning Obj.: L.O. 17.2

AACSB: Reflective Thinking

4) The financial manager typically cannot control the level of credit sales, and hence the company‘s

investment in accounts receivable, as the level of credit sales is determined in large part by the nature of

the business enterprise.

Keywords: Accounts Receivable Management, Credit Terms

Learning Obj.: L.O. 17.2

AACSB: Reflective Thinking

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

Keywords: Terms of Sale

Learning Obj.: L.O. 17.2

AACSB: Reflective Thinking

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

Keywords: Accounts Receivable Aging

Learning Obj.: L.O. 17.2

AACSB: Reflective Thinking

7) Efficient collection of accounts receivable helps to determine both the profitability and the liquidity of

the firm.

Keywords: Accounts Receivable, Profitability, Liquidity

Learning Obj.: L.O. 17.2

AACSB: Reflective Thinking

8) In terms of trade credit, default costs vary indirectly with the quality of the customer.

Keywords: Trade Credit, Customer Quality

Learning Obj.: L.O. 17.2

AACSB: Reflective Thinking

9) The decision to forgo the discount available to those customers who pay early has an advantage as well

as a disadvantage.

Keywords: Trade Credit, Cash Discount

Learning Obj.: L.O. 17.2

AACSB: Reflective Thinking

10) According to the Altman model, multiple discriminant analysis indicates that those applicants with a

Z score below 2.7 have a significant probability of filing for bankruptcy within a year.

Keywords: Altman Model, Z-Score, Bankruptcy

Learning Obj.: L.O. 17.2

AACSB: Reflective Thinking

11) A company‘s investment in accounts receivable is determined by the company’s level of sales, percent

of credit sales to total sales, and credit and collection policies.

Keywords: Accounts Receivable

Learning Obj.: L.O. 17.2

AACSB: Reflective Thinking

12) Current assets in order of liquidity are cash, marketable securities, inventory, and accounts receivable.

Keywords: Current Assets, Liquidity

Learning Obj.: L.O. 17.2

AACSB: Reflective Thinking