CHAPTER 17: THE MANAGEMENT OF CASH AND MARKETABLE
SECURITIES
1. Which of the following methods is (are) used to transfer surplus funds from local (collection) bank accounts to
concentration (disbursement) bank accounts?
a. wire transfers
b. electronic depository transfer checks
c. (mail) depository transfer checks
d. all of these answers are correct
2. are processed through the Automated Clearing House (ACH) System.
a. Drafts
b. Wire transfers
c. Check-like electronic images
d. Floats
3. consists of short-term unsecured promissory notes issued by large, well-known corporations and finance
companies.
a. Negotiable certificates of deposit
b. Commercial paper
c. Repurchase agreements
d. Bankers’ acceptances
4. are short-term debt instruments issued as part of a commercial transaction, with payment guaranteed by a
commercial bank.
a. Negotiable certificates of deposit
b. Commercial paper
c. Repurchase agreements
d. Bankers’ acceptances
5. Which of the following statements concerning auction rate money market preferred stocks is (are) true?
a. The price of the stock stays near par.
b. Fifty percent of the dividends are exempt from corporate income taxes.
c. The dividend yield on these securities is adjusted every 20 days through an auction process, where investors
can exchange their stock for cash.
d. The price of the stock stays well above par.
6. The primary reason(s) why firms hold liquid asset balances is (are):
a. for transactions purposes
b. for precautionary purposes
c. to compensate its broker for various services rendered to the firm
d. for transaction and precautionary purposes
7. The “shortage” costs associated with inadequate liquid asset balances include
a. higher cash discounts
b. possible financial insolvency
c. lower interest expense
d. possible financial insolvency and lower interest expense
8. Liquid asset balances include all of the following except
a. accounts receivable
b. checking account balances
c. marketable securities
d. currency on hand
9. The firm’s optimal liquid asset balance occurs where the sum of the opportunity holding and costs is
minimized.
a. borrowing
b. compensating balance
c. shortage
d. capital
10. The difference between the firm’s checking account balance shown on the books of the bank and the account
balance shown on its own books is known as
a. overdraft
b. compensating balances
c. surplus balances
d. float
Chapter 17: The Management of Cash and Marketable Securities
11. All of the following are methods used in expediting the collection of cash except
a. wire transfers
b. lockboxes
c. drafts
d. decentralized collection centers and concentration banks
12. The costs of a lockbox collection system include
a. foregone returns on the required compensating balances
b. service fees charged by the bank
c. increased bad-debt expenses
d. foregone returns on the required compensating balances and service fees charged by the bank
13. The fastest method for moving funds between banks is
a. special courier services
b. wire transfers
c. drafts
d. float
14. Which of the following statements concerning “zero balance” systems is (are) correct?
a. Zero balance systems help utilize disbursement float more effectively.
b. Exactly enough funds are transferred into the zero balance accounts each day to cover the checks that have
cleared.
c. The function of the concentration account is to receive all deposits coming into the zero balance system.
d. all of these answers are correct
15. Which of the following statements concerning drafts is (are) correct?
a. Drafts require the firm to keep larger balances in its disbursement account.
b. When a draft is transmitted to the firm’s bank for collection, the bank must present the draft to the firm for
acceptance before payment is made.
c. Both a and b are correct.
d. Neither a nor b is correct.
Chapter 17: The Management of Cash and Marketable Securities
16. The optimal amount of the firm’s liquid asset balance to be invested in marketable securities is a function of
a. the interest earned over the expected holding period
b. the transaction cost involved in buying and selling the securities
c. the spread between long-term and short-term interest rates
d. the interest earned over the expected holding period and the transaction cost involved in buying and selling
the securities
17. Which of the following criteria is generally least important in selecting marketable securities for inclusion in
the firm’s portfolio?
a. length of maturity
b. yield
c. marketability
d. default risk
18. Which of the following types of marketable securities is considered to have the lowest default risk?
a. bankers’ acceptances
b. U.S. Treasury issues
c. repurchase agreements
d. commercial paper
19. Which of the following types of marketable securities normally has the lowest yields?
a. Federal agency issues
b. Treasury bills
c. repurchase agreements
d. commercial paper
20. Which of the following types of marketable securities is most suitable for a smaller firm with only a few
thousand dollars to invest at any given time?
a. money market mutual funds
b. Treasury bills
c. Federal agency issues
d. commercial paper
Chapter 17: The Management of Cash and Marketable Securities
21. Which of the following types of marketable securities has a relatively weak secondary market?
a. Bankers’ acceptances
b. Federal agency issues
c. negotiable certificates of deposit
d. commercial paper
22. The primary reason(s) that firms do not hold long-term U.S. Treasury securities in their marketable securities
portfolio is because
a. the interest-rate risk associated with these securities is too high
b. the transactions costs associated with these securities is too high
c. the default risk associated with these securities is too high
d. these securities are not readily marketable
23. All of the following would be viable securities to purchase with temporary excess cash except:
a. a recently issued 30 year Baa corporate bond
b. U.S. Treasury bill
c. the commercial paper of General Motors Acceptance Corporation
d. a repurchase agreement
24. The “shortage” costs associated with inadequate liquid asset balances include all of the following except
a. deterioration of the firm’s credit rating
b. foregone cash discounts
c. lost sales
d. possible financial insolvency
25. All of the following are cash management strategies to expedite collections except
a. a lockbox collection system
b. wire transfers
c. decentralized collection system
d. the use of drafts instead of checks
Chapter 17: The Management of Cash and Marketable Securities
26. The cash management function is concerned with determining
a. the optimal size of a firm’s liquid asset balance
b. the appropriate types and amounts of short-term investments the firm should make
c. the most efficient methods of controlling the collection and disbursement of cash
d. all of these answers are correct.
27. In addition to providing their commercial customers with lines of credit and/or term loans, banks provide all of
the following tangible services except:
a. handling of dividend payments
b. registration and transfer of a firm’s stock
c. establishment of credit terms
d. cash management
28. The objective of cash collection and disbursement policies is to
a. minimize storage costs
b. speed up collections and slow down disbursements
c. maximize the return on near cash equivalents
d. avoid using float
29. The primary components or sources of float include all the following except
a. check clearing float
b. collection float
c. processing float
d. mail float
30. In general the the number of checks being handled and the the dollar amount of each check, the
greater the benefit of a lockbox arrangement is to a firm.
a. smaller, greater
b. greater, smaller
c. greater, greater
d. smaller, smaller
Chapter 17: The Management of Cash and Marketable Securities
31. , which are similar to other checks except they are not payable on demand, are used primarily to provide
for centralized control over payments authorized in field offices.
a. Preauthorized checks
b. Drafts
c. Mail depository transfer checks
d. Electronic depository transfer checks
32. All of the following are criteria that a firm should consider when deciding where to invest excess cash reserves
among the different types of securities except
a. rate of return.
b. maturity date.
c. issue date.
d. marketability.
33. To minimize the cost associated with misdirected funds between subsidiaries, many multinational companies
have instituted a process called .
a. multinational cash consolidation
b. multilateral netting
c. unilateral netting
d. cash restriction
34. The first step in efficient cash management is the development of a .
a. liquid asset balance
b. cash budget
c. proforma cash flow statement
d. compensating spreadsheet
35. There is a(n) relationship between a firm’s liquid asset balance and “shortage” costs.
a. direct
b. no
c. inverse
d. very small
Chapter 17: The Management of Cash and Marketable Securities
36. A(n) is an unsigned, nonnegotiable check drawn on the local collection bank and payable to the
concentration bank.
a. pre-authorized check
b. bankers acceptance check
c. special remittance
d. mail depository transfer check
37. A is a security issued by a commercial bank which entitles the holder to receive the amount deposited plus
accrued interest on a specified date.
a. negotiable certificate of deposit
b. commercial paper
c. banker’s acceptance
d. repurchase agreement
38. The Essex Company found that an average of 10 days elapses between when customer payments are received
and the deposited funds clear the customer’s bank and become usable by the firm. Essex’s annual sales are
$240 million. (Assume 365 days per year when converting from annual data to daily data or vice versa.) What
is the increase in Essex’s average cash balance assuming that it can reduce the time required to process
customer payments by 3 days through more efficient payment processing methods?
a. $666,667
b. $120,000,000
c. $1,972,603
d. $270,000
39. The Essex Company found that an average of 10 days elapses between when customer payments are received
and the deposited funds clear the customer’s bank and become usable by the firm. Essex’s annual sales are
$240 million (Assume 365 days per year when converting from annual data to daily data or vice versa.)
Suppose that Essex is able to reduce the time required to process customer payments by 4 days through more
efficient payment processing methods. Given that these additional funds can be used to reduce the firm’s
outstanding bank loans (10% interest rate), what is the annual pretax savings in interest expense?
a. $263,014
b. $96,000,000
c. $66,667
d. $2,630,149
Chapter 17: The Management of Cash and Marketable Securities
40. Osborne Shipbuilding Company, located in Baton Rouge, receives large remittances from its customers in New
York and California. If the firm deposits these checks in its local bank, two business days are required for the
checks to clear and the funds to become usable by the firm. However, if Osborne sends an employee to New
York or California and presents the check for payment at the bank upon which it is drawn, the funds are
available immediately to the firm. The firm can earn 8% per annum on short-term investments and the cost of
sending an employee to New York or California to present the check for payment is $500. What is the net
benefit to the firm of employing this special handling technique for a $5 million check received on Tuesday
(assume 365 days per year)?
a. $2,192.00
b. $1,692.00
c. $2,000.00
d. $1,095.50
41. Zycad has sales of $110 million a year. If Zycad reduces their processing float by 3 days, what is the increase
in the firm’s average cash balance? Assume 365 days per year.
a. $916,667
b. $904,110
c. $872,180
d. $30,137
42. MLX has annual sales of $320 million per year and has calculated that the collection float is 12 days. If MLX
is currently paying 9.35 percent on its line of credit, what amount of interest expense could be saved if the
collection float is reduced by 3 days? Assume 365 days per year.
a. $249,333
b. $573,808
c. $299,200
d. $245,918
43. Pronet has annual sales of $724 million from its 600 retail stores. Pronet can reduce its mail float by 2 days
through the use of wire transfers. The annual cost of the wire transfers is expected to be $105,610. If Pronet’s
cost of short-term funds is 9.75 percent, should the change to wire transfers be made? Assume 365 days per
year.
a. No, loss of $247,340
b. Yes, savings of $281,185
c. Yes, savings of $474,582
d. No, loss of $105,610
Chapter 17: The Management of Cash and Marketable Securities
44. Tocor is considering the implementation of a lockbox collection system for its mid-western and western sales
regions. Sales in those two regions are 30 percent of Tocor’s annual sales of $560 million. The lockbox system
will cost $187,000 a year and reduce collection time by 3 days. If Tocor could invest any released funds at
10.85 percent, should it use the lockbox system? Assume 365 days per year.
a. Yes, savings of $149,819
b. Yes, savings of $312,397
c. No, loss of $37,181
d. No, loss of $35,100
45. Average daily sales for Sierra are $140,000. The financial manager can reduce the float by 4 days using a
lockbox system that will cost $33,000. If the opportunity cost of any funds released is 11 percent, what is the
annual savings from this system?
a. $28,600
b. $14,520
c. $61,600
d. $35,000
46. Lexicon has a daily average check collections of $180,000 and it takes the firm 5 days before it can completely
process those checks. An automated lockbox system that costs $33,000 a year would reduce the processing
time by 2 days. Should Lexicon invest in this system if the opportunity cost of short-term funds is 12.3
percent?
a. Yes, savings of $44,280
b. Yes, savings of $33,420
c. Yes, savings of $11,280
d. No, loss of $10,860
47. Marcos Company annual sales are $730 million. Suppose Marcos is able to reduce the time required to process
customer payments by 3 days through more efficient payment processing techniques. Given that any funds
released by these methods can be invested elsewhere in the company to yield a 15% pretax rate of return,
determine the annual increase in pretax returns. (Assume 365 days per year in all calculations.)
a. $900,000
b. $300,000
c. $6,000,000
d. cannot be determined from the information provided
Chapter 17: The Management of Cash and Marketable Securities
48. Jester, Inc. has annual sales of $434 million. An average of 12 days elapses between the time a customer mails
its payment and the funds are available to Jester. What is the increase in the average cash balance if the use of a
lock box system is believed to reduce the collection time by 4 days?
a. $4.76 million
b. $49.6 million
c. $633,640
d. $9.5 million
49. Galway’s sales average $12 million per day. If Galway could reduce the time between customer’s mailing date
and when these payments are available to Galway by 3 days, what would be the resulting annual increase in
earnings if the opportunity cost of funds in 9.25%?
a. $1.11 million
b. $98,630
c. $3.33 million
d. $9,123
50. Fagins, a nationwide department store chain, currently processes all of its credit sales payments at its St. Louis
headquarters. The firm is considering the establishment of a lockbox arrangement with a Los Angeles bank to
process payments from its customers in 10 western states. With the lockbox system, average mailing time for
customers from this region would be reduced from 3 days to 1.5 days. Check clearing time would also be
reduced from 4 days to 2.5 days. Annual collections from the western region are $150 million. Establishment
of this lockbox system would reduce the compensating balance requirement at the firm’s St Louis bank by
$600,000 and reduce annual payment processing costs at the St. Louis office by $30,000. Funds released by the
lockbox arrangement can be invested elsewhere in the firm to earn 12 percent before taxes. The Los Angeles
bank has agreed to process Fagins’ customer payments for an annual fee of $100,000. What are the annual net
pretax benefits to Fagins of establishing a lockbox system with the Los Angeles bank (assume 365 days per
year)?
a. $222,000
b. $130,000
c. $1,832,877
d. $149,945
Chapter 17: The Management of Cash and Marketable Securities
51. Fagins, a nationwide department store chain, currently processes all of its credit sales payments at its St. Louis
headquarters. The firm is considering the establishment of a lockbox arrangement with a Los Angeles bank to
process payments from its customers in 10 western states. Average mailing time for customers from this region
would be reduced from 3 days to 1.5 days. In addition, check processing and clearing time would be reduced
from 4 days to 2.5 days. Annual collections from the western region are $150 million. Establishment of this
lockbox system would reduce the compensating balance requirement at the firm’s St. Louis bank by $600,000
and reduce annual payment processing costs at the St. Louis office by $30,000. Funds released by the lockbox
arrangement can be invested elsewhere in the firm to earn 12 percent. The Los Angeles bank has agreed to
process Fagins’ customer payments “free of charge” provided that the firm maintains a minimum
compensating balance of $1,500,000 in its account at the bank. What are the annual net benefits to Fagins of
establishing a lockbox system with the Los Angeles bank (assume 365 days per year)?
a. $630,000
b. $332,877
c. $69,945
d. $41,096
52. A Delaware bank has offered to set up a lock-box arrangement to process Union Oil Company of California’s
(UNOCAL) credit card payments from customers in 8 mid-Atlantic states for an annual fee of $150,000 plus
$0.05 per payment. Total collections from this area are $547.5 million annually—consisting of an average of
10 payments per year from 1,100,000 credit card customers. Average mailing time for customers from this
region would be reduced from 3.5 days currently to 2 days with the lock-box system. Check processing and
clearing time also would be reduced from 5 days presently to 1.5 days with the lock-box arrangement.
Establishment of the lock-box system would reduce annual payment processing costs at its Los Angeles
headquarters by $250,000 and reduce the compensating balance at its Los Angeles bank by $500,000. The
Delaware bank will not require UNOCAL to maintain a compensating balance if it establishes a lock-box
system. Funds released by the lock-box arrangement can be invested elsewhere in the firm to earn 15% per
annum pretax. Determine the net pretax benefits to UNOCAL of establishing the lock-box system with the
Delaware bank. (Assume 365 days per year in the calculations.)
a. $675,000
b. $750,000
c. $500,000
d. $450,000
Chapter 17: The Management of Cash and Marketable Securities
53. Lone Star Technologies has annual sales of $336 million. Management has determined that an average of 8
days elapses between the time customers mail their payments and when the funds are available to the firm. The
cost of reducing the float 3 days will be $60,000. Should Lone Star work to reduce the float if the increase in
cash can be invested to earn 7.5% per annum?
a. Yes, savings of $9,041
b. Yes, savings of $147,123
c. Yes, savings of $78,080
d. No, loss of $18,080
54.
Currently Nemonix is using a decentralized collection system whereby customers mail their checks to one of
the
firm’s eight regional locations. Its annual sales are $95 million. Checks are deposited each business day in
a local
bank and the amount of the deposit is sent to the firm’s concentration bank in Dallas. The average time
between deposit in the local bank and the availability of those funds, in Dallas, to Nemonix is 6 days. Nemonix
has determined
that the use of wire transfers would reduce the float by four days, but the transfer will cost
$7.50. If transfers will be
made on the 250 days that banks are open each year, should Nemonix switch to the
wire transfer system? Assume that Nemonix can earn 8% on the funds released through this more efficient
transfer.
a.
Yes, savings of $106,600
b.
Yes, savings of $61,388
c.
Yes, savings of $68,288
d.
No, loss of $6,671
55.
Tritonic is considering switching from depository transfer checks to using wire transfers for sending funds
from its
local banks to its bank in Chicago. The cost of the wire transfer is $5.25 more than the cost of
depository transfer checks. The change would reduce the total float by 3 days. Tritonic can earn 8.5% on the
funds released through the more efficient transfer. If Tritonic has 30 local banks, what annual sales level would
the firm require before the
change to wire transfers would be profitable? Assume there are 250 business days
each year.
a.
$391,544,118
b.
$56,360,294
c.
$84,286,029
d.
$1,149,750
Chapter 17: The Management of Cash and Marketable Securities
56. Slimware is considering establishing a zero-balance system for its payroll account. Currently, the firm pays its
hourly employees every week on late Friday afternoon and puts a check for $750,000 in the bank to cover the
payroll each Monday morning. Slimware has determined that the checks clear its bank as follows:
Day
Percent clearing
Monday
26%
Tuesday
51%
Wednesday
14%
Thursday
7%
Friday
2%
What is the annual pretax return to Slimware if the firm can earn 9% on any funds released from employing the
zero-balance system? Assume the company has 52 weekly pay periods each year.
a.
$10,374
b.
$199.72
c.
$24,601
d.
$17,488
57. Amazon’s CFO is considering the fees charged by two banks in trying to determine which is best for her firm.
First American charges a flat $0.11 per payment and First Western requires a minimum compensating balance
of $500,000 plus $0.05 per payment. If Amazon’s cost of funds is 8.50%, and the expected number of
payments per year is 900,000, which bank should be chosen?
a. FW, savings = $54,000
b. FA, savings = $23,000
c. FW, savings = $11,500
d. FW, savings = $18,500
Chapter 17: The Management of Cash and Marketable Securities
58. Dupree Funds is considering the fees charges by two banks. First America charges a flat rate of $0.11 per
payment and First Western requires a minimum compensating balance of $500,000, plus $0.05 per payment.
What is the number of payments per year where the costs of the two banks will be equal? Assume Dupree’s
costs of funds is 9%.
a. 281,250
b. 750,000
c. 900,000
d. 409,091
59. Cash management involves the determination of:
a. the minimal size of a firm’s asset balance
b. the maximum amount of dividends that should be paid
c. the optimal size of a firm’s liquid asset balance
d. the range of long-term financial alternatives
60. Cash management involves the determination of:
a. the best locations for lockboxes
b. setting up decentralized collection centers
c. both a and b
d. neither a nor b
61. Concentration banking involves:
a. using decentralized collection centers
b. having a large balance at a large commercial bank
c. having multiple accounts with a brokerage firm
d. utilizing an investment banker for when trying to market both stocks and bonds
62. Firms that have large multi-million dollar remittances use:
a. the Federal Reserve System
b. couriers
c. lockboxes
d. wire transfers
Chapter 17: The Management of Cash and Marketable Securities
63. An ordinary check that does not require the signature of the person or firm on whose account it is being drawn
is a:
a. cashier’s check
b. preauthorized check
c. depository check
d. float
64. Drafts are:
a. payable on demand
b. legally paid on the third business day
c. requires the firm to keep large balances in its disbursement accounts
d. more expensive than checks
65. The “Check 21” act allows banks to:
a. use substitute checks to reduce check clearing time.
b. delay paying the check without proper identification.
c. choose when checks are processed.
d. fingerprint people who are cashing checks.
66. All of the following portfolio criteria used in determining which securities to include in a portfolio are
concerned with risk except:
a. rate of return
b. default risk
c. marketability
d. maturity date
67. Which of the following is/are the most liquid of a company’s assets?
I. Inventory
II. Accounts Receivable
a. inventory only
b. accounts receivable only
c. Both inventory and accounts receivable are the most liquid
d. Neither inventory nor accounts receivable are the most liquid
Chapter 17: The Management of Cash and Marketable Securities
68. Cash management involves much more than simply paying bills and receiving payments for goods and
services. The cash management function is concerned with all of the following except:
a. Determining the optimal size of a firm’s liquid asset balance.
b. The appropriate types of long-term debt the firm should have.
c. The most efficient methods of controlling the collection and disbursement of cash.
d. The appropriate types and amounts of short-term investments a firm should make.
69. Cash flows differ with respect to their degree of certainty. Which of the following can be forecasted the
easiest?
a. Cash outflows
b. Current cash inflows
c. Seasonal cash requirements
d. Future cash inflows
70. Tangible services provided by a firm’s bank are all of the following except:
a. Cash management
b. Supplying credit information
c. Collection of deposits
d. Handling of dividend payments
71. Which of the following is/are considered an intangible banking service?
I. Providing lines of credit
II. Providing consultation on such matters as economic conditions and mergers
a. Only statement I is correct
b. Only statement II is correct
c. Both statements I and II are correct
d. Neither statement I nor II is correct
72. A reason that banks would maintain a bank balance exceeding the compensating balance requirements is:
a. It reduces the opportunity cost.
b. It improves the firm’s credit rating.
c. It alters the requirements imposed by the bank.
d. It reduces shortage costs.
Chapter 17: The Management of Cash and Marketable Securities
73. relationship exists between a firm’s liquid asset balance and shortage costs.
a. A unified
b. A positively correlated
c. An inverse
d. A linear
74. The level of liquid assets that should be invested in marketable securities depends on several factors, including
all of the following except:
a. Seasonal cash requirements
b. Interest to be earned over the expected holding period
c. Transaction costs involved in buying and selling the securities
d. The variability of the firm’s cash flows
75. Explain how companies can slow disbursements in order to keep funds in the bank for longer periods of time.
76. Name the three primary components (or sources) of float:
77. When and why is it best to use lockboxes? Explain when alternative methods should be used.
Chapter 17: The Management of Cash and Marketable Securities
78. Banks use depository transfer checks to move surplus funds from bank accounts to its concentration bank
account or accounts. Explain how this is done.
79. Why do firms hold liquid asset balances?
80. Explain why firms would want to maintain a bank balance exceeding the compensating balance requirements.