Chapter 17—Cash, Payables, and Liquidity Management
MULTIPLE CHOICE
1. The amount of time that it takes for a check to clear through the banking system is called
a.
mail float
b.
processing float
c.
clearing float
d.
delivery float
2. Funds that have been sent by the payer, but are not yet usable by the payee are called
a.
tax balance
b.
ledger balance
c.
float
d.
none of the above
3. The collection, concentration, and disbursement of funds for the company is called
a.
target cash balance
b.
cash position management
c.
bank account analysis
d.
none of the above
4. A collection system that is characterized by many collection points with each having a depository
account at a local bank is called
a.
field banking system
b.
mail based collection system
c.
electronic invoice presentment and payment system
d.
electronic bill presentment and payment system
5. A collection system that is characterized by many collection points with each having a depository
account at a local bank is called
a.
field banking system
b.
mail based collection system
c.
electronic invoice presentment and payment system
d.
electronic bill presentment and payment system
6. Special post office boxes set up by the firm to expedite the receipt and processing of its accounts
receivables are called
a.
safety-deposit boxes
b.
lockboxes
c.
float reducers
d.
none of the above
NARRBEGIN: Bavarian Brew Float
Bavarian Brew Float
Bavarian Brew receives about 350 checks a day with an average check size of $550. Currently
customer’s payments spend 2 days in the mail. Once a check is received it takes about 1.5 days to
process it and another 4 days to clear the banking system. The firm’s opportunity cost is 10%. Assume
a 365-day year.
NARREND
7. What is Bavarian Brew’s collection float?
a.
4 days
b.
2 days
c.
1.5 days
d.
7.5 days
8. What is the availability float of Bavarian Brew?
a.
2 days
b.
4 days
c.
7.5 days
d.
1.5 days
9. Bavarian Brew is contemplating implementing a collection system that would decrease the collection
float by 2.5 days. What would be the annual benefit of that system?
a.
$481,250
b.
$48,125
c.
$96,250
d.
$75,480
10. Bavarian Brew is contemplating implementing a lockbox system that would decrease the collection
float by 2 days. What would be the most the company should be willing to pay on an annual basis for
the system?
a.
$96,250
b.
$482,500
c.
$38,500
d.
$48,125
11. Bavarian Brew is contemplating implementing a lockbox system. If the system has an annual cost of
$60,000, by how many days would the float have to be reduced for the company to implement the
system?
a.
2.52 days
b.
3.12 days
c.
3.75 days
d.
4.74 days
NARRBEGIN: Bavarian Cash Transfer
Bavarian Sausage Cash Transfer
Bavarian Sausage needs to transfer $250,000 from its deposit account into its concentration account.
The company could do it with an EDT which would cost $1.50 or a wire transfer for $17. The wire
transfer would result in the funds being deposited in the concentration account 2 days earlier. The
firm’s opportunity cost is 10% and we assume a 360 day year.
NARREND
12. What is the benefit for Bavarian Sausage from using the wire transfer?
a.
$138.89
b.
$69.44
c.
$109.57
d.
$53.61
13. What is the net benefit for Bavarian Sausage from using the wire transfer?
a.
$53.01
b.
$137.89
c.
$60.95
d.
$121.89
14. What is the minimum transfer amount for which the transfer would be beneficial for Bavarian
Sausage?
a.
$55,800
b.
$27,900
c.
$13,850
d.
$41,950
15. Your supplier offers you trade terms of 3/10 net 40. What is the implicit interest that you pay on the
trade credit if you do not take the discount?
a.
37.63%
b.
0%
c.
36.50%
d.
28.22%
16. You are contemplating purchasing a $1,000,000 181 day T-Bill that is selling at a discount of 4.25%.
What is the dollar discount on the T-Bill?
a.
$21,368.06
b.
$42,500
c.
$38,845.26
d.
$19,367.51
17. You are contemplating purchasing a $1,000,000 181 day T-Bill that is selling at a discount of 4.25%.
What is the purchase price of the T-Bill?
a.
$21,368.06
b.
$978,631.94
c.
$1,000,000
d.
$954,621.52
18. You are contemplating purchasing a $1,000,000 181 day T-Bill that is selling at a discount of 4.25%.
What is the money market yield of the T-Bill?
a.
4.34%
b.
4.25%
c.
4.40$%
d.
4.15%
19. You are contemplating purchasing a $1,000,000 181 day T-Bill that is selling at a discount of 4.25%.
What is the bond market yield of the T-Bill?
a.
4.25%
b.
4.34%
c.
4.40%
d.
4.15%
20. Smith Enterprise has a one year credit line of $5,000,000 with Second Bank. On average Smith uses
half of the credit line. Second Bank charges a .67% commitment fee on the unused portion of the line
and the interest rate is set at LIBOR +2%. Assuming that the LIBOR is currently at 4.3%, what is
Smith’s effective borrowing rate?
a.
6.97%
b.
6.30%
c.
7.21%
d.
5.98%
NARRBEGIN: Smith Credit line
Smith Enterprise Credit Line
Smith Enterprise has a one year credit line of $5,000,000 with Second Bank. On average Smith uses
$3,250,000 of the credit line. Second Bank charges a .45% commitment fee on the unused portion of
the line and the interest rate is set at LIBOR +1.5%. The bank also requires a 5% compensating
balance.
NARREND
21. What is the most that Smith can effectively borrow against the line without having to deposit
additional funds with the bank?
a.
$5,000,000
b.
$4,255,374
c.
$4,586,408
d.
$4,761,905
22. If Smith needs to borrow $3,250,000, what is the effective borrowing rate if the LIBOR equals 6.3%?
a.
8.62%
b.
8.04%
c.
7.59%
d.
8.43%
NARRBEGIN: Smith Credit Ln -w/o comp
Smith Enterprise Credit line (w/o comp)
Smith Enterprise has an one year credit line of $5,000,000 with Second Bank. On average Smith uses
$3,250,000 of the credit line. Second Bank charges a .45% commitment fee on the unused portion of
the line and the interest rate is set at LIBOR +1.5%. Assume that the LIBOR is 6.3%
NARREND
23. What is Smith’s effective borrowing rate?
a.
8.45%
b.
7.59%
c.
8.04%
d.
7.80%
24. Refer to Smith Enterprise Credit line (w/o comp). If you only borrowed $2,000,000 against the line,
what would be your effective borrowing rate?
a.
7.80%
b.
8.04%
c.
8.45%
d.
8.48%
25. Refer to Smith Enterprise Credit line (w/o comp). What is the change in your EBR if you only borrow
$2,000,000 instead of $3,250,000?
a.
increases by .44%
b.
decreases by .44%
c.
does not change
d.
increases by .78%
26. Refer to Smith Enterprise Credit line (w/o comp). What would be the effective borrowing rate if you
exhausted your line of credit?
a.
8.04%
b.
7.80%
c.
8.48%
d.
8.21%
27. Most money market mutual funds set their net asset value at a fixed ____ per share.
a.
$1
b.
$10
c.
$100
d.
$1,000
28. The cash manager should seek to
a.
maximize disbursement float and maximize collection float.
b.
minimize disbursement float and minimize collection float.
c.
maximize disbursement float and minimize collection float.
d.
minimize disbursement float and maximize collection float.
29. Which of the following has the greatest potential to be the longest?
a.
mail float
b.
processing float
c.
availability float
d.
clearing float
30. A major retail firm like Walmart or Target would most likely not use
a.
point of sale information systems
b.
a cash concentration bank
c.
lock boxes
d.
any of the above
31. A producer of specialty electronic components is located in Arkansas, while many of its customers are
located in California, Texas, and Florida. This company may seek to use
a.
electronic invoice presentment and bill paying.
b.
lock boxes.
c.
concentration banks.
d.
all of the above.
32. The benefit(s) of a lock box system include
a.
reduction of mail float.
b.
reduction of processing float.
c.
reduction of availability float.
d.
all of the above.
33. In which situation below would a lock-box system likely produce greater benefits?
a.
when interest rates are very low
b.
when interest rates are very high
c.
when the firm’s customers are concentrated locally
d.
when the firm collects with ACH transfers
34. Extending payment beyond the due date in order to reduce the cash conversion cycle
a.
is an accepted “stretching” of credit terms.
b.
is an unethical cash management practice.
c.
is an unethical cash management practice, but can be viewed as acceptable.
d.
is backwards; this actually increases the cash conversion cycle.
35. The purpose of a “positive pay” service is to
a.
reduce availability and clearing float
b.
only clear checks when a firm’s cash balance is positive.
c.
reduce a firm’s exposure to check fraud.
d.
move funds to into a zero balance account.
36. Place the following in the correct order of priority for selecting short-term investments:
a.
expected return, liquidity, preservation of capital
b.
expected return, preservation of capital, liquidity
c.
liquidity, expected return, preservation of capital
d.
preservation of capital, liquidity, expected return
37. For which of the following would missing (that is, not taking) the discount be the least costly?
a.
2/10 net 40
b.
1/15 net 60
c.
3/10 net 70
d.
1/10 net 50
38. Suppose your firm can borrow at 10%. Which of the following discounts should your firm take?
I.
2/10 net 30
II.
1/15 net 60
III.
3/10 net 70
IV.
1/10 net 45
a.
II only
b.
I and III
c.
II and IV
d.
I, III, and IV
39. Which of the following credit terms has the highest relevant cost?
a.
3/10 net 60
b.
2/10 net 30
c.
2/15 net 45
d.
4/15 net 90
NARRBEGIN: Dilly Deli
Dilly Deli, Inc.
Dilly Deli, Inc., a nation-wide chain of deli-style restaurants, has built a $34,000 balance in one of its
regional bank accounts. It wishes to move $30,000 to its main concentration account. A DTC cost
$1.50 and requires 3 days to clear; an EDT costs $3.00 but requires only 1 day to clear; and a wire
transfer costs $15 and clears the same day. Dilly Deli, Inc. can earn 7% on short term investments.
NARREND
40. Refer to Dilly Deli. Which of the following is true?
a.
The wire transfer dominates both the DTC and the EDT.
b.
The wire transfer dominates the EDT but not the DTC.
c.
The DTC dominates both the EDT and the wire transfer.
d.
The EDT dominates the DTC and the wire transfer.
41. If the earnings rate for Dilly Deli, Inc. is 3%, which of the following is true?
a.
The wire transfer dominates both the DTC and EDT.
b.
The wire transfer dominates the EDT but not the DTC.
c.
The DTC dominates both the EDT and the wire transfer.
d.
The EDT dominates the DTC and the wire transfer.
42. Refer to Dilly Deli. Again assume short term investments can earn 7%. What is the minimum amount
that needs to be transferred in order to make the wire transfer more cost effective than the EDT?
a.
$62,751
b.
$78,214
c.
$70,393
d.
$66,482
43. Currently, a 91-day Treasury bill sells at a 2.5% discount. What is the price of a $1 million
investment?
a.
$993,967.12
b.
$871,250.00
c.
$993,750.00
d.
$993,680.56
44. Currently, a $1 million, 91-day T-bill sells at a 2.5% discount. What is the money market yield?
a.
2.500%
b.
2.516%
c.
2.551%
d.
2.532%
45. Currently, a $1 million, 91-day T-bill sells for a 2.5% discount. What is the bond equivalent yield?
a.
2.500%
b.
2.516%
c.
2.551%
d.
2.532%
46. Suppose the cash manager of Smart Products just bought a 91-day T-bill for $992,416.67. What are the
discount and bond equivalent yields on this security?
a.
3.06%, 3.03%
b.
3.03%, 3.06%
c.
3.00%, 3.06%
d.
3.00%, 3.03%
NARRBEGIN: Coyote Valley
Coyote Valley Products
Coyote Valley Products has daily cash collections of $500,000. The cash management staff has
determined (1) customers’ payments are in the mail an average of 3 days; (2) processing after receipt
averages 1 day; and (3) after deposit funds are cleared on average in 2 days. Assume a 365 day year.
NARREND
47. Refer to Coyote Valley Products. What is the firm’s collection float, in days?
a.
6
b.
5
c.
4
d.
3
48. If Coyote Valley Products faces a 9% opportunity cost of funds, what is the value of reducing float by
2 days?
a.
$1,000,000
b.
$45,000
c.
$49,315
d.
$90,000
49. If Coyote Valley Products faces an 8% opportunity cost of funds, what is the most it would pay to
implement a lock-box system that reduces collection float by 2 days?
a.
$40,000
b.
$60,000
c.
$80,000
d.
$100,000
50. Coyote Valley’s bank, Grand Lake National, proposes a lock-box collection and processing
arrangement that will reduce collection float by 2 days. If the system will cost Coyote Valley $115,000
per year, what is the minimum opportunity cost of funds that would make the system beneficial?
a.
23.0%
b.
15.6%
c.
19.8%
d.
11.5%
51. What would be the benefit of a lock-box system that reduced mail float by 1.5 days, eliminated
processing float, and reduced clearing float by 1 day, if Coyote Valley Products faces a 9%
opportunity cost of funds?
a.
$112,500
b.
$157,500
c.
$180,000
d.
$67,500
52. The firm needs to manage its accounts payable in a fashion that
a.
lengthens the payment period.
b.
preserves the firm’s credit reputation.
c.
both a and b.
d.
neither a nor b.
53. Liquidity management involves
a.
earning a positive return on idle excess cash balances.
b.
obtaining low-cost financing for meeting unexpected needs and seasonal cash shortages.
c.
maintaining the greatest degree of liquidity possible for the firm’s assets.
d.
both a and b
54. The primary role(s) of the cash manager is
a.
to manage the cash flow time line related to collection of funds.
b.
to manage the cash flow time line related to concentration of funds.
c.
to manage the cash flow time line related to disbursement of funds.
d.
all of the above
55. Funds that have been sent by the payer but are not yet usable funds to the payee are
a.
float.
b.
overdrawn funds.
c.
still available for the use of the payer.
d.
none of the above.
56. The primary role of the cash manager
a.
on the collections side is to minimize collection float and to maximize float on the
payments side.
b.
on the collections side is to maximize collection float and to minimize float on the
payments side.
c.
on the collections side is to maximize collection float and to maximize float on the
payments side.
d.
none of the above.
57. The time between receipt of the payment and its deposit into the firm’s account is
a.
mail float.
b.
processing float.
c.
availability float.
d.
clearing float.
58. $100 million dollar days of float could be arrived at by
a.
$100 million dollars worth of checks with an average of 5 days of float.
b.
$20 million dollars worth of checks with an average of 5 days of float.
c.
$10 million dollars worth of checks with an average of 20 days of float.
d.
$10 million dollars worth of checks with an average of 5 days of float.
59. A business such as a restaurant, that receives local checks, cash, and debit card payments is more
likely to utilize a(n)
a.
field-banking system for collections.
b.
mail-based system for collections.
c.
electronic system for collections.
d.
lockbox system for collections.
60. The difference between a lockbox system and a mail-based system is
a.
that a mail-based system is more secure.
b.
that a lockbox system is really a post office box that is emptied by the firm’s bank.
c.
that a lockbox system requires a larger in-house collection system for the firm.
d.
none of the above.
61. The Barrell Company is approached by a bank that offers to implement a lockbox system of receipts
for the firm. If the new system is implemented, it will reduce float by 6 days per year. If Barrell’s cost
of capital is 11.5% and its annual sales are expected to be $10,00,000, then what is the maximum
amount that Barrell is willing to pay for the lockbox system?
a.
$1,890.41
b.
$18,904.11
c.
$164,438.56
d.
$1,150,000.00
62. Your firm is expected to have $15,000,000 in sales next year and its cost of capital is 13.5%. How
many days of float will a lockbox system have to save you in order to pay for a system that will cost
your firm $27,740 per year?
a.
2 days
b.
3 days
c.
4 days
d.
5 days
63. An unsigned check drawn on one of the firm’s bank accounts and deposited in another of the firm’s
bank accounts is
a.
an automated clearinghouse debit transfer.
b.
a depository transfer check.
c.
a wire transfer.
d.
none of the above.
64. A preauthorized electronic withdrawal for the payer’s account is known as
a.
a depository transfer check.
b.
an automated clearinghouse debit transfer.
c.
a wire transfer.
d.
none of the above.
65. You need to decide whether your firm should transfer funds from a deposit account to a transfer
account via EDT that will cost $2 or via a wire transfer that will cost $20. It is a Friday so the wire
transfer will save you 3 days of float. If your cost of capital is 8%, then how large must the transfer be
in order to be indifferent between the wire and the ADT? round to the nearest dollar.
a.
$82,125
b.
$30,417
c.
$27,375
d.
$3,042