Ch 28 Advanced Issues in Cash Management and Inventory Control
1. The cash balances of most firms consist of transactions, compensating, precautionary, and speculative balances. We can
produce a total desired cash balance by calculating the amount needed for each purpose and then summing them together.
a.
True
b.
False
False
False
JFND-GO4G-EO4R-RTJW
2. The easier a firm’s access to borrowed funds the higher its precautionary balances will be, in order to protect against
sudden increases in interest rates.
a.
True
b.
False
False
False
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Ch 28 Advanced Issues in Cash Management and Inventory Control
3. For some firms, holding highly liquid marketable securities is a substitute for holding cash because a marketable
securities portfolio can accomplish the same objective as cash.
a.
True
b.
False
True
Difficulty: Moderate
True / False
False
FMTP.EHRH.17.28.02 – LO: 28-2
United States – BUSPROG: Reflective Thinking
United States – OH – Default City – TBA
Cash balances–nonalgorithmic
8/26/2015 10:48 AM
8/26/2015 10:48 AM
JFND-GO4G-EO4R-RT1B
4. Which of the following is true of the Baumol model? Note that the optimal cash transfer amount is C*.
a.
If the total amount of cash needed during the year increases by 20%, then C* will increase by 20%.
b.
If the average cash balance increases by 20%, then the total holding costs will increase by 20%.
c.
If the average cash balance increases by 20% the total transactions costs will increase by 20%.
d.
The optimal transfer amount is the same for all companies.
e.
If the fixed costs of selling securities or obtaining a loan (cost per transaction) increase by 20%, then C* will
increase by 20%.
Difficulty: Moderate
Multiple Choice
False
FMTP.EHRH.17.28.02 – LO: 28-2
United States – BUSPROG: Analytic
United States – OH – Default City – TBA
Baumol model–nonalgorithmic
Ch 28 Advanced Issues in Cash Management and Inventory Control
5. Halliday Inc. receives a $2 million payment once a year. Of this amount, $700,000 is needed for cash payments made
during the next year. Each time Halliday deposits money in its account, a charge of $2.00 is assessed to cover clerical
costs. If Halliday can hold marketable securities that yield 5 percent, and then convert these securities to cash at a cost of
only the $2 deposit charge, what is the total cost for one year of holding the minimum cost cash balance according to the
Baumol model?
a.
$7,483
b.
$187
c.
$3,741
d.
$374
e.
$748
False
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Ch 28 Advanced Issues in Cash Management and Inventory Control
6. Humphrey’s Housing has been practicing cash management for some time by using the Baumol model for determining
cash balances. Some time ago, the model called for an average balance (C*/2) of $500; at that time, the rate on marketable
securities was 4 percent. A rapid increase in interest rates has driven the interest rate up to 9 percent. What is the
appropriate average cash balance now?
a.
$200
b.
$333
c.
$414
d.
$500
e.
$666
False
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7. Gemini Inc.’s optimal cash transfer amount, using the Baumol model, is $60,000. The firm’s fixed cost per cash transfer
of marketable securities to cash is $180, and the total cash needed for transactions annually is $960,000. On what
opportunity cost of holding cash was this analysis based?
a.
19.2%
b.
10.4%
c.
6.3%
d.
12.1%
Ch 28 Advanced Issues in Cash Management and Inventory Control
e.
9.6%
e
False
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8. Gemini Inc.’s optimal cash transfer amount, using the Baumol model, is $60,000. The firm’s fixed cost per cash transfer
of marketable securities to cash is $180. In addition, the total estimated cash costs (transfers and carrying cost) for the
firm, based on 16 transactions per year, are $5,760. On what opportunity cost of holding cash was this analysis based?
a.
19.2%
b.
10.4%
c.
6.3%
d.
12.1%
e.
9.6%
e
Ch 28 Advanced Issues in Cash Management and Inventory Control
Difficulty: Moderate
Multiple Choice
FMTP.EHRH.17.28.02 – LO: 28-2
United States – BUSPROG: Analytic
United States – OH – Default City – TBA
Opportunity cost: Baumol model–nonalgorithmic
TYPE: Multiple Choice: Problem
8/26/2015 10:48 AM
8/26/2015 10:48 AM
9. Suppose Stanley’s Office Supply purchases 50,000 boxes of pens every year. Ordering costs are $100 per order and
carrying costs are $0.40 per box. Moreover, management has determined that the EOQ is 5,000 boxes. The vendor now
offers a quantity discount of $0.20 per box if the company buys pens in order sizes of 10,000 boxes. Determine the
before-tax benefit or loss of accepting the quantity discount. (Assume the carrying cost remains at $0.40 per box whether
or not the discount is taken.)
a.
$1,000 loss
b.
$1,000 benefit
c.
$500 loss
d.
$500 benefit
e.
$0 (The change would not affect profits.)
Ch 28 Advanced Issues in Cash Management and Inventory Control
Exhibit 28.1
The Duckett Group is trying to determine its optimal average cash balance. The firm has determined that it will need
$5,000,000 net new cash during the coming year. The fixed transaction cost of converting securities to cash is $50, and
the firm earns 10 percent on its marketable securities investments.
10. Refer to Exhibit 28.1. According to the Baumol model, what is the optimal transaction size for transfers from
marketable securities to cash?
a.
$7,071
b.
$38,357
c.
$70,711
d.
$102,956
e.
$87,000
c
Difficulty: Easy
Multiple Choice
Difficulty: Moderate
Multiple Choice
False
FMTP.EHRH.17.28.02 – LO: 28-2
United States – BUSPROG: Analytic
United States – AK – DISC: Financial statements, anal – DISC: Financial statements, analysis,
United States – OH – Default City – TBA
Quantity discounts–nonalgorithmic
TYPE: Multiple Choice: Problem
8/26/2015 10:48 AM
8/26/2015 10:48 AM
JFND-GO4G-EO4R-RT1D
Ch 28 Advanced Issues in Cash Management and Inventory Control
11. Refer to Exhibit 28.1. According to the Baumol model, what should be Duckett’s average cash balance?
a.
$35,356
b.
$3,536
c.
$22,157
d.
$70,711
e.
$42,918
a
False
False
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4OTI-GO4W-NQNBEE
GCID-1a97586f71b1-d209-b884-e360-92d97736
Ch 28 Advanced Issues in Cash Management and Inventory Control
12. Refer to Exhibit 28.1. What will be the total cost to Duckett of maintaining the optimal average cash balance, as
determined by the Baumol model?
a.
$35,356
b.
$7,071
c.
$18,493
d.
$70,711
e.
$53,190
False
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GCID-1a97586f71b1-d209-b884-e360-92d97736
Ch 28 Advanced Issues in Cash Management and Inventory Control
13. A just-in-time system is designed to stretch accounts payable as long as possible.
a.
True
b.
False
False
False
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14. If a company increases its safety stock, then its EOQ will go up.
a.
True
b.
False
False
False
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4OTI-GO4W-NQNBEE
GCID-1a97586f71b1-d209-b884-e360-92d97736
Ch 28 Advanced Issues in Cash Management and Inventory Control
15. If a company increases its safety stock, then its average inventory will go up.
a.
True
b.
False
True
Difficulty: Moderate
True / False
False
FMTP.EHRH.17.28.03 – LO: 28-3
United States – BUSPROG: Reflective Thinking
forecasting, and cash flows
United States – OH – Default City – TBA
EOQ Extension–nonalgorithmic
8/26/2015 10:48 AM
8/26/2015 10:48 AM
JFND-GO4G-EO4R-RTTS
16. Which of the following would cause average inventory holdings to decrease, other things held constant?
a.
The purchase price of inventory items decreases by 50 percent.
b.
The carrying price of an item decreases (as a percent of purchase price).
c.
The sales forecast is revised downward by 10 percent.
d.
Interest rates fall.
e.
Fixed order costs double.
c
Difficulty: Moderate
Multiple Choice
False
FMTP.EHRH.17.28.03 – LO: 28-3
United States – BUSPROG: Analytic
United States – OH – Default City – TBA
Average inventory–nonalgorithmic