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Fundamentals of Corporate Finance, 12e (Ross)
Chapter 19 Cash and Liquidity Management
1) RB Enterprises (RBE) received an unexpected phone call from a competitor offering all of its
assets to RBE at a bargain basement price. While RBE had not anticipated purchasing these
assets, the opportunity was too good to pass up. This illustrates which one of the following needs
to hold cash?
A) Precautionary
B) Transaction
C) Speculative
D) Compensation
E) Float
2) GT Motors regularly issues short-term debt to finance its daily operations. However, the credit
markets suddenly tightened and GT is unable to sell debt at this time. Fortunately, they have
some cash reserves that they can use to fund operations until additional credit becomes available.
The need to retain cash for situations such as this represents which one of the following motives
for holding cash?
A) Speculative
B) Float
C) Compensating
D) Precautionary
E) Transaction
3) The cash used to make change when customers pay for their purchases in cash is an example
of the ________ motive for holding cash.
A) speculative
B) daily float
C) compensating balance
D) precautionary
E) transaction
4) Which two of the following require liquidity but do not necessarily require cash reserves?
A) Transaction and precautionary motives
B) Compensating balance requirement and precautionary motive
C) Compensating balance requirement and transaction motive
D) Speculative and transaction motives
E) Precautionary and speculative motives
5) Cash management primarily involves:
A) optimizing the collections and disbursements of cash.
B) maximizing the income earned on cash reserves.
C) reconciling a company's book balance with its bank balance.
D) determining the optimal level of liquidity that should be maintained.
E) determining the best method of raising capital.
6) Disbursements float:
A) occurs when a deposit is recorded but the funds are unavailable.
B) causes the book balance to exceed the bank balance.
C) has tended to increase since the enactment of the Check Clearing Act for the 21st Century.
D) is a recommended source of funds for short-term investments.
E) is eliminated when payments are made electronically.
7) Float is defined as the:
A) amount of cash a company can immediately withdraw from its bank account.
B) difference between book cash and bank cash.
C) change in the cash balance from one accounting period to the next.
D) amount of cash on hand.
E) cash balance according to a company's records.
8) Collection float:
A) is more desirable to companies than disbursement float.
B) is totally eliminated by the installation of a lockbox system.
C) exists when the available balance exceeds the book balance.
D) can be avoided by collecting payments electronically at the time of sale.
E) is eliminated by implementing a concentration banking system.
9) Financial electronic data interchange (FEDI):
A) electronically processes invoices but not fund transfers.
B) eliminates the need for lockboxes.
C) was replaced by the Check Clearing Act for the 21st Century.
D) eliminates zero-balance accounts.
E) reduces float.
10) Which one of the following enabled checks to be paid electronically using an electronic
image?
A) Check Clearing Act for the 21st Century
B) Zero-balance Account Act
C) Miller-Orr Act
D) E.F. Hutton case
E) Electronic Data Interchange Act of 2013
11) Which one of these statements is correct?
A) Mailing time affects both collections and disbursements float.
B) A positive net float indicates that collection float exceeds disbursements float.
C) A zero net float is preferred by companies over a positive net float.
D) Net float is equal to collection float minus disbursement float.
E) Mailing time is a component of disbursement float.
12) Check kiting, or systematically overdrawing accounts, is:
A) is used by most companies as an ethical means of handling cash reserves.
B) the process of withdrawing all funds from a bank account as soon as the funds become
available.
C) the central core of a modern cash management system.
D) is unethical and has mostly been eliminated.
E) increasingly popular due to recent banking law changes.
13) Which one of the following will increase collection time?
A) Offering cash discounts for early payment
B) Billing customers electronically rather than by mail
C) Reducing the processing delay by one day
D) Accepting debit cards but not checks as payment for a sale
E) Requiring all nationwide payments be mailed to the home office rather than to lockboxes
14) A lockbox is a:
A) special safe used for overnight storage of any cash or undeposited checks.
B) special safe used that can only be opened at pre-specified times of the day.
C) box located in a bank's vault that is rented and used to hold unprocessed checks.
D) special post office box which can only be opened by pre-specified postal inspectors for direct
delivery to the addressee.
E) post office box strategically located so that a company's receivables can be collected faster.
15) The Research Center has branch operations in three states. Each branch deals with a local
bank. However, all excess funds in these branch bank accounts are transferred on a daily basis to
the company's primary bank located near the home office. This routine of transferring cash to the
primary bank on a regular basis is referred to as:
A) cash concentration.
B) strategic cash disbursement.
C) transfer flotation.
D) payables management.
E) float management.
16) Which one of the following is the least likely to reduce a company's total collection time?
A) Assigning additional staff in the morning to process incoming payments
B) Establishing preauthorized payments from customers
C) Opening a post office box so mail can be received earlier in the morning
D) Providing a discount for customers who pay electronically
E) Depositing funds only at day's end
17) Which one of the following collection times is correctly described?
A) The processing delay starts when a bill is mailed and ends when the payment is received.
B) Mailing time begins when a bill is mailed and ends when the payment is received.
C) Collection time begins when a bill is mailed and ends when the cash payment is available for
spending.
D) Availability delay begins when a payment is deposited and ends when the cash from that
payment is available for spending.
E) Processing delay begins when a bill is mailed and ends when the payment of that bill is
deposited into the bank.
18) A lockbox system:
A) entails the use of a bank that is centrally located to collect payments on a nationwide basis.
B) is designed to deposit payments prior to recording those payments to the customers' accounts.
C) is used to reduce disbursement float.
D) is efficient regardless of the locations selected for lockbox destinations.
E) automatically records payments to customers' accounts as soon as the payments are received
at the lockbox location.
19) Lockboxes:
A) should be geographically located close to primary customers.
B) should be located in remote locations to increase the net disbursement float.
C) offer no additional benefit now that the Check Clearing Act for the 21st Century has been
enacted.
D) tend to be negative net present value projects when they involve a large number of sizable
transactions.
E) tend to also be used as concentration accounts.
20) Cash concentration accounts:
A) tend to increase the funds available for short-term investing.
B) tend to decrease the efficiency of a cash management system.
C) that utilize wire transfers rather than automated clearing house transfers are less expensive to
maintain.
D) directly receive all customer payments.
E) are all zero-balance accounts.
21) Which one of the following statements is correct?
A) Funds received via automated clearing house transfers are available that day.
B) A depository transfer check is the most costly means of transferring funds into a cash
concentration account.
C) The means selected to transfer funds into a concentration account depend upon the bank used
for the concentration account.
D) Concentration accounts are used to transfer funds to lockbox locations as needed.
E) The fastest means of transferring funds into a concentration account is a wire transfer.
22) A cash concentration account:
A) is frequently used as a source of funds for short-term investments.
B) cannot be used to cover a compensating balance requirement.
C) can only be used to transfer funds into zero-balance accounts.
D) is generally the only bank account needed to efficiently manage cash collections.
E) is another name for a controlled disbursement account.
23) The purpose of a cash concentration account is to:
A) decrease collection float.
B) decrease disbursement float.
C) consolidate funds.
D) replace a lockbox system.
E) cover compensating balance requirements.
24) Which one of the following statements is correct concerning a cash management system that
employs both lockboxes and a concentration bank account?
A) All customer payments must be submitted to a lockbox.
B) The party that collects the checks from the lockbox is responsible for recording the payments
on the customer's accounts.
C) Payments received in a lockbox are transferred immediately to the concentration account.
D) A higher dollar return may be earned on short-term investments due to the cash management
system.
E) The concentration account must be zeroed out on a daily basis.
25) A zero-balance account:
A) is used to cover the compensating balance requirement of a line of credit agreement.
B) is only used to deposit funds received at local lockboxes.
C) is funded on an as-needed basis only.
D) is limited to handling payroll disbursements.
E) requires a compensating balance.
26) An account into which funds are deposited only in an amount equal to the value of the
checks presented for payment that day is called a ________ account.
A) lockbox
B) concentration
C) zero-balance
D) compensating balance
E) revolving
27) An account into which a company transfers funds in an amount sufficient to just cover the
daily demands for payment is called a ________ account.
A) lockbox
B) clean-up
C) compensating balance
D) revolving
E) controlled disbursement
28) Which one of the following statements is correct concerning zero-balance accounts?
A) Each zero-balance account is offset by a compensating balance account.
B) Zero-balance accounts are used for depositing incoming funds.
C) A master account must be used in conjunction with a zero-balance account.
D) Zero-balance accounts are used solely in conjunction with a lockbox system.
E) Zero-balance accounts are still required to maintain a minimal balance.
29) Which one of the following statements is correct?
A) Two primary reasons why a company holds cash are seasonal fluctuations and short-term
investments.
B) Banks are prohibited from investing cash surpluses on behalf of their customers on a short-
term basis.
C) Short-term securities tend to have a high degree of interest rate risk.
D) The money market refers to securities that mature in one year or less.
E) Corporations are not permitted to invest in money market mutual funds but can invest in bank
money market accounts.
30) Which two of the following are key reasons why companies temporarily accumulate large
cash surpluses?
A) Dividend payments and fixed expenses
B) Fixed asset purchases and payroll
C) Short-term investments and daily operations
D) Large asset purchases and payments to creditors
E) Large planned expenditures and cyclical activities
31) Which one of the following statements is correct?
A) Money market accounts are low-risk, high-return investments.
B) The rate of return earned on short-term securities tends to exceed that earned on long-term
securities.
C) U.S. Treasury bills are well suited for short-term investments.
D) The income earned on U.S. Treasury bills is exempt from all taxation.
E) Short-term investments tend to have high levels of default risk.
32) Money market securities:
A) are highly marketable.
B) pay interest that is exempt from federal taxation.
C) generally mature in 6 to 18 months.
D) tend to have a high level of default risk.
E) are issued only by governmental and banking organizations.
33) Money market securities generally have which of the following characteristics?
A) Short maturity, low risk, low liquidity
B) Low default risk, low liquidity, low return
C) High return, high liquidity, low risk
D) High liquidity, low risk, low return
E) Long maturity, low risk, high return
34) A jumbo CD:
A) is issued by the federal government.
B) generally matures between two and five years.
C) is a loan of $100,000 or more to a municipality.
D) is a loan of $1 million or more on a short-term basis.
E) is a short-term loan of $100,000 or more to a commercial bank.
35) Brown Trucking is buying a U.S. Treasury bill today with the understanding that the seller
will buy it back tomorrow at a slightly higher price. This investment is known as a:
A) commercial paper transaction.
B) repurchase agreement.
C) private certificate of deposit.
D) revenue anticipation note.
E) bill anticipation note.
36) A repurchase agreement generally has a maximum life of:
A) one day.
B) a few days.
C) one month.
D) one to three months.
E) three to six months.
37) Which one of these is a characteristic of money market preferred stock?
A) A floating dividend
B) No dividend payments
C) Totally tax-exempt interest
D) More price volatility than ordinary preferred
E) Interest rate reset daily
38) Which of the following costs related to holding cash are minimized when the level of cash
held is optimized?
A) Opportunity costs
B) Trading costs
C) Total costs
D) Both trading and opportunity costs
E) None of the above
39) The BAT model:
A) computes the fixed costs of securities trading based on the current U.S. Treasury bill rate.
B) accounts for daily fluctuations in cash outflows.
C) assumes cash is replenished when the cash level falls to its average balance.
D) ignores the opportunity costs of holding cash.
E) can be used to determine the target cash balance for a firm.
40) Which of the following variables are included in the BAT model?
A) Fixed costs, upper cash limit, target cash limit
B) Total transaction need, upper limit, and lower limit
C) Target cash limit, upper limit, and lower limit
D) Rate of return on market securities, fixed costs, and total transaction need
E) Target cash limit, total transaction need, rate of return on market securities
41) The BAT model:
A) maximizes the benefits of leverage.
B) assumes net cash outflows are consistent over time.
C) eliminates all daily cash surpluses.
D) analyzes the cash balance given fluctuating cash outflows.
E) maximizes the opportunity costs of holding cash.
42) The Miller–Orr model assumes that:
A) the cash balance is depleted at regular intervals.
B) all cash flows are known with certainty.
C) the average change in the daily cash flows is positive.
D) management will set both the lower and the upper desired levels of cash.
E) the cash balance fluctuates in a random manner.
43) The Miller–Orr model:
A) recommends selling securities in an amount equal to (U* − C) when the cash balance reaches
L.
B) requires that marketable securities be sold whenever the cash balance falls below the target
level.
C) bases the optimal level of cash solely on the opportunity costs of holding cash.
D) supports the argument that the target cash balance declines as order costs increase.
E) advocates investing an amount described as (U* – C*) in marketable securities when the cash
balance reaches U*.
