Book Title
Fundamentals of Corporate Finance Standard Edition 9th Edition

978-0073382395 Chapter 19 Concepts Review and Critical Thinking Questions

April 3, 2019
Answers to Concepts Review and Critical Thinking Questions
1. Yes. Once a firm has more cash than it needs for operations and planned expenditures, the excess cash
2. If it has too much cash it can simply pay a dividend, or, more likely in the current financial
3. Probably not. Creditors would probably want substantially more.
4. In the case of Ford, the company generally argued that it held cash to guard against future economic
5. Cash management is associated more with the collection and disbursement of cash. Liquidity
management is broader and concerns the optimal level of liquid assets needed by a firm. Thus, for
6. Such instruments go by a variety of names, but the key feature is that the dividend adjusts, keeping the
7. Net disbursement float is more desirable because the bank thinks the firm has more money than it
actually does, and the firm is, therefore, receiving interest on funds it has already spent.
8. The firm has a net disbursement float of $500,000. If this is an ongoing situation, the firm may be
tempted to write checks for more than it actually has in its account.
9. a. About the only disadvantage to holding T-bills are the generally lower yields compared to
b. Some ordinary preferred stock issues pose both credit and price risks that are not consistent with
c. The primary disadvantage of NCDs is the normally large transactions sizes, which may not be
d. The primary disadvantages of the commercial paper market are the higher default risk
CHAPTER 19 B-319
e. The primary disadvantages of RANs is that some possess non-trivial levels of default risk, and
f. The primary disadvantage of the repo market is the generally very short maturities available.
10. The concern is that excess cash on hand can lead to poorly thought-out management decisions. The
11. A potential advantage is that the quicker payment often means a better price. The disadvantage is that
doing so increases the firm’s cash cycle.
12. This is really a capital structure decision. If the firm has an optimal capital structure, paying off debt
13. It is unethical because you have essentially tricked the grocery store into making you an interest-free
Solutions to Questions and Problems
NOTE: All end of chapter problems were solved using a spreadsheet. Many problems require multiple steps.
Due to space and readability constraints, when these intermediate steps are included in this solutions
manual, rounding may appear to have occurred. However, the final answer for each problem is found
without rounding during any step in the problem.
1. The average daily float is the average amount of checks received per day times the average number of
days delay, divided by the number of days in a month. Assuming 30 days in a month, the average daily
float is:
Average daily float = 4($156,000)/30
Average daily float = $20,800
2. a. The disbursement float is the average monthly checks written times the average number of days for
the checks to clear, so:
Disbursement float = 4($14,000)
Disbursement float = $56,000
The collection float is the average monthly checks received times the average number of days for
the checks to clear, so:
Collection float = 2(–$26,000)
Collection float = –$52,000