Chapter 20

1) Which one of the following is correct?

[A] The Miller-Orr model illustrates that higher interest rates lead to higher target cash balances.
[B] The BAT model illustrates that higher order costs lead to higher target cash balances.
[C] Firms will find that borrowing is likely to be less expensive than selling marketable securities when
utilized as part of their overall cash management program.
[D] A firm is less likely to have to borrow to cover an unexpected cash outflow when the variability of
their cash flows rises.
[E] A firm is less likely to have to borrow to cover an unexpected cash outflow when they lower their
investments in marketable securities.

[A] :Interest rates and target cash balances are inversely related. Review section 20A.
[B] :You are correct!
[C] :Borrowing is generally more expensive than investing in marketable securities. Review section 20A.
[D] :As the variability of the cash flows increases the likelihood that the firm will have to borrow also
increases. Review section 20A.
[E] :The lower the safety reserve, the more likely the firm will have to borrow unexpectedly. Review
section 20A.

2) The only characteristics of short-term securities that matter are their maturity and default risk.

[A] True
[B] False

[A] :What about their marketability and taxability? Review section 20.5.
[B] :You are correct!

3) Suppose your checkbook shows you have a $10,000 balance in your account. You write checks
totaling $4,000 and make a deposit of $6,000. What is your collection float?

[A] -$2,000
[B] -$4,000
[C] -$6,000
[D] -$7,000
[E] -$8,000

[A] :Collection float relates only to checks that have been received and deposited. Review section 20.2.
[B] :Collection float relates only to checks that have been received and deposited. Review section 20.2.
[C] :You are correct!
[D] :Collection float relates only to checks that have been received and deposited. Review section 20.2.
[E] :Collection float relates only to checks that have been received and deposited. Review section 20.2.

4) To use the BAT model of cash management you must know each of the following EXCEPT the:

[A] opportunity cost of holding cash.

[B] fixed cost of making a securities trade to replenish cash.
[C] total amount of new cash needed for transactions purposes over the relevant planning period.
[D] interest rate on marketable securities.
[E] variance of cash balances.

[A] :You must know this in order to use the BAT model. Review section 20A.
[B] :You must know this in order to use the BAT model. Review section 20A.
[C] :You must know this in order to use the BAT model. Review section 20A.
[D] :You must know this in order to use the BAT model. Review section 20A.
[E] :You are correct!

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5) Picard Industries requires $250,000 a week to pay bills. The fixed cost of transferring money is $65
per transfer. The standard deviation of the weekly cash flows is $25,000 and the lower cash balance
limit is $40,000. Using the Miller-Orr model, what is the optimum upper limit?

[A] $73,227
[B] $100,455
[C] $124,592
[D] $133,699
[E] $151,617

[A] :To compute this, you must first find the optimum target cash balance. Did you get $71,233? Review
section 20A.
[B] :To compute this, you must first find the optimum target cash balance. Did you get $71,233? Review
section 20A.
[C] :To compute this, you must first find the optimum target cash balance. Did you get $71,233? Review
section 20A.
[D] :You are correct!
[E] :To compute this, you must first find the optimum target cash balance. Did you get $71,233? Review
section 20A.

6) Which one of the following is true regarding the opportunity costs of holding cash and the size of the
cash balance held by a firm?

[A] There is no relationship between cash balances and opportunity costs.

[B] The higher the cash balance, the higher the opportunity cost.
[C] Opportunity costs are minimized at the optimal cash balance.
[D] If a firm can reduce its collection float, opportunity costs will fall and the optimal cash balance for the
firm will increase.
[E] If a firm can reduce its collection float, opportunity costs will rise and the optimal cash balance for the
firm will decrease.

[A] :Cash balances and opportunity costs are directly related. Review section 20.1.
[B] :You are correct!
[C] :Opportunity costs are minimized when the firm holds no cash. Does this sound optimal? Review
section 20.1.
[D] :In this case, the optimal cash balance will decrease. Review section 20.1.
[E] :In this case, opportunity costs will fall. Review section 20.1.

7) According to the BAT model, the optimum cash balance is located at the point where the:

[A] trading costs are minimized.

[B] opportunity costs are maximized.
[C] opportunity costs exceed the trading costs by the greatest amount.
[D] trading costs exceed the opportunity costs by the greatest amount.
[E] trading costs equal the opportunity costs.

[A] :What about the opportunity costs? Review section 20A.

[B] :What about the trading costs? Review section 20A.
[C] :This will not produce the optimum cash balance. Review section 20A.
[D] :This will not produce the optimum cash balance. Review section 20A.
[E] :You are correct!

8) Which of the following is (are) true?

I. Collection time is the time that elapses between when a customer mails a payment and when the
check clears the banking system.
II. Collection time is equal to the sum of the mail delay and the availability delay.
III. Collection float increases book balances but does not immediately change available balances.

[A] I only
[B] I and II only
[C] I and III only

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[D] II and III only
[E] I, II, and III

[A] :Correct, but there is at least one more correct choice. Review section 20.2.
[B] :At least one of these choices is incorrect. Review section 20.2.
[C] :You are correct!
[D] :At least one of these choices is incorrect. Review section 20.2.
[E] :At least one of these choices is incorrect. Review section 20.2.

9) Warehouse Liquidators specializes in selling consumer goods at very low prices. This firm often
keeps excess cash on hand, particularly after the holiday season, to take advantage of situations where
other retailers need to sell their excess inventory below cost in order to raise cash. Warehouse
Liquidators is holding cash for _____ reasons.

[A] speculative
[B] transactions
[C] precautionary
[D] compensating balance
[E] non-financial

[A] :You are correct!

[B] :The transaction motive is the need to hold cash to satisfy normal cash transactions associated with
a firm's ongoing operations. Does that sound like the case here? Review section 20.1.
[C] :The precautionary motive is the need to hold cash as a safety margin to act as a financial reserve.
Does that sound like the case here? Review section 20.1.
[D] :Holding cash as a compensating balance relates to the terms of a financing arrangement. Review
section 20.1.
[E] :The text does not discuss this as a motive for holding cash. Review section 20.1.

10) Which one of the following is true regarding cash management?

[A] The basic objective in cash management is to keep the investment in cash as low as possible while
still operating efficiently and effectively.
[B] A cost of holding cash is the liquidity it gives the firm.
[C] A cost of holding cash is the interest income earned on the outstanding cash balance.
[D] A firm should decrease its cash holdings as long as the NPV of doing so is negative.
[E] Effective cash management results in minimization of the total interest earnings involved with holding
cash.

[A] :You are correct!

[B] :Liquidity is a benefit of holding cash, not a cost. Review section 20.1.
[C] :Interest income is a benefit, not a cost. Review section 20.5.
[D] :A firm should not take a negative NPV project. Review section 20.1.
[E] :This is not one of the stated goals of effective cash management. Review section 0.1.

11) Schulte Fashions begins every month with a cash balance of $8,000 which it depletes by the end of
the month. The current market rate of return is .4% per month. Schulte is charged a fee of $20 each
time it is forced to raise cash. In addition, history has shown that the monthly standard deviation of cash
flows is $1,500. The firm has targeted a lower cash limit of $2,500. According to the Miller-Orr model,
what is the optimal initial cash balance for Schulte Fashion?

[A] $3,105
[B] $3,266
[C] $3,827
[D] $4,536
[E] $4,727

[A] :Remember to square the standard deviation. Review section 20A.

[B] :Remember to square the standard deviation. Review section 20A.
[C] :Remember to square the standard deviation. Review section 20A.
[D] :You are correct!

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[E] :Remember to square the standard deviation. Review section 20A.

12) Which of the following are reasons why a firm may build up a temporary cash surplus?
I. to finance seasonal sales activities
II. to finance an upcoming merger
III. to finance a capital investment project
IV. to pay investors in a stock split

[A] I and III only

[B] II and IV only
[C] I and II only
[D] I, II, and III only
[E] I, II, III, and IV only

[A] :Correct, but there is at least one more reason for accumulating cash. Review section 20.5.
[B] :Is cash distributed in a stock split? Review sections 20.5 and 18.8.
[C] :Correct, but there is at least one more reason for accumulating cash. Review section 20.5.
[D] :You are correct!
[E] :Is cash distributed in a stock split? Review sections 20.5 and 18.8.

13) O'Pinion Manufacturing estimates that they disburse $900,000 weekly in order to pay bills. The
firm's annual opportunity rate is 5%. The fixed cost of transferring money is $75 per transfer. Based on
historical data, the standard deviation of the weekly cash flows is $295,000 and the lower cash balance
limit is $300,000. Using the BAT model, what is the total cost of holding cash?

[A] $18,734
[B] $20,664
[C] $24,877
[D] $32,333
[E] $41,237

[A] :You are correct!

[B] :What is the relationship between the total cost, the trading cost, and the opportunity cost? Review
section 20A.
[C] :What is the relationship between the total cost, the trading cost, and the opportunity cost? Review
section 20A.
[D] :What is the relationship between the total cost, the trading cost, and the opportunity cost? Review
section 20A.
[E] :What is the relationship between the total cost, the trading cost, and the opportunity cost? Review
section 20A.

14) The opportunity cost of holding cash is inversely related to the level of market interest rates.

[A] True
[B] False

[A] :Your answer implies that as interest rates rise, the opportunity costs of holding cash fall. Does this
sound correct? Review section 20.1.
[B] :You are correct!

15) The Lawrence Stone-Age Pottery Co. receives 50 checks per month from customers. Average
payments and clearing times are as follows. Five checks: $21,000, 2 days; Fifteen checks: $58,000, 3
days; Twenty-five checks: $37,000, 4 days; and the remainder: $10,000, 5 days. Assume a 360-day
year. What is the weighted average delay in receiving the funds?

[A] 2.98 days

[B] 3.47 days
[C] 4.23 days
[D] 5.01 days

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[E] 5.93 days

[A] :To compute this, you must first find the total receipts per month. Did you get $1,950,000? Then, you
must find the weighted average delay in receiving the funds as described in section 20.2.
[B] :You are correct!
[C] :To compute this, you must first find the total receipts per month. Did you get $1,950,000? Then,
you must find the weighted average delay in receiving the funds as described in section 20.2.
[D] :To compute this, you must first find the total receipts per month. Did you get $1,950,000? Then,
you must find the weighted average delay in receiving the funds as described in section 20.2.
[E] :To compute this, you must first find the total receipts per month. Did you get $1,950,000? Then, you
must find the weighted average delay in receiving the funds as described in section 20.2.

16) It is important for any firm to determine its appropriate target cash balance:

[A] in order to maximize their purchases of marketable securities.

[B] because there is a trade-off between the benefit and cost of liquidity.
[C] since most firms follow flexible policies of working capital management.
[D] because of the float the firm gains when it writes checks.
[E] because of the fluctuation in interest rates on marketable securities.

[A] :Maximizing the purchases of marketable securities is not one of the stated goals of effective cash
management. Review section 20.1.
[B] :You are correct!
[C] :This is not a reason a firm should set a target cash balance. Review section 20.1.
[D] :This is not a reason a firm should set a target cash balance. Review section 20.1.
[E] :This is not a reason a firm should set a target cash balance. Review section 20.1.

17) Suppose your checkbook shows you have a $10,000 balance in your account. You write checks
totaling $4,000 and make a deposit of $6,000. What is your disbursement float?

[A] $2,000
[B] $4,000
[C] $6,000
[D] $7,000
[E] $8,000

[A] :Disbursement float relates only to checks that have been written. Review section 20.2.
[B] :You are correct!
[C] :Disbursement float relates only to checks that have been written. Review section 20.2.
[D] :Disbursement float relates only to checks that have been written. Review section 20.2.
[E] :Disbursement float relates only to checks that have been written. Review section 20.2.

18) Two of the most important reasons that firms have temporary cash surpluses are the financing of
seasonal or cyclical activities and the financing of planned or possible expenditures.

[A] True
[B] False

[A] :You are correct!

[B] :These are listed in the text as two of the most important reasons firms have temporary cash
surpluses. Review section 20.5.

19) Money market securities generally have the following characteristics: short _____, low _____, and
high_____:

[A] maturities; default risk; marketability.

[B] maturities; marketability; default risk.
[C] marketability; maturities; default risk.
[D] marketability; default risk; maturities.

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[E] default risk; marketability; maturities.

[A] :You are correct!

[B] :At a minimum, money market securities do not have high default risk. Review section 20.5.
[C] :At a minimum, money market securities do not have high default risk. Review section 20.5.
[D] :At a minimum, money market securities do not have high maturities. Review section 20.5.
[E] :At a minimum, money market securities do not have high maturities. Review section 20.5.

20) Came Apart, Inc., a leading retailer of consumer goods, keeps excess cash on hand in October to
pay for its huge increase in inventory prior to the holiday season. Came Apart is keeping this cash for
_____ reasons.

[A] speculative
[B] transactions
[C] precautionary
[D] compensating balance
[E] collateral

[A] :The speculative motive is the need to hold cash in order to take advantage of unexpected
opportunities that might arise. Does that sound like the case here? Review section 20.1.
[B] :You are correct!
[C] :The precautionary motive is the need to hold cash as a safety margin to act as a financial reserve.
Does that sound like the case here? Review section 20.1.
[D] :Holding cash as a compensating balance relates to the terms of a financing arrangement. Review
section 20.1.
[E] :The cash is not being held as collateral in this case. Review section 20.1.

21) Which one of the following is true regarding a lockbox arrangement?

[A] Lockboxes are one of the most widely used devices to speed up the disbursement of cash.
[B] A large corporation may maintain more than 20 lockboxes across the country.
[C] A lockbox arrangement increases mail delay by reducing mail time.
[D] A lockbox arrangement increases processing time.
[E] The payments are usually removed from the lockbox by company employees and then taken to the
bank.

[A] :Lockboxes are designed to speed up collections, not disbursements. Review section 20.3.
[B] :You are correct!
[C] :A lockbox arrangement reduces mail delay. Review section 20.3.
[D] :A lockbox arrangement reduces processing time. Review section 20.3.
[E] :The payments are usually removed from the box by bank employees. Review section 20.3.

22) A growing firm finds that its customer base is growing in geographical terms and wishes to reduce
collection float by obtaining customer checks from receiving locations nearer the customer rather than
having the customers send their checks directly to the firm's main office. This setup is called:

[A] a lockbox arrangement.

[B] a wire transfer arrangement.
[C] cash concentration.
[D] overnight mail.
[E] a compensating balance.

[A] :You are correct!

[B] :Wire transfers are electronic transfers of funds between banks. That is not the case here. Review
section 20.3.
[C] :This arrangement does not describe a cash concentration account although it may be used in
conjunction with a cash concentration account. Review section 20.3.
[D] :Overnight mail does not describe this setup. Review section 20.3.
[E] :This is not a compensating balance arrangement. Review section 20.3.

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23) Marketable securities cannot be readily used to satisfy:
I. speculative needs.
II. precautionary needs.
III. transactions needs.
IV. compensating balances.

[A] I and II only

[B] II and III only
[C] III and IV only
[D] I, II, and III only
[E] I, II, and IV only

[A] :Since marketable securities can be sold rather rapidly, they can satisfy both of these needs. Review
section 20.5.
[B] :At least one of these responses is incorrect. Review section 20.5.
[C] :You are correct!
[D] :At least one of these responses is incorrect. Review section 20.5.
[E] :At least one of these responses is incorrect. Review section 20.5.

24) Which one of the following correctly describes average daily float?

[A] Average daily receipts + Weighted average delay X Opportunity rate

[B] Average daily receipts X Weighted average delay
[C] Total receipts / Total days
[D] Weighted average delay - Average daily receipts
[E] Total float X Total days

[A] :You need to review this computation in section 20.2.

[B] :You are correct!
[C] :You need to review this computation in section 20.2.
[D] :You need to review this computation in section 20.2.
[E] :You need to review this computation in section 20.2.

25) The Lawrence Stone-Age Pottery Co. receives 50 checks per month from customers. Average
payments and clearing times are as follows. Five checks: $21,000, 2 days; Fifteen checks: $58,000, 3
days; Twenty-five checks: $37,000, 4 days; and the remainder: $10,000, 5 days. Assume a 360-day
year. What are the average daily receipts?

[A] $31,676
[B] $39,102
[C] $56,267
[D] $65,000
[E] $68,901

[A] :Average daily receipts are total receipts divided by the total number of days. Review section 20.2.
[B] :Average daily receipts are total receipts divided by the total number of days. Review section 20.2.
[C] :Average daily receipts are total receipts divided by the total number of days. Review section 20.2.
[D] :You are correct!
[E] :Average daily receipts are total receipts divided by the total number of days. Review section 20.2.

26) Picard Industries requires $250,000 a week to pay bills. The fixed cost of transferring money is $65
per transfer. The standard deviation of the weekly cash flows is $25,000 and the lower cash balance
limit is $40,000. Assume the applicable annual interest rate is 5%. Using the BAT model, what is the
optimal average cash balance?

[A] $91,924
[B] $97,735
[C] $183,848
[D] $205,470
[E] $367,696

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[A] :You are correct!
[B] :To find this, you must first compute the optimum initial cash balance. Did you get $183,848?
Review section 20A.
[C] :This is the optimum initial cash balance. Review section 20A.
[D] :To find this, you must first compute the optimum initial cash balance. Did you get $183,848?
Review section 20A.
[E] :To find this, you must first compute the optimum initial cash balance. Did you get $183,848?
Review section 20A.

27) O'Pinion Manufacturing estimates that they disburse $900,000 weekly in order to pay bills. The
firm's annual opportunity rate is 5%. The fixed cost of transferring money is $75 per transfer. Based on
historical data, the standard deviation of the weekly cash flows is $295,000 and the lower cash balance
limit is $300,000. Using the BAT model, what is the opportunity cost of holding cash?

[A] $8,100
[B] $9,367
[C] $9,832
[D] $10,001
[E] $12,320

[A] :To begin, you must first find the optimum initial cash balance. Did you get $374,700? Review
section 20A.
[B] :You are correct!
[C] :Did you get an average cash balance of $187,350? Review section 20A.
[D] :To begin, you must first find the optimum initial cash balance. Did you get $374,700? Review
section 20A.
[E] :Did you get an average cash balance of $187,350? Review section 20A.

28) Picard Industries requires $250,000 a week to pay bills. The fixed cost of transferring money is $65
per transfer. The standard deviation of the weekly cash flows is $25,000 and the lower cash balance
limit is $40,000. Assume the applicable annual interest rate is 5%. Using the BAT model, what is the
total cost of holding cash?

[A] $3,117
[B] $4,596
[C] $5,580
[D] $8,664
[E] $9,192

[A] :How does the total cost relate to the trading cost and the opportunity cost? Review section 20A.
[B] :How does the total cost relate to the trading cost and the opportunity cost? Review section 20A.
[C] :How does the total cost relate to the trading cost and the opportunity cost? Review section 20A.
[D] :How does the total cost relate to the trading cost and the opportunity cost? Review section 20A.
[E] :You are correct!

29) Martin's Methods, an educational training firm, has taken steps to reduce the time taken to process
checks received from customers from 4 days to 2. Additionally, the firm has switched banks. The old
one made funds available for withdrawal 2 days after deposit, the new one makes them available after
only 1 day. All else equal, these steps should _____ the firm's _____ float.

[A] increase; net

[B] increase; collection
[C] decrease; collection
[D] decrease; disbursement
[E] not change; net

[A] :The firm's float will be decreased, not increased. Review section 20.2.
[B] :The firm's float will be decreased, not increased. Review section 20.2.
[C] :You are correct!
[D] :The question deals with checks that are deposited, not those that are written. Review section 20.2.

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[E] :The firm's float will change. How? Review section 20.2.

30) In the Miller-Orr model, the _____, the greater will be the difference between the target cash
balance and the minimum cash balance.

[A] lower the uncertainty of the cash flow per period

[B] lower the upper limit for cash balances
[C] lower the opportunity cost of holding cash
[D] lower the cost of buying and selling marketable securities
[E] higher the minimum cash balance

[A] :The higher the uncertainty, the greater the difference will be between these two amounts. Review
section 20A.
[B] :The upper limit on cash does not affect the difference between the target and minimum cash
balances. Review section 20A.
[C] :You are correct!
[D] :The lower the cost of buying and selling securities, the lower the difference will be between these
two amounts. Review section 20A.
[E] :The lower limit on cash does not affect the difference between the target and minimum cash
balances. Review section 20A.

31) Peterson Products uses a zero-balance account for cash management purposes. McLeod
Enterprises does not. If the firms are otherwise identical, one would expect McLeod to maintain a larger
total cash safety stock than Peterson.

[A] True
[B] False

[A] :You are correct!

[B] :Since Peterson uses a zero-balance account, it doesn't need to have a safety stock of cash in each
of its accounts as McLeod does. Peterson carries a safety stock only in its master account. Review
section 20.4.

32) Picard Industries requires $250,000 a week to pay bills. The fixed cost of transferring money is $65
per transfer. The standard deviation of the weekly cash flows is $25,000 and the lower cash balance
limit is $40,000. Assume the applicable annual interest rate is 5%. Using the BAT model, what is the
opportunity cost of holding cash?

[A] $3,117
[B] $4,596
[C] $5,580
[D] $7,664
[E] $9,192

[A] :To find this, you must compute the optimal average cash balance. Did you get $91,924? Review
section 20A.
[B] :You are correct!
[C] :To start, you must first compute the optimum initial cash balance. Did you get $183,848? Review
section 20A.
[D] :To find this, you must compute the optimal average cash balance. Did you get $91,924? Review
section 20A.
[E] :To find this, you must first compute the optimum initial cash balance. Did you get $183,848?
Review section 20A.

33) A firm's total cash collection time is the sum of its mailing time and availability delay.

[A] True
[B] False

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[A] :A firm's total cash collection time is the sum of its mailing time, processing delay and availability
delay. Review section 20.3.
[B] :You are correct!

34) In an ideal world, all of creditors would require that you pay them on exactly the same day you get
paid. If this were true, then the level of cash you would need to hold to meet your _____ needs would be
relatively low during the month.

[A] speculative
[B] transactions
[C] precautionary
[D] Keynesian
[E] float

[A] :The speculative motive is the need to hold cash in order to take advantage of unexpected
opportunities that might arise. Does that sound like the case here? Review section 20.1.
[B] :You are correct!
[C] :The precautionary motive is the need to hold cash as a safety margin to act as a financial reserve.
Does that sound like the case here? Review section 20.1.
[D] :There is no such motivation for holding cash discussed in the text. Review section 20.1.
[E] :Float does not describe this need for holding cash. Review section 20.1.

35) Schulte Fashions begins every month with a cash balance of $8,000 which it depletes by the end of
the month. The current market rate of return is .4% per month. Schulte is charged a fee of $20 each
time it is forced to raise cash. In addition, history has shown that the monthly standard deviation of cash
flows is $1,500. The firm has targeted a lower cash limit of $2,500. According to the Miller-Orr model, at
what level of cash would Schulte choose to remove cash from the account and invest in marketable
securities?

[A] $3,827
[B] $4,536
[C] $4,727
[D] $6,989
[E] $8,608

[A] :To find this you must first determine the cash balance target. Did you get $4,536? Review section
20A.
[B] :This is the cash balance target. Review section 20A.
[C] :To find this you must first determine the cash balance target. Did you get $4,536? Review section
20A.
[D] :To find this you must first determine the cash balance target. Did you get $4,536? Review section
20A.
[E] :You are correct!

36) Arshadi Wineries is considering the purchase of lockbox services from First Bancorp. Currently, it
takes 6 days to collect funds from customers. The collection period would bereduced by 2 days if the
lockbox system is implemented. The average number of payments received daily is 300 and the
average check size is $150. First Bancorp will charge $.05 per check in return for operating the lockbox
system. Assume a 360-day year. Suppose one-year T-bills yield 5%. Should Arshadi Wineries purchase
the system?

[A] yes; because the NPV is $63,000

[B] yes; because the NPV is $18,000
[C] doesn’t matter; because the NPV is zero
[D] no; because the NPV is -$18,000
[E] no; because the NPV is -$63,000

[A] :You need to recompute your NPV. Review section 20.3.

[B] :The sign on your NPV is wrong. Review section 20.3.
[C] :The NPV does not equal zero. Review section 20.3.
[D] :You are correct!

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[E] :You need to recompute your NPV. Review section 20.3.

37) The precautionary motive for holding cash is the need for a safety supply of cash to act as a
financial reserve.

[A] True
[B] False

[A] :You are correct!

[B] :This is a correct definition of the precautionary motive. Review section 20.1.

38) Picard Industries requires $250,000 a week to pay bills. The fixed cost of transferring money is $65
per transfer. The standard deviation of the weekly cash flows is $25,000 and the lower cash balance
limit is $40,000. Using the Miller-Orr model, what is the average cash balance?

[A] $56,250
[B] $61,539
[C] $81,644
[D] $90,720
[E] $101,617

[A] :To compute this, you must first find the optimum target cash balance. Did you get $71,233? Review
section 20A.
[B] :To compute this, you must first find the optimum target cash balance. Did you get $71,233? Review
section 20A.
[C] :You are correct!
[D] :To compute this, you must first find the optimum target cash balance. Did you get $71,233? Review
section 20A.
[E] :To compute this, you must first find the optimum target cash balance. Did you get $71,233? Review
section 20A.

39) Which one of the following is true regarding float costs and the size of the optimal cash balance held
by a firm?

[A] Float costs impact the optimal cash balance as determined by the BAT model only.
[B] The higher the cash balance, the lower the float cost.
[C] The lower the cash balance, the lower the float cost.
[D] Float costs have no impact on the size of the optimal cash balance.
[E] Float costs increase the variance of the cash flows per period, and thus increase the optimal cash
balance.

[A] :Float costs do not affect the BAT model. Review section 20A.
[B] :Float costs are not a part of either the BAT model or the Miller-Orr model. Review section 20A.
[C] :Float costs are not a part of either the BAT model or the Miller-Orr model. Review section 20A.
[D] :You are correct!
[E] :Float costs are not a part of either the BAT model or the Miller-Orr model. Review section 20A.

40) Sometimes a firm, such as an automaker, holds large sums of cash because they know they will
need it to weather a recession if one comes. This is a _____ motive for holding cash.

[A] transactions
[B] precautionary
[C] adjustment
[D] speculative
[E] non-financial

[A] :The transaction motive is the need to hold cash to satisfy normal cash transactions associated with
a firm's ongoing operations. Does that sound like the case here? Review section 20.1.
[B] :You are correct!

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[C] :There is no such motive for holding cash. Review section 20.1.
[D] :The speculative motive is the need to hold cash in order to take advantage of unexpected
opportunities that might arise. Does that sound like the case here? Review section 20.1.
[E] :The text does not discuss this as a motive for holding cash. Review section 20.1.

41) The amount of time it takes for a check to clear through the banking system is called:

[A] mail delay.

[B] processing delay.
[C] total float.
[D] availability delay.
[E] collection float.

[A] :This is the time during which checks are trapped in the postal system. Review section 20.2.
[B] :This is the time it takes the receiver of a check to process the payment and deposit it in the bank for
collection. Review section 20.2.
[C] :This definition does not describe total float. Review section 20.2.
[D] :You are correct!
[E] :This is the sum of mailing delay, processing delay and availability delay. Reviewn section 20.2.

42) Suppose your checkbook shows you have a $10,000 balance in your account. You write checks
totaling $4,000 and make a deposit of $6,000. What is your net float?

[A] -$6,000
[B] -$2,000
[C] +$2,000
[D] +$4,000
[E] +$6,000

[A] :Your net float is the sum of your disbursement float and your collection float. Review section 20.2.
[B] :You are correct!
[C] :Your net float is the sum of your disbursement float and your collection float. Review section 20.2.
[D] :Your net float is the sum of your disbursement float and your collection float. Review section 20.2.
[E] :Your net float is the sum of your disbursement float and your collection float. Review section 20.2.

43) In the Miller-Orr model of cash management a firm must do each of the following EXCEPT:

[A] determine the variance of the cash flow per period.

[B] determine the cost per transaction of buying and selling securities.
[C] determine the opportunity cost of holding cash.
[D] specify an upper cash balance limit.
[E] determine the safety stock of cash the firm needs.

[A] :This must be determined before the Miller-Orr model can be used. Review section 20A.
[B] :This must be determined before the Miller-Orr model can be used. Review section 20A.
[C] :This must be determined before the Miller-Orr model can be used. Review section 20A.
[D] :You are correct!
[E] :This must be determined before the Miller-Orr model can be used. Review section 20A.

44) The size of float depends on both the dollars and the time delay involved.

[A] True
[B] False

[A] :You are correct!

[B] :Both the dollars and the time delay impact the size of the float for a firm. Review section 20.2.

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45) In the BAT model, the optimal cash balance is achieved when opportunity costs equal trading costs.

[A] True
[B] False

[A] :You are correct!

[B] :This is the equilibrium point in the model. Review section 20A.

46) The Buffalo Bill Co. receives five checks per month of operation. The payments and clearing times
are: $4,000, 2 days; $6,000, 2 days; $3,000, 5 days; $8,000, 3 days, and $7,000, 4 days. Assume a
360-day year. What are the average daily receipts?

[A] $76.71
[B] $686.67
[C] $920.55
[D] $933.33
[E] $1,020.20

[A] :Average daily receipts are equal to total receipts divided by the total number of days. Review
section 20.2.
[B] :Average daily receipts are equal to total receipts divided by the total number of days. Review
section 20.2.
[C] :Average daily receipts are equal to total receipts divided by the total number of days. Review
section 20.2.
[D] :You are correct!
[E] :Average daily receipts are equal to total receipts divided by the total number of days. Review
section 20.2.

47) The need for cash that arises from the normal activities of the firm is a (an) _____ motive for holding
cash.

[A] transactions
[B] precautionary
[C] adjustment
[D] speculative
[E] financial

[A] :You are correct!

[B] :The precautionary motive is the need to hold cash as a safety margin to act as a financial reserve.
Does that sound like the case here? Review section 20.1.
[C] :There is no such motive for holding cash. Review section 20.1.
[D] :The speculative motive is the need to hold cash in order to take advantage of unexpected
opportunities that might arise. Does that sound like the case here? Review section 20.1.
[E] :The text does not discuss this as a motive for holding cash. Review section 20.1.

48) The BAT model is more useful than the Miller-Orr model because the Miller-Orr model is too
complex for most firms.

[A] True
[B] False

[A] :While it is true that the BAT model is the simpler of the two, it is not the case that the Miller-Orr
model is too complex for most firms. Review section 20A.
[B] :You are correct!

49) Terminator, Inc. keeps excess cash on hand in case of an industrial accident in the manufacturing of
its wheat herbicide GroundUp. This is an example of a _____ need for holding cash.

[A] speculative

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[B] transactions
[C] deterministic
[D] compensating
[E] precautionary

[A] :The firm is not holding cash to take advantage of investment opportunities. Review section 20.1.
[B] :The firm is not holding cash to meet its ordinary day-to-day operating expenses. Review section
20.1.
[C] :There is no such need for holding cash identified in the text. Review section 20.1.
[D] :The firm is not holding cash as part of a compensating balance requirement associated with a loan
arrangement. Review section 20.1.
[E] :You are correct!

50) Money market securities are debt securities that have a maturity of _____ or less.

[A] ninety days

[B] six months
[C] one year
[D] two years
[E] three years

[A] :This time frame is too narrow. Review section 20.5.

[B] :This time frame is too narrow. Review section 20.5.
[C] :You are correct!
[D] :This time frame is too long. Review section 20.5.
[E] :This time frame is too long. Review section 20.5.

51) Processing delay refers to the time required to clear a check through the banking system.

[A] True
[B] False

[A] :This definition describes availability delay, not processing delay. Review section 20.2.
[B] :You are correct!

52) A U.S. Treasury Bill is a type of money market security.

[A] True
[B] False

[A] :You are correct!

[B] :A U.S. Treasury Bill is one example of a money market security. Review section 20.5.

53) Boulder Wineries is considering the purchase of lockbox services from First Bancorp. Currently, it
takes 6 days to collect funds from customers. The average number of payments received daily is 300
and the average check size is $150. First Bancorp will charge $.05 per check in return for operating the
lockbox system. Assume a 360-day year. Suppose one-year T-bills yield 5%. What is the smallest
acceptable reduction in collection time that could occur, from the point-of-view of Boulder Wineries, that
would make the lockbox acceptable?

[A] 2.00 days

[B] 2.25 days
[C] 2.40 days
[D] 2.75 days
[E] 3.00 days

[A] :Did you try setting the daily cost of 5 cents per check equal to the daily benefit using this equation:
.05 = 150 X N X .05 / 360? Review section 20.3.

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 [B] :Did you try setting the daily cost of 5 cents per check equal to the daily benefit using this equation:
.05 = 150 X N X .05 / 360? Review section 20.3.
[C] :You are correct!
[D] :Did you try setting the daily cost of 5 cents per check equal to the daily benefit using this equation:
.05 = 150 X N X .05 / 360? Review section 20.3.
[E] :Did you try setting the daily cost of 5 cents per check equal to the daily benefit using this equation:
.05 = 150 X N X .05 / 360? Review section 20.3.

54) Which one of the following is correct about the various cash management models?

[A] BAT assumes unsteady, uncertain cash outflows.

[B] BAT is generally considered one of the most complex cash management models to use.
[C] The Miller-Orr model assumes the transaction cost of trading securities varies from day to day.
[D] The Miller-Orr model assumes cash flows fluctuate randomly from day to day.
[E] In the Miller-Orr model, cash flows can fluctuate up but not down.

[A] :BAT assumes steady, certain cash outflows. Review section 20A.
[B] :On the contrary, it is considered one of the simplest to use. Review section 20A.
[C] :The model assumes these trading costs are fixed. Review section 20A.
[D] :You are correct!
[E] :According to the model, cash flows can fluctuate in either direction. Review section 20A.

55) O'Pinion Manufacturing estimates that they disburse $900,000 weekly in order to pay bills. The
firm's annual opportunity rate is 5%. The fixed cost of transferring money is $75 per transfer. Based on
historical data, the standard deviation of the weekly cash flows is $295,000 and the lower cash balance
limit is $300,000. Using the Miller-Orr model, and assuming the interest rate is 0.094% per week, what is
the optimum upper limit?

[A] $699,991
[B] $622,455
[C] $756,507
[D] $799,230
[E] $819,996

[A] :To begin, you must first find the optimum initial cash balance. Did you get $473,332?
[B] :To begin, you must first find the optimum initial cash balance. Did you get $473,332?
[C] :To begin, you must first find the optimum initial cash balance. Did you get $473,332?
[D] :To begin, you must first find the optimum initial cash balance. Did you get $473,332?
[E] :You are correct!

56) O'Pinion Manufacturing estimates that they disburse $900,000 weekly in order to pay bills. The
firm's annual opportunity rate is 5%. The fixed cost of transferring money is $75 per transfer. Based on
historical data, the standard deviation of the weekly cash flows is $295,000 and the lower cash balance
limit is $300,000. Using the BAT model, what is the optimum initial cash balance?

[A] $108,639
[B] $227,745
[C] $355,777
[D] $374,700
[E] $383,270

[A] :You need to review this computation in section 20A.

[B] :You need to review this computation in section 20A.
[C] :You need to review this computation in section 20A.
[D] :You are correct!
[E] :You need to review this computation in section 20A.

57) According to your checkbook, you have a $3,000 balance in your account. You write checks totaling
$4,500 and make a deposit of $3,500. What is your net float?

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[A] -$1,000
[B] $0
[C] $1,000
[D] $4,000
[E] $8,000

[A] :Your net float is the sum of your disbursement float and your collection float. Review section 20.2.
[B] :Your net float is the sum of your disbursement float and your collection float. Review section 20.2.
[C] :You are correct!
[D] :Your net float is the sum of your disbursement float and your collection float. Review section 20.2.
[E] :Your net float is the sum of your disbursement float and your collection float. Review section 20.2.

58) Which one of the following is true?

[A] Collection time is the time that elapses between when a customer mails a payment and when the
check is actually received.
[B] Collection time is the time that elapses between when the company receives a customer's payment
and when the check is deposited in the bank.
[C] Collection float includes mail delay while disbursement float does not.
[D] Collection time is the time that elapses between when the customer mails a payment and when the
cash is actually available to be used by the firm.
[E] Collection time is equal to the sum of mail delay and processing delay, minus availability delay.

[A] :Collection time is the time that elapses between when a customer mails a payment and when the
cash is actually available to be used by the firm. Review section 20.2.
[B] :Collection time is the time that elapses between when a customer mails a payment and when the
cash is actually available to be used by the firm. Review section 20.2.
[C] :The opposite is true. Review section 20.2.
[D] :You are correct!
[E] :Collection time is the sum of all three of these delays. Review section 20.2.

59) Picard Industries requires $250,000 a week to pay bills. The fixed cost of transferring money is $65
per transfer. The standard deviation of the weekly cash flows is $25,000 and the lower cash balance
limit is $40,000. Assume the applicable weekly interest rate is .1%. Using the Miller-Orr model, what is
the optimum initial cash balance?

[A] $38,478
[B] $41,233
[C] $55,592
[D] $65,434
[E] $71,233

[A] :You need to review this computation in section 20A.

[B] :You need to review this computation in section 20A.
[C] :You need to review this computation in section 20A.
[D] :You need to review this computation in section 20A.
[E] :You are correct!

60) Tactics for maximizing disbursement float are debatable on both ethical and economic grounds.

[A] True
[B] False

[A] :You are correct!

[B] :Slowing down payments could lead to friction with suppliers and a loss of valuable discounts.
Review section 20.4.

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61) A firm with a restrictive working capital policy may incur adjustment costs in the form of each of the
following EXCEPT the:

[A] cost of compensating balances.

[B] interest cost on short term loans.
[C] fees paid on short term loans.
[D] costs of buying securities.
[E] costs of selling securities.

[A] :You are correct!

[B] :This is an adjustment cost that a firm with a restrictive working capital policy could incur. Review
section 20A.
[C] :This is an adjustment cost that a firm with a restrictive working capital policy could incur. Review
section 20A.
[D] :This is an adjustment cost that a firm with a restrictive working capital policy could incur. Review
section 20A.
[E] :This is an adjustment cost that a firm with a restrictive working capital policy could incur. Review
section 20A.

62) Shadow Wineries is considering the purchase of lockbox services from First Bancorp. Currently, it
takes 7 days to collect funds from customers. The collection period would bereduced by 3 days if the
lockbox system is implemented. The average number of payments received daily is 600 and the
average check size is $250. Assume a 360-day year. Suppose one-year T-bills yield 3%. What is the
maximum acceptable cost per check that Shadow Wineries could pay and still find the system
acceptable?

[A] $0.0313
[B] $0.0475
[C] $0.0500
[D] $0.0625
[E] $0.0750

[A] :What is the daily benefit per check? What is $250 X 3 X .03 / 360? Review section 20.3.
[B] :What is the daily benefit per check? What is $250 X 3 X .03 / 360? Review section 20.3.
[C] :What is the daily benefit per check? What is $250 X 3 X .03 / 360? Review section 20.3.
[D] :You are correct!
[E] :What is the daily benefit per check? What is $250 X 3 X .03 / 360? Review section 20.3.

63) A lockbox system is one method a firm can use to accelerate collections of cash.

[A] True
[B] False

[A] :You are correct!

[B] :A lockbox system is one of the primary methods of accelerating collections. Review section 20.3.

64) Which one of the following is true regarding trading costs and the size of the cash balance held by a
firm?

[A] Total trading costs are inversely related to the fixed cost of making a securities trade.
[B] Trading costs will not change as the size of the cash balance is increased.
[C] The lower the trading costs, the lower will be the firm's target cash balance as determined by the
BAT model.
[D] The total cost to a firm of maintaining a specific cash balance is inversely related to the amount of
trading costs incurred to maintain that balance.
[E] Trading costs are irrelevant in determining the optimal cash balance in the Miller-Orr model only.

[A] :The two are directly related. Review section 20A.

[B] :Trading costs decrease with increases in the size of the cash balance. Review section 20A.
[C] :You are correct!
[D] :The two are directly related. Review section 20A.

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[E] :Trading costs are relevant in both the BAT and the Miller-Orr models. Review section 20A.

65) O'Pinion Manufacturing estimates that they disburse $900,000 weekly in order to pay bills. The
firm's annual opportunity rate is 5%. The fixed cost of transferring money is $75 per transfer. Based on
historical data, the standard deviation of the weekly cash flows is $295,000 and the lower cash balance
limit is $300,000. Using the Miller-Orr model, and assuming the interest rate is 0.094% per week, what is
the average cash balance?

[A] $413,250
[B] $521,339
[C] $531,109
[D] $598,712
[E] $631,773

[A] :To begin, you must first find the optimum initial cash balance. Did you get $473,332? Review
section 20A.
[B] :To begin, you must first find the optimum initial cash balance. Did you get $473,332? Review
section 20A.
[C] :You are correct!
[D] :To begin, you must first find the optimum initial cash balance. Did you get $473,332? Review
section 20A.
[E] :To begin, you must first find the optimum initial cash balance. Did you get $473,332? Review
section 20A.

66) Picard Industries requires $250,000 a week to pay bills. The fixed cost of transferring money is $65
per transfer. The standard deviation of the weekly cash flows is $25,000 and the lower cash balance
limit is $40,000. Assume the applicable annual interest rate is 5%. Using the BAT model, what is the
optimum initial cash balance?

[A] $91,924
[B] $97,735
[C] $183,848
[D] $205,470
[E] $367,696

[A] :You need to review this computation in section 20A.

[B] :You need to review this computation in section 20A.
[C] :You are correct!
[D] :You need to review this computation in section 20A.
[E] :You need to review this computation in section 20A.

67) The Buffalo Bill Co. receives five checks per month of operation. The payments and clearing times
are: $4,000, 2 days; $6,000, 2 days; $3,000, 5 days; $8,000, 3 days, and $7,000, 4 days. Assume a
360-day year. What is the average daily float?

[A] $1,921
[B] $1,933
[C] $2,033
[D] $2,629
[E] $2,900

[A] :Average daily float is total float divided by total days. Review section 20.2.
[B] :Average daily float is total float divided by total days. Review section 20.2.
[C] :Average daily float is total float divided by total days. Review section 20.2.
[D] :Average daily float is total float divided by total days. Review section 20.2.
[E] :You are correct!

68) O'Pinion Manufacturing estimates that they disburse $900,000 weekly in order to pay bills. The
firm's annual opportunity rate is 5%. The fixed cost of transferring money is $75 per transfer. Based on

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historical data, the standard deviation of the weekly cash flows is $295,000 and the lower cash balance
limit is $300,000. Using the BAT model, what is the optimal average cash balance?

[A] $54,320
[B] $113,873
[C] $177,889
[D] $187,350
[E] $201,635

[A] :To begin, you must first find the optimal initial cash balance. Did you get $374,700? Review section
20A.
[B] :To begin, you must first find the optimal initial cash balance. Did you get $374,700? Review section
20A.
[C] :To begin, you must first find the optimal initial cash balance. Did you get $374,700? Review section
20A.
[D] :You are correct!
[E] :To begin, you must first find the optimal initial cash balance. Did you get $374,700? Review section
20A.

69) Which of the following is (are) true?

I. If the variance of the cash flows is equal to 1 then both the BAT model and the Miller-Orr model will
produce the same optimal cash balance.
II. According to the BAT model, the target cash balance increases as the order costs increase.
III. The Miller-Orr model is more useful than the BAT model for firms that have a high degree of
variability in their cash flows.

[A] II only
[B] I and II only
[C] I and III only
[D] II and III only
[E] I, II, and III

[A] :Correct, but there is at least one more correct choice. Review section 20A.
[B] :At least one of these responses is incorrect. Review section 20A.
[C] :At least one of these responses is incorrect. Review section 20A.
[D] :You are correct!
[E] :At least one of these responses is incorrect. Review section 20A.

70) O'Pinion Manufacturing estimates that they disburse $900,000 weekly in order to pay bills. The
firm's annual opportunity rate is 5%. The fixed cost of transferring money is $75 per transfer. Based on
historical data, the standard deviation of the weekly cash flows is $295,000 and the lower cash balance
limit is $300,000. Using the BAT model, what is the total trading cost?

[A] $8,100
[B] $9,367
[C] $9,832
[D] $10,001
[E] $18,734

[A] :To begin, you must first find the optimum initial cash balance. Did you get $374,700? Review
section 20A.
[B] :You are correct!
[C] :How long will the initial cash balance last if you spend $900,000 a week? Review section 20A.
[D] :How many times a year must the firm replenish the cash account? Review section 20A.
[E] :To begin, you must first find the optimum initial cash balance. Did you get $374,700? Review
section 20A.

71) Which one of the following is true about the BAT model?

[A] As the initial cash balance rises, the opportunity costs fall.

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[B] For a given initial cash balance, the total cost of holding cash rises with decreases in the opportunity
costs.
[C] As the average cash balance falls, the opportunity costs rise.
[D] For a given initial cash balance, the total cost of holding cash will rise as the fixed cost of making a
securities trade falls.
[E] A drawback to the BAT model is that it assumes the cash outflows are steady and known for certain.

[A] :Opportunity costs rise as the initial cash balance rises. Review section 20A.
[B] :The total cost of holding cash will rise with increases in opportunity costs. Review section 20A.
[C] :Opportunity costs rise with the average cash balance. Review section 20A.
[D] :The total cost of holding cash will rise with increases in the fixed cost of making a securities trade.
Review section 20A.
[E] :You are correct!

72) The Buffalo Bill Co. receives five checks per month of operation. The payments and clearing times
are: $4,000, 2 days; $6,000, 2 days; $3,000, 5 days; $8,000, 3 days, and $7,000, 4 days. Assume a
360-day year. What is the weighted average delay in receiving the funds?

[A] 3.1 days

[B] 3.6 days
[C] 4.2 days
[D] 4.7 days
[E] 6.3 days

[A] :You are correct!

[B] :You need to review this computation in section 20.2.
[C] :You need to review this computation in section 20.2.
[D] :You need to review this computation in section 20.2.
[E] :You need to review this computation in section 20.2.

73) As a general rule, which of the following statements is (are) true regarding the BAT and the Miller-
Orr cash management models?
I. An increase in the interest rate will lower the target cash balance.
II. A lessening of the uncertainty of cash flows will increase the target cash balance.
III. An increase in the fixed cost of trading securities will increase the target cash balance.

[A] I only
[B] II only
[C] III only
[D] I and III only
[E] II and III only

[A] :Correct, but there is at least one more correct choice. Review section 20A.
[B] :The higher the uncertainty, the higher the target cash balance. Review section 20A.
[C] :Correct, but there is at least one more correct choice. Review section 20A.
[D] :You are correct!
[E] :At least one of these choices is incorrect. Review section 20A.

74) Your firm maintains a banking relationship with a local bank. When your firm writes checks on its
account, there is an immediate decrease in the firm's _____ balance, but no decrease in its _____
balance until the check is presented to the bank for payment.

[A] collected; ledger

[B] book; available
[C] available; ledger
[D] clearing; ledger
[E] book; clearing

[A] :At least one of these terms is incorrect. Review section 20.2.
[B] :You are correct!
[C] :At least one of these terms is incorrect. Review section 20.2.

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[D] :The term clearing is inappropriate here. Review section 20.2.
[E] :The term clearing is inappropriate here. Review section 20.2.

75) The ABC Co. has a checking account at the First United Bank. The amount of funds in this account
according to the books of ABC Co. is called the _____ balance.

[A] collected
[B] disbursement
[C] available
[D] clearing
[E] ledger

[A] :The collected balance relates to how many of the customers' checks have cleared the banking
process. Review section 20.2.
[B] :This question does not describe the term disbursement. Review section 20.2.
[C] :The amount of money shown on thr firm's books will most likely be different than the available
balance. Review section 20.2.
[D] :This question does not describe the term clearing. Review section 20.2.
[E] :You are correct!

76) Float is the difference between book cash and bank cash.

[A] True
[B] False

[A] :You are correct!

[B] :This is a correct definition of float. Review section 20.2.

77) The difference between a firm's available cash balance and its book cash balance is called:

[A] a firm's compensating balance.

[B] float.
[C] the target cash level.
[D] the adjustment cost.
[E] the average cash balance.

[A] :A compensating balance is money that must be held on deposit in a bank as a requirement of a
loan arrangement. Review section 20.1.
[B] :You are correct!
[C] :This is not the definition of a target cash level. Review section 20.2.
[D] :This is not the definition of an adjustment cost. Review section 20.2.
[E] :This is not the definition of an average cash balance. Review section 20.2.

78) According to your checkbook, you have a $3,000 balance in your account. You write checks totaling
$4,500 and make a deposit of $3,500. What is your disbursement float?

[A] $1,500
[B] $3,500
[C] $3,000
[D] $4,500
[E] $8,000

[A] :Disbursement float relates only to checks that have been written. Review section 20.2.
[B] :Disbursement float relates only to checks that have been written. Review section 20.2.
[C] :Disbursement float relates only to checks that have been written. Review section 20.2.
[D] :You are correct!
[E] :Disbursement float relates only to checks that have been written. Review section 20.2.

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79) Your company is thinking of installing a lockbox system in Denver to collect payments from west of
the Mississippi River. The collection time is currently 5 days and would be reduced to 3 days if the
system is installed. Daily interest on T-bills is .015%. The average number of daily payments is 650 and
the average check size is $250. If the bank charges $.06 per check, should the company get the
lockbox?

[A] yes; because the NPV is $97,500

[B] yes; because the NPV is $65,000
[C] doesn’t matter; because the NPV is zero
[D] no; because the NPV is -$65,000
[E] no; because the NPV is -$97,500

[A] :You need to recompute your NPV. Review section 20.3.

[B] :You are correct!
[C] :The NPV does not equal zero. Review section 20.3.
[D] :The sign on your NPV is incorrect. Review section 20.3.
[E] :You need to recompute your NPV. Review section 20.3.

80) A firm has a weighted average delay of 3.47 days and average daily receipts of $65,000. Assume a
360-day year. What is the average daily float?

[A] $164,561
[B] $175,093
[C] $204,321
[D] $225,550
[E] $238,275

[A] :Average daily float is equal to the average daily receipts multiplied by the weighted average delay.
Review section 20.2.
[B] :Average daily float is equal to the average daily receipts multiplied by the weighted average delay.
Review section 20.2.
[C] :Average daily float is equal to the average daily receipts multiplied by the weighted average delay.
Review section 20.2.
[D] :You are correct!
[E] :Average daily float is equal to the average daily receipts multiplied by the weighted average delay.
Review section 20.2.

81) The use of a lockbox system to collect payments provides just one principal benefit and that is a
reduction in processing time.

[A] True
[B] False

[A] :While processing time is reduced, this is not the only benefit. Mailing time is reduced as well.
Review section 20.3.
[B] :You are correct!

82) Which one of the following is true regarding float?

[A] Checks written by a firm generate collection float.

[B] Checks received by a firm create disbursement float.
[C] In general, a firm's disbursement activities and its collection activities generate float.
[D] A firm's float is negative when its available cash balance equals its book cash balance.
[E] A firm cannot exploit float by using cash needed to cover a check while the check is clearing.

[A] :Checks written create disbursement float. Review section 20.2.

[B] :Checks received create collection float. Review section 20.2.
[C] :You are correct!
[D] :In this case net float is zero. Review section 20.2.
[E] :Although it may be unethical or illegal, a firm can exploit float in this manner. Review section 20.2.

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83) The amount of funds in your checking account at the bank that can be drawn on at any time is called
the _____ balance.

[A] collected
[B] disbursement
[C] book
[D] clearing
[E] ledger

[A] :You are correct!

[B] :This definition does not match the term disbursement. Review section 20.2.
[C] :The book balance cannot necessarily be drawn upon. Review section 20.2.
[D] :This definition does not match the term clearing. Review section 20.2.
[E] :The ledger balance cannot necessarily be drawn upon. Review section 20.2.

84) One of the objectives of the cash management process is to determine the:
I. appropriate level of cash that must be kept on hand.
II. best means by which to collect cash owed to the firm.
III. best way to invest the temporary excess cash reserves of the firm.
IV. best way to pay for the materials and services provided to the firm.

[A] I and III only

[B] II and IV only
[C] I, II, and III only
[D] II, III, and IV only
[E] I, II, III, and IV

[A] :Correct, but there is at least one more correct choice. Review section 20.1.
[B] :Correct, but there is at least one more correct choice. Review section 20.1.
[C] :Correct, but why aren’t cash disbursements also an objective of cash management? Review
section 20.1.
[D] :Correct, but why shouldn't cash management include determining the appropriate amount of cash
to keep on hand? Review section 20.1.
[E] :You are correct!

85) Cash and liquidity management are essentially the same thing.

[A] True
[B] False

[A] :Cash management deals with collecting and disbursing cash. Liquidity management concerns the
optimal quantity of liquid assets a firm should have on hand. Review section 20.1.
[B] :You are correct!

86) If a firm holds cash in order to take advantage of unexpected opportunities that might arise, its
reason for holding cash is called a (an)_____ motive.

[A] transactions
[B] precautionary
[C] adjustment
[D] speculative
[E] non-financial

[A] :The transaction motive is the need to hold cash to satisfy normal cash transactions ssociated with a
firm's ongoing operations. Does that sound like the case here? Review section 20.1.
[B] :The precautionary motive is the need to hold cash as a safety margin to act as a financial reserve.
Does that sound like the case here? Review section 20.1.
[C] :There is no such motive for holding cash. Review section 20.1.

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[D] :You are correct!
[E] :The text does not discuss this as a motive for holding cash. Review section 20.1.

87) Financial slack is a term used by financial economists to identify the funds available from cash and
near-cash holdings, as well as the ability to borrow readily to meet day-to-day obligations and to take
advantage of unexpected opportunities. As such, the maintenance of financial slack represents a
combination of the _____ and the _____ motives for holding cash, respectively, as identified by Keynes.

[A] speculative; transactions

[B] transactions; precautionary
[C] precautionary; speculative
[D] speculative; precautionary
[E] transactions; speculative

[A] :These are the correct terms but they are not in the correct order. Review section 20.1.
[B] :The precautionary motive for holding cash does not exist here. Review section 20.1.
[C] :The precautionary motive for holding cash does not exist here. Review section 20.1.
[D] :The precautionary motive for holding cash does not exist here. Review section 20.1.
[E] :You are correct!

88) The _____ delay is the amount of time between the date when a company receives payment from a
customer and the date that cash becomes available to the firm.

[A] processing delay plus the availability

[B] mailing time plus the processing
[C] mailing time plus the processing delay minus the availability
[D] availability delay minus the processing
[E] mailing time plus availability

[A] :You are correct!

[B] :Mailing time is not a factor here since it is assumed the firm has already received the check.
Review section 20.2.
[C] :Mailing time is not a factor here since it is assumed the firm has already received the check.
Review section 20.2.
[D] :Why would you subtract one form of delay from another? Review section 20.2.
[E] :Mailing time is not a factor here since it is assumed the firm has already received the check.
Review section 20.2.

89) Picard Industries requires $250,000 a week to pay bills. The fixed cost of transferring money is $65
per transfer. The standard deviation of the weekly cash flows is $25,000 and the lower cash balance
limit is $40,000. Assume the applicable annual interest rate is 5%. Using the BAT model, what is the
total trading cost?

[A] $3,117
[B] $4,596
[C] $5,580
[D] $7,664
[E] $9,192

[A] :To find this, you must first compute the optimum initial cash balance. Did you get $183,848?
Review section 20A.
[B] :You are correct!
[C] :How many weeks will the optimum initial cash balance of $183,848 last if you spend $250,000 a
week? Review section 20A.
[D] :How many times a year will the cash account need to be replenished if the optimum initial cash
balance only lasts .7354 weeks? Review section 20A.
[E] :Review responses a, c and d for some hints. Review section 20A.

90) The transaction and speculative motives for holding cash are essentially the same thing.

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[A] True
[B] False

[A] :The transaction motive relates to keeping cash on hand for day-to-day operating activities. The
speculative motive is related to unanticipated investment opportunities. These are not the same thing.
Review section 20.1.
[B] :You are correct!

91) A shortcoming of both the BAT and the Miller-Orr models is that the cost of borrowing is likely more
expensive than selling marketable securities.

[A] True
[B] False

[A] :You are correct!

[B] :A shortcoming of these models is that this cost differential is not included in either. Review section
20A.

92) O'Pinion Manufacturing estimates that they disburse $900,000 weekly in order to pay bills. The fixed
cost of transferring money is $75 per transfer. Based on historical data, the standard deviation of the
weekly cash flows is $295,000 and the lower cash balance limit is $300,000. Using the Miller-Orr model,
and assuming the interest rate is 0.094% per week, what is the optimum initial cash balance?

[A] $173,332
[B] $203,835
[C] $405,592
[D] $473,332
[E] $493,835

[A] :Did you forget to add in the lower cash limit? Review section 20A.
[B] :You need to review this computation in section 20A.
[C] :You need to review this computation in section 20A.
[D] :You are correct!
[E] :You need to review this computation in section 20A.

93) A firm's marketable securities account is presently comprised of 270-day corporate commercial
paper and 3-month U.S. Treasury Bills. If the firm chooses to shift its policy and invest 100% in
commercial paper, it would likely increase the _____ of its marketable securities portfolio.
I. maturity risk
II. marketability risk
III. taxability
IV. default risk

[A] I and II only

[B] II and IV only
[C] I, II, and III only
[D] II, III, and IV only
[E] I, II, III, and IV

[A] :Correct, but there is at least one more correct choice. Review section 20.5.
[B] :Correct, but there is at least one more correct choice. Review section 20.5.
[C] :Correct, but isn't there more default risk with commercial paper than there is with a T-bill? Review
section 20.5.
[D] :Correct, but why isn't maturity risk increased since the commercial paper matures 180 later than
the T-bills? Review section 20.5.
[E] :You are correct!

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94) The target cash balance for a firm that follows a flexible cash management policy is the point at
which:

[A] opportunity costs are minimized.

[B] opportunity costs are equal to trading costs.
[C] total costs just exceed the minimum cash balance.
[D] total costs are just below their maximum.
[E] transactions costs are maximized.

[A] :Opportunity costs are at their lowest when a firm holds no cash. Does this sound correct? Review
section 20A.
[B] :You are correct!
[C] :This does not describe the optimal target cash balance for this type of firm. Review section 20A.
[D] :This does not describe the optimal target cash balance for this type of firm. Review section 20A.
[E] :Maximizing costs is certainly not one of the objectives of cash management. Review section 20A.

95) Due to a flood in the upper Midwest, checks drawn on the banks in the affected area are delayed
several days in reaching the banks for payment. This represents an increase in _____ float for the firms
writing the checks.

[A] ledger
[B] target
[C] minimum
[D] collection
[E] disbursement

[A] :This is not a type of float discussed in the text. Review section 20.2.
[B] :This is not a type of float discussed in the text. Review section 20.2.
[C] :This is not a type of float discussed in the text. Review section 20.2.
[D] :Collection float applies to the parties receiving the checks, not those writing the checks. Review
section 20.2.
[E] :You are correct!

96) Winton Wineries is considering the purchase of lockbox services from First Bancorp. Currently, it
takes 6 days to collect funds from customers. The collection period would bereduced by 2 days if the
lockbox system is implemented. The average number of payments received daily is 300 and the
average check size is $150. First Bancorp will charge 5¢ per check in return for operating the lockbox
system. Assume a 360-day year. Suppose one-year T-bills yield 6%. Should Winton Wineries purchase
the system?

[A] yes; because the NPV is $54,000

[B] yes; because the NPV is $28,000
[C] doesn’t matter; because the NPV is zero
[D] no; because the NPV is -$28,000
[E] no; because the NPV is -$54,000

[A] :You need to recompute your NPV. Review section 20.3.

[B] :You need to recompute your NPV. Review section 20.3.
[C] :You are correct!
[D] :You need to recompute your NPV. Review section 20.3.
[E] :You need to recompute your NPV. Review section 20.3.

97) The present value of eliminating float is equal to the amount of:

[A] mail delay.

[B] collection float.
[C] processing delay.
[D] total float.
[E] availability delay.

[A] :This is just one component of the present value of eliminating float. Review section 20.2.

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[B] :This is just one component of the present value of eliminating float. Review section 20.2.
[C] :This is just one component of the present value of eliminating float. Review section 20.2.
[D] :You are correct!
[E] :This is just one component of the present value of eliminating float. Review section 20.2.

98) According to your checkbook, you have a $3,000 balance in your account. You write checks totaling
$4,500 and make a deposit of $3,500. What is your collection float?

[A] -$1,500
[B] -$3,500
[C] -$3,000
[D] -$4,500
[E] -$8,000

[A] :Collection float relates only to checks that have been received and deposited. Review section 20.2.
[B] :You are correct!
[C] :Collection float relates only to checks that have been received and deposited. Review section 20.2.
[D] :Collection float relates only to checks that have been received and deposited. Review section 20.2.
[E] :Collection float relates only to checks that have been received and deposited. Review section 20.2.

99) If the lower limit on cash balances rises by one dollar, the upper limit as specified by the Miller-Orr
model also rises by one dollar.

[A] True
[B] False

[A] :You are correct!

[B] :This is one of the characteristics of the Miller-Orr model. Review section 20A.

100) Due to a flood in the upper Midwest, checks received by firms in the affected area are not
deposited for several days. This represents an increase in the _____ float for the depositing firm.

[A] ledger
[B] clearing
[C] net
[D] collection
[E] disbursement

[A] :This is not a type of float discussed in the text. Review section 20.2.
[B] :This is not a type of float discussed in the text. Review section 20.2.
[C] :This is not a type of float discussed in the text. Review section 20.2.
[D] :You are correct!
[E] :Disbursement float applies to the parties writing the checks, not those receiving the checks. Review
section 20.2.

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