Chapter 27 - Cash Management

Chapter 27
Cash Management

Multiple Choice Questions

1. Financial managers broaden their definition of cash to include:

A. currency, bank deposits, stocks and bonds.
B. currency, checking deposits, undeposited checks, and bonds.
C. cash, bonds, bank deposits and short-term marketable securities.
D. currency, checking deposits, undeposited checks and short-term marketable securities.
E. None of the above.

2. Examples of cash disbursements do not include:

A. wages.
B. payment for raw materials.
C. taxes.
D. dividends.
E. sales of assets.

3. Which of the following is not an important characteristic of short-term marketable

securities?
A. Maturity risk
B. Marketability
C. Taxability
D. Default risk
E. All of the above are important.

4. Marketability risk is synonymous with:

A. maturity risk.
B. default risk.
C. liquidity risk.
D. interest rate risk.
E. None of the above.

27-1
Chapter 27 - Cash Management

5. Which of the following money-market securities has no active secondary market?

A. Certificates of deposit (CD's)
B. Commercial paper
C. Banker's acceptances
D. Treasury bills
E. All money-market securities have active secondary markets.

6. If a firm has achieved its target cash balance the net present value is:
A. positive because the cash balance is positive.
B. zero because increasing the cash balance increases the interest cost.
C. negative because the cash balance has a financing cost.
D. positive because decreasing the cash decreases the cost of illiquidity.
E. None of the above.

7. Determining the appropriate target cash balance involves assessing the trade-off between:
A. income and diversification.
B. the benefit and cost of liquidity.
C. balance sheet strength and transaction needs.
D. All of the above.
E. None of the above.

8. The target cash balance is reached when:

A. the interest on any marketable security throw-off is maximized.
B. the interest foregone from not investing in an equivalent amount of Treasury bills is
minimized.
C. the value of cash liquidity equals interest foregone on an equivalent amount of Treasury
bills.
D. the liquidity value is greater than interest foregone on an equivalent amount of Treasury
bills.
E. None of the above.

27-2
Chapter 27 - Cash Management

9. Firms would need to hold zero cash when transactions related needs are:
A. greater than cash inflows.
B. less than cash inflows.
C. not perfectly synchronized with cash inflows.
D. perfectly synchronized with cash inflows.
E. None of the above.

10. Firms hold cash to satisfy the transaction motive. This means that cash is held:
A. to meet disbursements for normal operations.
B. to balance the flow between cash inflows and outflows.
C. to make unexpected payments such as special price discounts.
D. Both A and B.
E. None of the above.

11. Firms hold cash, in part, to satisfy compensating balances. Compensating balances are:
A. cash balances held at the firm in excess of its transactions needs.
B. cash balances held at the firm that are below that of its transactions needs.
C. cash balances held at the firm in excess of its cash inflows.
D. cash balances held at commercial banks to pay implicitly for bank services.
E. None of the above.

12. In determining the firm's target cash balance, trading costs:

A. tend to fall when cash balances are large.
B. tend to rise when cash balances are large.
C. tend to rise when cash balances are low.
D. Both A and B.
E. Both A and C.

13. The cost of holding cash:

A. is the opportunity cost of lost return.
B. is zero because it is the most liquid and desirable asset.
C. increases as cash holdings increase.
D. Both A and B.
E. Both A and C.

27-3
Chapter 27 - Cash Management

14. A firm with low cash balances will need to borrow to cover an unexpected cash outflow:
A. if it has high cash flow variability.
B. if COGS decrease.
C. if the firm maintains a zero lower control limit.
D. Both A and B.
E. Both A and C.

15. Most large firms hold a cash balance greater than most models imply because:
A. it is too difficult to estimate the costs of security transactions.
B. banks are compensated by account balances for payment of services.
C. corporations have few bank accounts and it is difficult to manage their cash.
D. cash is costless and need not be managed closely.
E. None of the above.

16. The difference between bank cash and book cash is called:
A. float.
B. disbursement float.
C. net float.
D. collection float.
E. None of the above.

17. Checks written by the firm are said to generate:

A. collection float.
B. ledger float.
C. disbursement float.
D. book float.
E. None of the above.

27-4
Chapter 27 - Cash Management

18. When a firm writes a check, there is an immediate decrease in _____ cash, but no
immediate change in _____ cash.
A. bank; collected
B. ledger; book
C. bank; ledger
D. book; bank
E. None of the above

19. Collection float increases:

A. disbursement float.
B. bank cash.
C. book cash.
D. gross float times net float.
E. None of the above.

20. A financial manager should be concerned about bank cash and net float, which is the sum
of:
A. collection and book cash.
B. collection float and disbursement float.
C. disbursement float and book cash.
D. disbursement float and bank credit.
E. None of the above.

21. Which of the following is not true of float management?

A. Float management involves controlling the collection and disbursement of cash.
B. An objective of float management is to speed up the collection float.
C. An objective of float management is to slow down disbursement float.
D. Float management will succeed if the firm can collect late and pay early.
E. All of the above are true of float management.

27-5
Chapter 27 - Cash Management

22. By getting closer to the source of payment, lockboxes can be used to reduce:
A. availability or clearing float.
B. mail float.
C. in-house processing float.
D. disbursement float.
E. None of the above.

23. The most common cash management technique used to speed up collections is:
A. concentration banking.
B. wire transfers.
C. lockboxes.
D. in-house processing.
E. None of the above.

24. The fastest but most expensive way to transfer surplus funds from the local deposit bank
to the concentration bank is:
A. a lockbox system.
B. a mail float system.
C. a wire transfer.
D. an in-house processing float system.
E. an availability float system.

25. Which of the following statements concerning zero balance accounts is not correct?
A. They are set up to handle disbursement activity.
B. The account has a minimum amount at all times.
C. Checks are automatically transferred into the account as checks are presented for payment.
D. The transfer is automatic and involves an accounting entry only.
E. The master and the zero balance accounts are located at the same bank.

27-6
Chapter 27 - Cash Management

26. Efficient funds management attempts to reduce mailing and clearing time. Two methods
do this by:
A. moving collections and deposits closer together in concentration banks; and moving
surplus funds quickly by wire transfers.
B. moving mailing points to cross country locations and using depository drafts to transfer
funds.
C. drawing checks against zero balance accounts and using cross country mailing.
D. wiring funds to zero balance accounts and using lockboxes in many cities.
E. None of the above.

27. The major difference between a check and a draft is that:

A. the draft is not drawn on the bank but on the issuer.
B. the bank must present the draft to the firm for acceptance.
C. after acceptance of the draft the firm must deposit the funds to make payment.
D. All of the above.
E. None of the above.

28. If the total long term financing of the firm is greater than the total financing needs for part
of the year, and less than the needs for some of the year due to seasonal fluctuations, the
company will most likely:
A. hold excess cash.
B. borrow short term and hold excess cash.
C. hold excess cash and reduce business activities.
D. invest in marketable securities and borrow short term.
E. None of the above.

29. Adjustable rate preferred stock (ARPS) offer competitive rates of return with traditional
money-market instruments but:
A. are not rated by Moody's or Standard & Poor's.
B. still provide the corporate investor with the tax exclusion on dividend income.
C. have a fixed rate of dividend income.
D. offers a highly competitive trading market.
E. None of the above.

27-7
Chapter 27 - Cash Management

30. Even though the dividend rate on an Adjustable-Rate Preferred Stock (ARPS) is floating
to keep in line with interest rates, the instrument still suffers from risk such as:
A. a thin market causing potential principal risk and liquidity concerns.
B. the risk of downgrades from the narrow range of issuers.
C. the impact of tax law changes, which may reduce the after-tax value of the instrument.
D. All of the above.
E. None of the above.

31. Auction-Rate Preferred Stock is similar to Adjustable-Rate Preferred Stock (ARPS) in that
they:
A. are both issued for 90 days.
B. have a dividend rate set by the issuer.
C. both have a floating rate and a dividend tax exclusion.
D. are equally accessible to the corporate investor directly.
E. are not similar in any manner.

32. Auction-Rate Preferred Stock has less risk factors than Adjustable-Rate Preferred Stock
(ARPS) because:
A. the reset period is 49 days instead of 90.
B. the market sets the dividend level reducing principle volatility.
C. better liquidity allows corporate investors to control their investments individually.
D. All of the above.
E. None of the above.

33. Floating rate CDs differ from regular CDs in that:

A. they have longer maturity.
B. they differ substantially in default risk.
C. they are not taxed.
D. they have coupons that are frequently reset.
E. All of the above describe differences.

27-8
Chapter 27 - Cash Management

34. A sensible cash management policy would be to:

A. have enough cash on hand to meet ordinary course of business and some excess cash to
invest in marketable securities as a precautionary measure.
B. have nearly enough cash on hand to meet ordinary course of business.
C. have enough cash on hand to meet any potential demand for cash.
D. have a zero cash balance and charge all expenditures.
E. None of the above.

The Timberline firm expects a total cash need of $12,500 over the next 3 months. They have
a beginning cash balance of $1,500, and cash is replenished when it hits zero. The fixed cost
of selling securities to replenish cash balances is $3.50. The interest rate on marketable
securities is 8% per annum. There is a constant rate of cash disbursement and no cash receipts
during the month.

35. Based on the firm's current practice, what is the average daily cash balance (a month has
30 days)?
A. $50.00
B. $69.44
C. $94.44
D. $138.89
E. None of the above.

36. Based on the firm's current practice, how many times during the next 3 months will the
cash balance be replenished?
A. 3.33 times
B. 4.42 times
C. 8.33 times
D. 13.35 times
E. None of the above.

27-9
Chapter 27 - Cash Management

37. What is the total opportunity cost for a month based on the firm's current practice?
A. $5.00
B. $18.98
C. $27.92
D. $60.00
E. None of the above.

38. What is the total fixed order cost for the next three months based on the firm's current
practice?
A. $29.17
B. $37.80
C. $55.60
D. $75.60
E. None of the above.

On an average day, a company writes checks totaling $1,500. These checks take 7 days to
clear. The company receives checks totaling $1,800. These checks take 4 days to clear. The
cost of debt is 9%.

39. What is the firm's disbursement float?

A. $-10,500
B. $-8,700
C. $1,800
D. $10,500
E. None of the above.

40. What is the firm's collection float?

A. $-7,200
B. $-1,800
C. $1,800
D. $10,500
E. None of the above.

27-10
Chapter 27 - Cash Management

41. What is the firm's net float?

A. $-3,300
B. $-300
C. $300
D. $3,300
E. None of the above.

42. If the average daily float is $3,300, what is the net present value per day?
A. $-0.81
B. $-79.41
C. $-282.48
D. $-297.00
E. None of the above.

43. Your firm has average daily receipts of $2,500. These receipts are available after 6 days
on average. The interest rate that could be earned is .02% (.0002) per day. What is the
approximate cost of the float per day?
A. $2.50
B. $3.00
C. $30.00
D. $50.00
E. None of the above.

44. Your firm receives 40 checks per month. Of these, 10 are for $1,200 and 30 are for $500.
The delay for the $1,200 checks is 4 days; the $500 checks are delayed 6 days. What is the
weighted average delay?
A. 4 days
B. 4.5 days
C. 5 days
D. 5.5 days
E. 6 days

27-11
Chapter 27 - Cash Management

45. Your firm receives 10 checks per month. Of these, 6 are for $1,000 and 4 are for $500.
The delay for the $1,000 checks is 5 days, and the $500 checks are delayed 8 days. Calculate
the average daily float.
A. $1,533.33
B. $1,486.87
C. $1,500.00
D. $1,530.35
E. $1,590.04

On an average day, Tennis R Us writes checks totaling $2,000. These checks take 3 days to
clear. The company receives checks totaling $1,800. These checks take 2 days to clear. The
cost of debt is 8%.

46. What is the firm's disbursement float?

A. $-6,000
B. $-4,500
C. $4,500
D. $6,000
E. None of the above.

47. What is the firm's collection float?

A. $-4,500
B. $-3,600
C. $3,600
D. $4,500
E. None of the above.

48. What is the firm's net float?

A. $-2,500
B. $-2,400
C. $2,400
D. $2,500
E. None of the above.

27-12
Chapter 27 - Cash Management

49. If the average daily float is $2,500, what is the net present value per day?
A. $-0.55
B. $-5.55
C. $-252.66
D. $-197.00
E. None of the above.

Essay Questions

50. Fly-By-Night Airlines currently has $2.4 million on deposit with its bank. Fly-By-Night
pays its fuel bill by writing a check for $1.1 million. Calculate the company's book cash and
bank cash after it writes the check.

51. During the month you receive 4 checks, one for $100, two for $200, and one for $500.
They are delayed for 2 days, 4 days, and 8 days respectively. What is your average daily
collection float (a month has 30 days)?

The Mesa Bank is offering your company the use of their lockbox services. They estimate
that you can reduce your average mail time by 2 days and they can save you a combined
clearing and processing time of 1.5 days by putting the checks into the clearing system
sooner. The firm receives 320 checks a day on average written for $2,500. The current T-Bill
rate is 4% or .0107% per day.

27-13
Chapter 27 - Cash Management

52. What is the savings float and what can you earn if the firm takes Mesa's lockbox service?

53. If Mesa will charge your firm an annual fee of $35,000 and $.20 per check handled will
you accept Mesa's services?

54. The net float of a firm is made up of disbursement float and collection float. Discuss the
three components of collection float and how they would work against the firm.

55. Discuss the Check Clearing Act for the 21st Century, known as Check 21 and how it will
impact floats.

27-14
Chapter 27 - Cash Management

Chapter 27 Cash Management Answer Key

Multiple Choice Questions

1. Financial managers broaden their definition of cash to include:

A. currency, bank deposits, stocks and bonds.
B. currency, checking deposits, undeposited checks, and bonds.
C. cash, bonds, bank deposits and short-term marketable securities.
D. currency, checking deposits, undeposited checks and short-term marketable securities.
E. None of the above.

Difficulty level: Medium

Topic: CASH
Type: DEFINITIONS

2. Examples of cash disbursements do not include:

A. wages.
B. payment for raw materials.
C. taxes.
D. dividends.
E. sales of assets.

Difficulty level: Easy

Topic: CASH DISBURSEMENTS
Type: DEFINITIONS

27-15
Chapter 27 - Cash Management

3. Which of the following is not an important characteristic of short-term marketable

securities?
A. Maturity risk
B. Marketability
C. Taxability
D. Default risk
E. All of the above are important.

Difficulty level: Easy

Topic: MARKETABLE SECURITIES
Type: DEFINITIONS

4. Marketability risk is synonymous with:

A. maturity risk.
B. default risk.
C. liquidity risk.
D. interest rate risk.
E. None of the above.

Difficulty level: Easy

Topic: MARKETABILITY RISK
Type: DEFINITIONS

5. Which of the following money-market securities has no active secondary market?

A. Certificates of deposit (CD's)
B. Commercial paper
C. Banker's acceptances
D. Treasury bills
E. All money-market securities have active secondary markets.

Difficulty level: Medium

Topic: COMMERCIAL PAPER
Type: DEFINITIONS

27-16
Chapter 27 - Cash Management

6. If a firm has achieved its target cash balance the net present value is:
A. positive because the cash balance is positive.
B. zero because increasing the cash balance increases the interest cost.
C. negative because the cash balance has a financing cost.
D. positive because decreasing the cash decreases the cost of illiquidity.
E. None of the above.

Difficulty level: Medium

Topic: TARGET CASH BALANCE
Type: CONCEPTS

7. Determining the appropriate target cash balance involves assessing the trade-off between:
A. income and diversification.
B. the benefit and cost of liquidity.
C. balance sheet strength and transaction needs.
D. All of the above.
E. None of the above.

Difficulty level: Medium

Topic: TARGET CASH BALANCE
Type: CONCEPTS

8. The target cash balance is reached when:

A. the interest on any marketable security throw-off is maximized.
B. the interest foregone from not investing in an equivalent amount of Treasury bills is
minimized.
C. the value of cash liquidity equals interest foregone on an equivalent amount of Treasury
bills.
D. the liquidity value is greater than interest foregone on an equivalent amount of Treasury
bills.
E. None of the above.

Difficulty level: Medium

Topic: TARGET CASH BALANCE
Type: CONCEPTS

27-17
Chapter 27 - Cash Management

9. Firms would need to hold zero cash when transactions related needs are:
A. greater than cash inflows.
B. less than cash inflows.
C. not perfectly synchronized with cash inflows.
D. perfectly synchronized with cash inflows.
E. None of the above.

Difficulty level: Medium

Topic: TARGET CASH BALANCE
Type: CONCEPTS

10. Firms hold cash to satisfy the transaction motive. This means that cash is held:
A. to meet disbursements for normal operations.
B. to balance the flow between cash inflows and outflows.
C. to make unexpected payments such as special price discounts.
D. Both A and B.
E. None of the above.

Difficulty level: Medium

Topic: TRANSACTIONS BALANCE
Type: CONCEPTS

11. Firms hold cash, in part, to satisfy compensating balances. Compensating balances are:
A. cash balances held at the firm in excess of its transactions needs.
B. cash balances held at the firm that are below that of its transactions needs.
C. cash balances held at the firm in excess of its cash inflows.
D. cash balances held at commercial banks to pay implicitly for bank services.
E. None of the above.

Difficulty level: Easy

Topic: COMPENSATING BALANCE
Type: CONCEPTS

27-18
Chapter 27 - Cash Management

12. In determining the firm's target cash balance, trading costs:

A. tend to fall when cash balances are large.
B. tend to rise when cash balances are large.
C. tend to rise when cash balances are low.
D. Both A and B.
E. Both A and C.

Difficulty level: Easy

Topic: TARGET CASH BALANCE
Type: CONCEPTS

13. The cost of holding cash:

A. is the opportunity cost of lost return.
B. is zero because it is the most liquid and desirable asset.
C. increases as cash holdings increase.
D. Both A and B.
E. Both A and C.

Difficulty level: Medium

Topic: COST OF HOLDING CASH
Type: CONCEPTS

14. A firm with low cash balances will need to borrow to cover an unexpected cash outflow:
A. if it has high cash flow variability.
B. if COGS decrease.
C. if the firm maintains a zero lower control limit.
D. Both A and B.
E. Both A and C.

Difficulty level: Medium

Topic: CASH BALANCE
Type: CONCEPTS

27-19
Chapter 27 - Cash Management

15. Most large firms hold a cash balance greater than most models imply because:
A. it is too difficult to estimate the costs of security transactions.
B. banks are compensated by account balances for payment of services.
C. corporations have few bank accounts and it is difficult to manage their cash.
D. cash is costless and need not be managed closely.
E. None of the above.

Difficulty level: Medium

Topic: CASH BALANCE
Type: CONCEPTS

16. The difference between bank cash and book cash is called:
A. float.
B. disbursement float.
C. net float.
D. collection float.
E. None of the above.

Difficulty level: Easy

Topic: FLOAT
Type: CONCEPTS

17. Checks written by the firm are said to generate:

A. collection float.
B. ledger float.
C. disbursement float.
D. book float.
E. None of the above.

Difficulty level: Easy

Topic: DISBURSEMENT FLOAT
Type: CONCEPTS

27-20
Chapter 27 - Cash Management

18. When a firm writes a check, there is an immediate decrease in _____ cash, but no
immediate change in _____ cash.
A. bank; collected
B. ledger; book
C. bank; ledger
D. book; bank
E. None of the above

Difficulty level: Easy

Topic: DISBURSEMENT FLOAT
Type: CONCEPTS

19. Collection float increases:

A. disbursement float.
B. bank cash.
C. book cash.
D. gross float times net float.
E. None of the above.

Difficulty level: Easy

Topic: COLLECTION FLOAT
Type: CONCEPTS

20. A financial manager should be concerned about bank cash and net float, which is the sum
of:
A. collection and book cash.
B. collection float and disbursement float.
C. disbursement float and book cash.
D. disbursement float and bank credit.
E. None of the above.

Difficulty level: Medium

Topic: COLLECTION FLOAT AND DISBURSEMENT FLOAT
Type: CONCEPTS

27-21
Chapter 27 - Cash Management

21. Which of the following is not true of float management?

A. Float management involves controlling the collection and disbursement of cash.
B. An objective of float management is to speed up the collection float.
C. An objective of float management is to slow down disbursement float.
D. Float management will succeed if the firm can collect late and pay early.
E. All of the above are true of float management.

Difficulty level: Easy

Topic: FLOAT MANAGEMENT
Type: CONCEPTS

22. By getting closer to the source of payment, lockboxes can be used to reduce:
A. availability or clearing float.
B. mail float.
C. in-house processing float.
D. disbursement float.
E. None of the above.

Difficulty level: Easy

Topic: LOCKBOX
Type: CONCEPTS

23. The most common cash management technique used to speed up collections is:
A. concentration banking.
B. wire transfers.
C. lockboxes.
D. in-house processing.
E. None of the above.

Difficulty level: Easy

Topic: LOCKBOX
Type: CONCEPTS

27-22
Chapter 27 - Cash Management

24. The fastest but most expensive way to transfer surplus funds from the local deposit bank
to the concentration bank is:
A. a lockbox system.
B. a mail float system.
C. a wire transfer.
D. an in-house processing float system.
E. an availability float system.

Difficulty level: Easy

Topic: WIRE TRANSFER
Type: CONCEPTS

25. Which of the following statements concerning zero balance accounts is not correct?
A. They are set up to handle disbursement activity.
B. The account has a minimum amount at all times.
C. Checks are automatically transferred into the account as checks are presented for payment.
D. The transfer is automatic and involves an accounting entry only.
E. The master and the zero balance accounts are located at the same bank.

Difficulty level: Medium

Topic: ZERO BALANCE ACCOUNTS
Type: CONCEPTS

26. Efficient funds management attempts to reduce mailing and clearing time. Two methods
do this by:
A. moving collections and deposits closer together in concentration banks; and moving
surplus funds quickly by wire transfers.
B. moving mailing points to cross country locations and using depository drafts to transfer
funds.
C. drawing checks against zero balance accounts and using cross country mailing.
D. wiring funds to zero balance accounts and using lockboxes in many cities.
E. None of the above.

Difficulty level: Challenge

Topic: FUNDS MANAGEMENT
Type: CONCEPTS

27-23
Chapter 27 - Cash Management

27. The major difference between a check and a draft is that:

A. the draft is not drawn on the bank but on the issuer.
B. the bank must present the draft to the firm for acceptance.
C. after acceptance of the draft the firm must deposit the funds to make payment.
D. All of the above.
E. None of the above.

Difficulty level: Medium

Topic: CHECKS AND DRAFTS
Type: CONCEPTS

28. If the total long term financing of the firm is greater than the total financing needs for part
of the year, and less than the needs for some of the year due to seasonal fluctuations, the
company will most likely:
A. hold excess cash.
B. borrow short term and hold excess cash.
C. hold excess cash and reduce business activities.
D. invest in marketable securities and borrow short term.
E. None of the above.

Difficulty level: Challenge

Topic: SEASONAL FLUCTUATIONS AND CASH MANAGEMENT
Type: CONCEPTS

29. Adjustable rate preferred stock (ARPS) offer competitive rates of return with traditional
money-market instruments but:
A. are not rated by Moody's or Standard & Poor's.
B. still provide the corporate investor with the tax exclusion on dividend income.
C. have a fixed rate of dividend income.
D. offers a highly competitive trading market.
E. None of the above.

Difficulty level: Medium

Topic: ADJUSTABLE RATE PREFERRED STOCK
Type: CONCEPTS

27-24
Chapter 27 - Cash Management

30. Even though the dividend rate on an Adjustable-Rate Preferred Stock (ARPS) is floating
to keep in line with interest rates, the instrument still suffers from risk such as:
A. a thin market causing potential principal risk and liquidity concerns.
B. the risk of downgrades from the narrow range of issuers.
C. the impact of tax law changes, which may reduce the after-tax value of the instrument.
D. All of the above.
E. None of the above.

Difficulty level: Challenge

Topic: ADJUSTABLE RATE PREFERRED STOCK
Type: CONCEPTS

31. Auction-Rate Preferred Stock is similar to Adjustable-Rate Preferred Stock (ARPS) in that
they:
A. are both issued for 90 days.
B. have a dividend rate set by the issuer.
C. both have a floating rate and a dividend tax exclusion.
D. are equally accessible to the corporate investor directly.
E. are not similar in any manner.

Difficulty level: Medium

Topic: ADJUSTABLE RATE PREFERRED STOCK
Type: CONCEPTS

32. Auction-Rate Preferred Stock has less risk factors than Adjustable-Rate Preferred Stock
(ARPS) because:
A. the reset period is 49 days instead of 90.
B. the market sets the dividend level reducing principle volatility.
C. better liquidity allows corporate investors to control their investments individually.
D. All of the above.
E. None of the above.

Difficulty level: Medium

Topic: ADJUSTABLE RATE PREFERRED STOCK
Type: CONCEPTS

27-25
Chapter 27 - Cash Management

33. Floating rate CDs differ from regular CDs in that:

A. they have longer maturity.
B. they differ substantially in default risk.
C. they are not taxed.
D. they have coupons that are frequently reset.
E. All of the above describe differences.

Difficulty level: Easy

Topic: CERTIFICATES OF DEPOSIT
Type: CONCEPTS

34. A sensible cash management policy would be to:

A. have enough cash on hand to meet ordinary course of business and some excess cash to
invest in marketable securities as a precautionary measure.
B. have nearly enough cash on hand to meet ordinary course of business.
C. have enough cash on hand to meet any potential demand for cash.
D. have a zero cash balance and charge all expenditures.
E. None of the above.

Difficulty level: Easy

Topic: CASH MANAGEMENT POLICY
Type: CONCEPTS

The Timberline firm expects a total cash need of $12,500 over the next 3 months. They have
a beginning cash balance of $1,500, and cash is replenished when it hits zero. The fixed cost
of selling securities to replenish cash balances is $3.50. The interest rate on marketable
securities is 8% per annum. There is a constant rate of cash disbursement and no cash receipts
during the month.

27-26
Chapter 27 - Cash Management

35. Based on the firm's current practice, what is the average daily cash balance (a month has
30 days)?
A. $50.00
B. $69.44
C. $94.44
D. $138.89
E. None of the above.

Average daily cash balance = [(($12,500/3) + $1,500)/2]/30 = $94.44

Difficulty level: Medium

Topic: AVERAGE CASH BALANCE
Type: PROBLEMS

36. Based on the firm's current practice, how many times during the next 3 months will the
cash balance be replenished?
A. 3.33 times
B. 4.42 times
C. 8.33 times
D. 13.35 times
E. None of the above.

Replenish Times = Cash Needs/Cash Balance = $12,500/$1,500 = 8.33 times

Difficulty level: Medium

Topic: CASH BALANCE
Type: PROBLEMS

37. What is the total opportunity cost for a month based on the firm's current practice?
A. $5.00
B. $18.98
C. $27.92
D. $60.00
E. None of the above.

Opportunity cost = (C/2)(K) = ($1,500/2)(.006667) = $5.00

Difficulty level: Medium

Topic: OPPORTUNITY COST OF HOLDING CASH
Type: PROBLEMS

27-27
Chapter 27 - Cash Management

38. What is the total fixed order cost for the next three months based on the firm's current
practice?
A. $29.17
B. $37.80
C. $55.60
D. $75.60
E. None of the above.

Total Fixed Order Cost = ($12,500/$1,500)(3.5) = $29.17

Difficulty level: Easy

Topic: TOTAL FIXED ORDER COST
Type: PROBLEMS

On an average day, a company writes checks totaling $1,500. These checks take 7 days to
clear. The company receives checks totaling $1,800. These checks take 4 days to clear. The
cost of debt is 9%.

39. What is the firm's disbursement float?

A. $-10,500
B. $-8,700
C. $1,800
D. $10,500
E. None of the above.

DF = number of days times amount per day = 7 ($1,500) = $10,500

Difficulty level: Easy

Topic: DISBURSEMENT FLOAT
Type: PROBLEMS

27-28
Chapter 27 - Cash Management

40. What is the firm's collection float?

A. $-7,200
B. $-1,800
C. $1,800
D. $10,500
E. None of the above.

CF = Days x Amount/Day = 4 ($-1,800) = $-7,200

Difficulty level: Easy

Topic: COLLECTION FLOAT
Type: PROBLEMS

41. What is the firm's net float?

A. $-3,300
B. $-300
C. $300
D. $3,300
E. None of the above.

DF + CF = $10,500 - $7,200 = $3,300

Difficulty level: Easy

Topic: NET FLOAT
Type: PROBLEMS

42. If the average daily float is $3,300, what is the net present value per day?
A. $-0.81
B. $-79.41
C. $-282.48
D. $-297.00
E. None of the above.

NPV = $3,300/(1 + .09/365) - $3,300 = $3,299.19 - $3,300 = $-0.81

Difficulty level: Challenge

Topic: FLOAT
Type: PROBLEMS

27-29
Chapter 27 - Cash Management

43. Your firm has average daily receipts of $2,500. These receipts are available after 6 days
on average. The interest rate that could be earned is .02% (.0002) per day. What is the
approximate cost of the float per day?
A. $2.50
B. $3.00
C. $30.00
D. $50.00
E. None of the above.

Present value of delayed float = $2,500/(1 + .0002(6)) = $2,497 Cost = $2,500 - $2,497 = $3

Difficulty level: Medium

Topic: FLOAT COST
Type: PROBLEMS

44. Your firm receives 40 checks per month. Of these, 10 are for $1,200 and 30 are for $500.
The delay for the $1,200 checks is 4 days; the $500 checks are delayed 6 days. What is the
weighted average delay?
A. 4 days
B. 4.5 days
C. 5 days
D. 5.5 days
E. 6 days

(.25)(4 days) + (.75)(6 days) = 5.5 days

Difficulty level: Medium

Topic: WEIGHTED AVERAGE DELAY
Type: PROBLEMS

27-30
Chapter 27 - Cash Management

45. Your firm receives 10 checks per month. Of these, 6 are for $1,000 and 4 are for $500.
The delay for the $1,000 checks is 5 days, and the $500 checks are delayed 8 days. Calculate
the average daily float.
A. $1,533.33
B. $1,486.87
C. $1,500.00
D. $1,530.35
E. $1,590.04

Total Float = $1,000 (6) (5) + $500 (4) (8) = $46,000

Average Daily Float = $46,000/30 = $1,533.33

Difficulty level: Medium

Topic: AVERAGE DAILY FLOAT
Type: PROBLEMS

On an average day, Tennis R Us writes checks totaling $2,000. These checks take 3 days to
clear. The company receives checks totaling $1,800. These checks take 2 days to clear. The
cost of debt is 8%.

46. What is the firm's disbursement float?

A. $-6,000
B. $-4,500
C. $4,500
D. $6,000
E. None of the above.

DF = number of days times amount per day = 3 ($2,000) = $6,000

Difficulty level: Easy

Topic: DISBURSEMENT FLOAT
Type: PROBLEMS

27-31
Chapter 27 - Cash Management

47. What is the firm's collection float?

A. $-4,500
B. $-3,600
C. $3,600
D. $4,500
E. None of the above.

CF = Days x Amount/Day = 2 ($-1,800) = $-3,600

Difficulty level: Easy

Topic: COLLECTION FLOAT
Type: PROBLEMS

48. What is the firm's net float?

A. $-2,500
B. $-2,400
C. $2,400
D. $2,500
E. None of the above.

DF + CF = $6,000 - $3,600 = $2,400

Difficulty level: Easy

Topic: NET FLOAT
Type: PROBLEMS

27-32
Chapter 27 - Cash Management

49. If the average daily float is $2,500, what is the net present value per day?
A. $-0.55
B. $-5.55
C. $-252.66
D. $-197.00
E. None of the above.

NPV = $2,500/(1 + .08/365) - $2,500 = $2,499.45 - $2,500 = $-.55

Difficulty level: Challenge

Topic: FLOAT
Type: PROBLEMS

Essay Questions

50. Fly-By-Night Airlines currently has $2.4 million on deposit with its bank. Fly-By-Night
pays its fuel bill by writing a check for $1.1 million. Calculate the company's book cash and
bank cash after it writes the check.

Book Cash = $2.4 - $1.1 = $1.3 million

Bank Cash = $2.4 - $0.0 = $2.4 million

Topic: CASH BALANCES

Type: ESSAYS

51. During the month you receive 4 checks, one for $100, two for $200, and one for $500.
They are delayed for 2 days, 4 days, and 8 days respectively. What is your average daily
collection float (a month has 30 days)?

[100 (2) + 200 (4) (2) + 500 (8)]/30 = 5800/30 = $193.33

Topic: COLLECTION FLOAT

Type: ESSAYS

27-33
Chapter 27 - Cash Management

The Mesa Bank is offering your company the use of their lockbox services. They estimate
that you can reduce your average mail time by 2 days and they can save you a combined
clearing and processing time of 1.5 days by putting the checks into the clearing system
sooner. The firm receives 320 checks a day on average written for $2,500. The current T-Bill
rate is 4% or .0107% per day.

52. What is the savings float and what can you earn if the firm takes Mesa's lockbox service?

Total days of float saved = 2 + 1.5 = 3.5 days

Dollars of float saved = 3.5($800,000) = $2,800,000
Earnings = $2,800,000(.000107)(365) = $109,354

Topic: SAVINGS FLOAT

Type: ESSAYS

27-34
Chapter 27 - Cash Management

53. If Mesa will charge your firm an annual fee of $35,000 and $.20 per check handled will
you accept Mesa's services?

Cost of services: Annual fee = $35,000

Variable fee ($.20)(320)(365) = $23,360
Total fees = $58,360
Total earnings = $109,354 [ = $2,800,000(.000107)(365)]
Net earnings = $50,994 Accept Mesa's services.

Topic: LOCKBOX
Type: ESSAYS

54. The net float of a firm is made up of disbursement float and collection float. Discuss the
three components of collection float and how they would work against the firm.

1) Mail float--based on time checks pass through the postal system.

2) In-house processing float--time receiver takes to process and deposit check in bank.
3) Availability Float--time to clear banking system and have use of funds.
They work against the firm by increasing the time until final payment and use of funds.
Systems can be placed internally and externally to move checks into clearing system faster.

Topic: COLLECTION FLOAT

Type: ESSAYS

55. Discuss the Check Clearing Act for the 21st Century, known as Check 21 and how it will
impact floats.

Check 21 was enacted on October 29, 2004 and should dramatically reduce floats. Formerly,
for a check to clear, the receiver had to send the check to the issuing bank for clearance.
Under Check 21, an electronic copy of the check is sent and clearing times have reduced
dramatically. Formerly, out-of-state checks would take 3 days to clear, with Check 21, they
take 1 day. This will have impact on float management as funds are nearly immediately
released and disbursed.

Topic: CHECK 21
Type: ESSAYS

27-35