Chap 019

Chapter 19 - Cash and Liquidity Management
Chapter 19
Cash and Liquidity Management
Multiple Choice Questions
1. Yesterday, the president of RB Enterprises received a phone call from DLK, a competitor.
DLK is a sole proprietorship. An unexpected family situation has caused the owner to
suddenly want to retire and relocate closer to his family. Thus, the assets of DLK are being
offered to RB Enterprises at a bargain basement price. While RB Enterprises had not
anticipated purchasing these assets, it was decided that the opportunity was too good to pass
up. This illustrates which of the following needs to hold cash?
A. precautionary
B. transaction
C. speculative
D. compensation
E. float
2. GT Motors regularly issues short-term debt to finance its daily operations. Suddenly, the
credit markets froze and no funds were available for borrowing. Fortunately, the firm had
some cash reserves saved that it was able to use to fund its operations until additional credit
was available. The need to retain cash for situations such as this is referred to as which one of
the following motives for holding cash?
A. speculative
B. float
C. compensating
D. precautionary
E. transaction
3. The cash found in a cash drawer that a check-out clerk uses to make change is an example
of which of the following motives for holding cash?
A. speculative
B. daily float
C. compensating balance
D. precautionary
E. transaction
19-1
4. Float is defined as the:

A. amount of cash a firm can immediately withdraw from its bank account.
B. difference between book cash and bank cash.
C. change in a firm's cash balance from one accounting period to the next.
D. amount of cash a firm has on hand.
E. cash balance according to a firm's records.
5. A lockbox is a:
A. special safe used by a firm for overnight storage of any cash or undeposited checks.
B. special safe used by a firm that can only be opened at prespecified times of the day.
C. box located in a bank's vault that is rented by a firm and used to hold unprocessed checks.
D. special post office box which can only be opened by prespecified postal inspectors for
direct delivery to the addressee.
E. post office box strategically located so that a firm's receivables can be collected faster.
6. The Presque Isle Center has branch operations in three states. Each branch deals with a
local bank. However, all excess funds in these branch bank accounts are transferred on a daily
basis to the firm's primary bank located near the firm's home office. This routine of
transferring cash to the primary bank on a regular basis is referred to as:
A. cash concentration.
B. strategic cash disbursement.
C. transfer flotation.
D. payables management.
E. float management.
7. An account into which funds are deposited only in an amount equal to the value of the
checks presented for payment that day is called a _____ account.
A. lockbox
B. concentration
C. zero-balance
D. compensating balance
E. revolving
19-2
8. An account into which a firm transfers funds, usually from a master account, in an amount
sufficient to cover the checks presented for payment that day is called a _____ account.
A. lockbox
B. cleanup
D. revolving
E. controlled disbursement
9. The Snow Hut has analyzed the carrying and shortage costs associated with its cash
holdings and determined that the firm should ideally maintain a cash balance of $3,600. This
$3,600 represents which one of the following to the firm?
A. target cash balance
B. concentration balance
C. available balance
D. selected cash amount
E. compensating balance
10. Adjustment costs is another name for which one of the following?
A. borrowing costs
B. shortage costs
C. cash transfer costs
D. cash wire costs
E. excess cash costs
11. Why do firms need liquidity?

I. to meet compensating balance requirements
II. to take advantage of an opportunity that suddenly arises
III. to conduct daily business activities
IV. to be prepared for a financial emergency
A. I and II only
B. III and IV only
C. I, III, and IV only
D. II, III, and IV only
E. I, II, III, and IV
19-3
12. Cash management primarily involves:

A. optimizing a firm's collections and disbursements of cash.
B. maximizing the income a firm earns on its cash reserves.
C. reconciling a firm's book balance with its bank balance.
D. determining the optimal level of liquidity a firm should maintain.
E. determining the best method of raising capital.
13. Disbursements float:

A. occurs when a deposit is recorded but the funds are unavailable.
B. causes the book balance to exceed the bank balance.
C. has tended to increase since the enactment of the Check Clearing Act for the 21st Century.
D. is a recommended source of funds for short-term investments.
E. is eliminated when payments are made electronically.
14. Collection float:

A. is more desirable to firms than disbursement float.
B. is totally eliminated by the installation of a lockbox system.
C. exists when a firm's available balance exceeds its book balance.
D. can be avoided by collecting payments electronically at the time of sale.
E. is eliminated by implementing a concentration banking system.
15. Which one of the following statements is correct?

A. Net float decreases every time a firm issues a check to pay one of its suppliers.
B. A positive net float indicates that collection float exceeds disbursements float.
C. Firms prefer a zero net float over a positive net float.
D. Net float is equal to collection float minus disbursement float.
E. Net float is equal to a firm's available balance minus its book balance.
16. Check kiting is:

A. used by most firms as an ethical means of handling its cash reserves.
B. the process of withdrawing all funds from a bank account as soon as the funds are
available.
C. the central core of a good cash management system.
D. using uncollected cash to invest in short-term, liquid assets.
E. increasingly popular due to recent banking law changes.
19-4
17. Which of the following will reduce collection time?

I. billing customers electronically rather than by mail
II. accepting debit cards but not checks as payment for a sale
III. offering cash discounts for early payment
IV. reducing the processing delay by one day
A. I and II only
B. I and III only
C. I, II, and III only
18. Which of the following should help reduce the total collection time for a firm?
I. opening a post office box so mail can be received earlier in the morning
II. assigning additional staff in the morning to process incoming payments
III. providing a discount for customers who pay electronically
IV. establishing preauthorized payments from customers
A. I and II only
B. III and IV only
C. II, III, and IV only
D. I, II, and IV only
19. Which one of the following collection times is correctly described?

A. The processing delay starts when a firm mails out a billing statement and ends when the
payment is received from a customer.
B. Mailing time begins when a firm mails out a billing statement and ends when the payment
is received.
C. Collection time begins when a firm mails out a billing statement and ends when the cash
payment for that billing is available to the firm.
D. Availability delay begins when a firm deposits a customer's check into its bank account
and ends when the cash from that payment is available to the firm.
E. Processing delay begins when a firm mails out billing statements and ends when the firm
deposits the payment for that statement into its bank account.
19-5
20. A lockbox system:

A. entails the use of a bank which is centrally located to collect payments on a nationwide
basis.
B. is designed to deposit a customer's check into the firm's bank account prior to recording the
receipt of that check to a customer's account.
C. is used to reduce the disbursement float of a firm.
D. is efficient regardless of the locations selected for lockbox destinations.
E. automatically records payments to a customer's account when the customer's check is
received at the lockbox location.
21. Lockboxes:
A. should be geographically located close to a firm's primary customers.
B. should be located in remote locations to increase the net disbursement float.
C. offer no additional benefit to a firm now that the Check Clearing Act for the 21st Century
has been enacted.
D. tend to be negative net present value projects for firms with a large number of sizeable
transactions.
E. tend to also be used as concentration accounts.
22. Cash concentration accounts:

A. tend to increase the funds available for short-term investing.
B. tend to increase the complexity of a firm's cash management system.
C. that utilize wire transfers rather than automated clearing house transfers are less expensive
to maintain.
D. receive checks directly from all of a firm's customers.
E. are all zero-balance accounts.

A. Funds received via automated clearinghouse transfers are available that day.
B. A depository transfer check is the most costly means of transferring funds into a cash
concentration account.
C. The means selected to transfer funds into a concentration account depends primarily upon
the size of the transfers.
D. Concentration accounts are used to transfer funds to lockbox locations as needed.
E. The most expedient means of transferring funds into a concentration account is a wire
transfer.
19-6
24. A cash concentration account:

A. is frequently used as a source of funds for short-term investments.
B. cannot be used to cover a compensating balance requirement.
C. cannot be used to transfer funds into zero-balance accounts.
D. is generally the only bank account a firm needs to efficiently manage its cash.
E. is another name for a controlled disbursement account.
25. The main purpose of a cash concentration account is to:

A. decrease collection float.
B. decrease disbursement float.
C. consolidate funds.
D. replace a lockbox system.
E. cover compensating balance requirements.
26. Which one of the following statements is correct concerning a cash management system
that employs both lockboxes and a concentration bank account?
A. All customer payments must be submitted to a lockbox.
B. The party which collects the checks from the lockbox is responsible for recording the
payment on the customer's account.
C. Payments received in a lockbox are transferred immediately to the concentration account.
D. The firm's cash manager determines how the funds in the concentration account are
disbursed.
E. The concentration account must be zeroed out on a daily basis.
27. A zero-balance account:

A. is used to cover the compensating balance requirement of a line of credit agreement.
B. is only used to deposit funds received at local lockboxes.
C. is funded on an as-needed basis only.
D. is limited to handling payroll disbursements.
E. requires a compensating balance.
19-7
28. Which one of the following statements is correct concerning zero-balance accounts?
A. Each zero-balance account is offset by a compensating balance account.
B. Zero-balance accounts are used for depositing incoming funds.
C. A master account must be used in conjunction with a zero-balance account.
D. Zero-balance accounts are used solely in conjunction with a lockbox system.
E. Zero-balance accounts are still required to maintain a minimal balance.

A. The money market refers to securities that mature in two years or less.
B. Banks are prohibited from investing cash surpluses on behalf of their customers on a shortterm basis.
C. Short-term securities tend to have a high degree of interest rate risk.
D. A cyclical firm may purchase marketable securities as part of its short-term financing plan.
E. Corporations are not permitted to invest in money market mutual funds but can invest in
bank money market accounts.
30. Which two of the following are the primary reasons why firms temporarily accumulate
large cash surpluses?
I. cyclical activities
II. desire to invest funds
III. daily operations
IV. fixed asset purchases
A. I and III only
B. II and IV only
C. I and II only
D. III and IV only
E. I and IV only

A. Money market accounts are low-risk, high-return investments.
B. The rate of return earned on short-term securities tends to exceed that earned on long-term
securities.
C. U.S. Treasury bills are well suited for short-term investments.
D. The income earned on U.S. Treasury bills is exempt from all taxation.
E. Short-term investments tend to have high levels of default risk.
19-8
32. Municipal bonds:

A. are less liquid than U.S. Treasury bills.
B. produce income that is subject to federal income taxation.
C. generally pay a higher coupon than corporate bonds.
D. are also referred to as commercial paper.
E. are issued by the federal government.
33. Money market securities have which of the following characteristics?

I. long maturities
II. low default risk
III. high degree of liquidity
IV. low rates of return
A. I and III only
B. II and III only
C. I and IV only
34. A jumbo CD:

A. is issued by the federal government.
B. generally matures between 2 and 5 years.
C. is a loan of $100,000 or more to a municipality.
D. is a loan of $1 million or more on a short-term basis.
E. is a short-term loan of $100,000 or more to a commercial bank.
35. Brown Trucking is buying a U.S. Treasury bill today with the understanding that the seller
will buy it back tomorrow at a slightly higher price. This investment is known as a:
A. commercial paper transaction.
B. repurchase agreement.
C. private certificate of deposit.
D. revenue anticipation note.
E. bill anticipation note.
19-9
36. A repurchase agreement generally has a maximum life of:

A. 1 day.
B. a few days.
C. one month.
D. one to three months.
E. three to six months.
37. A money market preferred stock:

A. has a floating dividend.
B. is sold only under a repurchase agreement.
C. is a special form of commercial paper.
D. has more price volatility than an ordinary preferred.
E. has its interest rate reset daily.
38. Which of the following costs related to holding cash are minimized when the level of cash
a firm holds is optimized?
A. opportunity costs
B. trading costs
C. total costs
D. both trading and opportunity costs
E. trading costs, opportunity costs, and total costs
39. Which of the following statements related to the BAT model is correct?
I. The BAT model is used to determine the target cash balance for a firm.
II. The BAT model is rarely used in business due to its complex nature.
III. The BAT model is a model that helps eliminate a firm's collection float.
IV. One disadvantage of the BAT model is the fact that it assumes all cash outflows are known
with certainty.
A. I and II only
B. III and IV only
C. II and III only
D. I and III only
E. I and IV only
19-10
40. Which of the following variables are included in the BAT model?
I. upper cash limit
II. interest rate on marketable securities
III. opportunity cost of holding cash
IV. fixed cost of each securities trade
A. II only
B. I and III only
C. II and IV only
E. I, III, and IV only
41. The BAT model is used to:

A. maximize the benefits of leverage.
B. determine the optimal cash position of a firm.
C. eliminate all daily cash surpluses.
D. analyze the cash balance given fluctuating cash inflows and outflows.
E. maximize the opportunity costs of holding cash.
42. The Miller-Orr model assumes that:

A. the cash balance is depleted at regular intervals.
B. all cash flows are known with certainty.
C. the average change in the daily cash flows is positive.
D. management will set both the lower and the upper desired levels of cash.
E. the cash balance fluctuates in a random manner.
43. The Miller-Orr model:

A. recommends selling securities in an amount equal to (U* - C) when the cash balance
reaches L.
B. requires that marketable securities be sold whenever the cash balance falls below the target
level.
C. bases the optimal level of cash solely on the opportunity costs of holding cash.
D. supports the argument that the target cash balance declines as order costs increase.
E. advocates investing an amount described as (U* - C) in marketable securities when the
cash balance reaches U*.
19-11
44. Which of the following statements is correct?

A. A firm has a greater likelihood of needing an unexpected loan when its cash flows are
relatively constant over time.
B. The cost of borrowing affects the target cash balance of a firm.
C. Management's desire to maintain a low cash balance has no effect on the borrowing needs
of a firm.
D. The target cash balance increases as the interest rate rises.
E. The target cash balance decreases as the order costs increase.
45. The Hobby Shop has a checking account with a ledger balance of $692. The firm has
$1,063 in uncollected deposits and $846 in outstanding checks. What is the amount of the
disbursement float on this account?
A. $0
B. $217
C. $846
D. $909
E. $1,063
46. On an average day, Plastics Enterprises writes 42 checks with an average amount of $587.
These checks clear the bank in an average of 2 days. What is the average amount of the
disbursement float?
A. $1,174
B. $5,805
C. $24,654
D. $49,308
E. $73,962
47. On average, your firm receives 62 checks a day from customers. These checks, on
average, are worth $39.90 each and clear the bank in 1.5 days. In addition, your firm disburses
38 checks a day with an average amount of $89.50. These checks clear your bank in 2 days.
What is the average amount of the collection float?
A. $2,473.80
B. $3,401.00
C. $3,710.70
D. $5,101.50
E. $6,802.00
19-12
48. When Chris balanced her business checkbook, she had an adjusted bank balance of
$11,418. She had 2 outstanding deposits worth $879 each and 11 checks outstanding with a
total value of $3,648. What is the amount of the collection float on this account?
A. -$1,890
B. $1,758
C. $3,648
D. $5,406
E. $6,012
49. Your company has an available balance of $7,911. A deposit of $2,480 that was made this
morning is not yet included in the bank's balance. There are also 4 checks outstanding with a
value of $325 each. What is the net float?
A. net collection float of $1,180
B. net collection float of $2,480
C. net float of $6,731
D. net disbursement float of $1,300
E. net disbursement float of $2,480
50. A firm has $16,718 in outstanding checks that have not cleared the bank. The firm also
has $13,450 in deposits that have been recorded by the firm but not by the bank. The current
available balance is $11,407. What is the status of the net float?
C. net collection float of $13,450
19-13
51. Your firm generally receives 4 checks a month. The check amounts and the collection
delay for each check is shown below. Given this information what is the amount of the
average daily float? Assume a 30 day month.
A. $1,070
B. $2,333
C. $2,640
D. $2,900
E. $3,416
52. Hoyes Lumber generally receives 3 checks a month. The check amounts and the collection
delay for each check are shown below. Given this information, what is the amount of the
average daily float? Assume each month has 30 days.
A. $1,386.67
B. $1,407.19
C. $4,750.00
D. $6,833.33
E. $6,933.33
19-14
53. The Blue Star generally receives only 3 checks a month. The check amounts and the
collection delay for each check are shown below. Given this information, what is the amount
of the average daily float? Assume every month has 30 days.
A. $971.43
B. $1,456.67
C. $3,351.33
D. $5,666.67
E. $6,800.00
54. The Food Wholesaler generally receives 4 checks a month. The check amounts and the
A. $3,963.89
B. $21,750.00
C. $22,236.67
D. $28,133.33
E. $35,675.00
19-15
55. Hot Tub Builders sells to three retail outlets. Each retailer pays once a month in the
amounts shown below. The collection delay associated with each payment is also given
below. What is the amount of the average daily receipts if you assume each month has 30
days?
A. $2,389.70
B. $8,190.00
C. $14,608.13
D. $23,896.97
E. $81,900.00
56. Atlas Builders deals strictly with five customers. The average amount each customer pays
per month along with the collection delay associated with each payment is shown below.
Given this information, what is the amount of the average daily receipts? Assume every
month has 30 days.
A. $1,143.33
B. $2,546.67
C. $2,983.33
D. $6,166.67
E. $6,860.00
19-16
57. National Exporters deals strictly with two customers. The average amount each customer
pays per month along with the collection delay associated with each payment is shown below.
Given this information, what is the amount of the average daily receipts? Assume that every
month has 30 days.
A. $2,653.33
B. $3,006.33
C. $5,306.67
D. $7,811.67
E. $8,600.00
58. Cross Country Trucking provides transportation services exclusively for four customers.
The average amount each customer pays per month along with the collection delay associated
with each payment is shown below. Given this information, what is the weighted average
delay? Assume each month has 30 days.
A. 2.11 days
B. 2.27 days
C. 2.46 days
D. 2.50 days
E. 2.78 days
19-17
59. High Brow Express deals strictly with two customers. The average amount each customer
Given this information, what is the weighted average delay? Assume that every month has 30
days.
A. 1.79 days
B. 1.84 days
C. 2.00 days
D. 2.07 days
E. 2.16 days
60. The Metallurgical Specialty Co. deals strictly with four customers. The average amount
each customer pays per month along with the collection delay associated with each payment
is shown below. Given this information, what is the weighted average delay? Assume each
month has 30 days.
A. 1.98 days
B. 2.04 days
C. 2.09 days
D. 2.16 days
E. 2.23 days
19-18
61. On an average day, Goose Down Feathers receives $2,400 in checks from customers.
These checks clear the bank in an average of 1.7 days. The applicable daily interest rate is
0.04 percent. What is the present value of the float? Assume each month has 30 days.
A. $115.20
B. $618.40
C. $2,400.00
D. $4,080.00
E. $4,256.50
62. On an average day, Town Center Hardware receives $2,420 in checks from customers.
0.025 percent. What is the maximum amount this store should pay to completely eliminate its
collection float? Assume each month has 30 days.
A. $1,152.38
B. $1,288.15
C. $2,109.16
D. $4,637.33
E. $5,082.00
63. On an average day, your firm receives $11,800 in checks from customers. These checks
clear the bank in an average of 2.1 days. The applicable daily interest rate is 0.015 percent.
What is the highest daily fee your firm should pay to completely eliminate the collection
float? Assume each month has 30 days.
A. $3.42
B. $3.72
C. $17.78
D. $34.18
E. $37.20
19-19
64. On an average day, Wilson & Wilson receives $7,800 in checks from customers. These
checks clear the bank in an average of 1.7 days. The applicable daily interest rate is 0.022
percent. What is the highest daily fee this firm should pay to completely eliminate its
A. $1.72
B. $2.92
C. $17.20
D. $24.30
E. $29.17
65. Your average customer is located 4.3 mailing days away from your firm. You have
determined that, on average, it is taking your staff 1.5 days to process payments received from
customers. In addition, it takes an average of 2.2 days for your funds to be available for use
once you have made your bank deposit. What is your firm's collection time?
A. 2.2 days
B. 3.7 days
C. 4.3 days
D. 5.8 days
E. 8.0 days
66. It takes your firm 4.5 days to prepare and mail out all the monthly statements to your
customers. On average, the mail time between your firm and your customers is 2.6 days.
Customer checks take an average of 1.8 days to clear the bank. You have determined that your
total average collection time is 6.1 days. How long, on average, does it take your firm to
process the payments from customers?
A. 1.7 days
B. 2.6 days
C. 4.4 days
D. 4.8 days
E. 6.2 days
19-20
67. Currently, your firm requires 2 days to process the checks which customers mail in to pay
for their credit purchases. The average mail time associated with these payments is 2.3 days
and the check clearing time is 2.1 days. If your firm adopts a lockbox system, the mail time
will be cut in half. In addition, if employees are reassigned, checks could be processed the
same day they are received. How long will your collection time be if both the lockbox system
and the job reassignments are implemented?
A. 3.85 days
B. 4.10 days
C. 4.25 days
D. 4.40 days
E. 4.55 days
68. You are considering implementing a lockbox system for your firm. The system is expected
to reduce the average collection time by 1.2 days. On an average day, your firm receives 320
checks with an average value of $99 each. The daily interest rate on Treasury bills is 0.014
percent. What is the anticipated amount of the daily savings if this system is implemented?
A. $2.61
B. $3.29
C. $4.45
D. $5.32
E. $5.78
69. Roger's Distributors receives an average of 216 checks a day. The average amount per
check is $629. The firm is considering a lockbox system which it anticipates will reduce the
average collection time by 1.5 days. The daily interest rate on Treasury bills is 0.011 percent.
What is the amount of the expected daily savings of the lockbox system?
A. $2.04
B. $6.92
C. $14.95
D. $18.10
E. $22.42
19-21
70. Hand Tools, Inc. receives an average of 611 checks a day. The average amount per check
is $425. The firm is considering a lockbox system which it anticipates will reduce the average
collection time by 1 day. The bank charges $0.275 a check for this service. The daily interest
rate on Treasury bills is 0.013 percent. What is the average daily cost of the lockbox system?
A. $31.16
B. $54.19
C. $168.03
D. $180.11
E. $199.19
percent. The bank charge per check is $0.22. What is the anticipated daily cost of the lockbox
system?
A. $3.48
B. $6.25
C. $12.60
D. $29.92
E. $36.17
to reduce the average collection time by 2.8 days. On an average day, your firm receives
2,419 checks with an average value of $1,287 each. The daily interest rate on Treasury bills is
0.016 percent. The bank charge per check is $0.30. What is the net present value of this
lockbox arrangement?
A. -$4,535,625
B. -$2,611,575
C. $187,419
D. $4,181,483
E. $13,252,733
19-22
73. Rosewell International receives an average of 268 checks a day with an average amount
per check of $820. The firm is considering a lockbox system which it anticipates will reduce
the average collection time by 1.4 days. The bank charges $0.21 a check for this service. The
daily interest rate on Treasury bills is 0.02 percent. What is the net present value of this
A. -$61,640
B. -$26,264,
C. $26,264
D. $30,820
E. $61,640
74. The Eliot Co. needs $185,000 a week to pay bills. The standard deviation of the weekly
disbursements is $17,600. The firm has established a lower cash balance limit of $75,000. The
applicable interest rate is 5.5 percent and the fixed cost of transferring funds is $47. Based on
the BAT model, what is the optimal initial cash balance?
A. $90,668
B. $97,515
C. $104,141
D. $128,224
E. $136,509
75. Theo's Bar & Grill needs $147,000 a week to pay bills. The standard deviation of the
weekly disbursements is $9,600. The firm has established a lower cash balance limit of
$40,000. The applicable interest rate is 3.5 percent and the fixed cost of transferring funds is
$45. Based on the BAT model, what is the optimal average cash balance?
A. $36,199
B. $49,568
C. $70,100
D. $99,136
E. $112,400
19-23
76. Parkway Express needs $318,000 a week to pay bills. The standard deviation of the
$65. Based on the BAT model, what is the opportunity cost of holding cash?
A. $3,873
B. $4,918
C. $5,207
D. $109,283
E. $110,440
77. Penco Supply spends $428,000 a week to pay bills and maintains a lower cash balance
limit of $75,000. The standard deviation of its disbursements is $18,900. The applicable
interest rate is 5 percent and the fixed cost of transferring funds is $65. What is the firm's
optimal initial cash balance based on the BAT model?
A. $150,600
B. $158,929
C. $170,096
D. $221,506
E. $240,553
78. Your firm spends $54,000 a week to pay bills and maintains a lower cash balance limit of
$45,000. The standard deviation of your disbursements is $12,100. The applicable interest rate
is 4.5 percent and the fixed cost of transferring funds is $55. What is your opportunity cost of
holding cash based on the BAT model?
A. $1,318
B. $1,864
C. $2,204
D. $2,311
E. $3,709
19-24
79. Rosie O'Grady's spends $98,000 a week to pay bills and maintains a lower cash balance
limit of $95,000. The standard deviation of the disbursements is $14,600. The applicable
interest rate is 4.8 percent and the fixed cost of transferring funds is $50. What is this firm's
total cost of holding cash based on the BAT model?
A. $1,431
B. $2,862
C. $3,034
D. $4,912
E. $4,946
$150,000. The standard deviation of your disbursements is $28,700. The applicable interest
rate is 5 percent and the fixed cost of transferring funds is $60. What is your optimal average
cash balance based on the BAT model?
A. $103,900
B. $146,500
C. $182,200
D. $207,800
E. $249,900
81. The Cow Pie Spreader Co. spends $214,000 a week to pay bills and maintains a lower
cash balance limit of $175,000. The standard deviation of the disbursements is $16,000. The
applicable weekly interest rate is 0.025 percent and the fixed cost of transferring funds is $49.
What is the firm's cash balance target based on the Miller-Orr model?
A. $208,511
B. $247,560
C. $251,006
D. $254,545
E. $258,878
19-25
82. The Blue Moon Hotel and Spa spends $359,000 a week to pay bills and maintains a lower
What is the hotel's optimal upper cash limit based on the Miller-Orr model?
A. $430,836
B. $447,905
C. $528,700
D. $739,459
E. $861,672
83. Donaldson, Inc. spends $94,000 a week to pay bills and maintains a lower cash balance
weekly interest rate is 0.045 percent and the fixed cost of transferring funds is $52. What is
your optimal average cash balance based on the Miller-Orr model?
A. $78,778
B. $82,623
C. $231,969
D. $236,334
E. $247,868
84. The Burger Stop spends $52,000 a week to pay bills and maintains a lower cash balance
A. $79,116
B. $83,208
C. $110,315
D. $237,348
E. $249,624
19-26
$50,000. The standard deviation of the disbursements is $8,600. The applicable weekly
interest rate is 0.054 percent and the fixed cost of transferring funds is $65. What is your cash
balance target based on the Miller-Orr model?
A. $48,156
B. $49,990
C. $54,884
D. $68,830
E. $75,726
86. Travel Inn Express spends $109,000 a week to pay bills and maintains a lower cash
balance limit of $125,000. The standard deviation of the disbursements is $14,400. The
What is the inn's cash balance target based on the Miller-Orr model?
A. $28,492
B. $31,359
C. $153,492
D. $156,359
E. $225,417
Essay Questions
87. Explain how a lockbox system operates and why a firm might consider implementing such
a system.
19-27
88. Explain how the Check Clearing Act for the 21st Century affects both collection and
disbursement float.
89. Explain how the unethical use of uncollected funds has been impacted by the growth of
on-line retailing and banking.
90. Float management systems may provide only minimal benefits to a firm. Given that most
firms have other projects with higher positive net present values, why should a firm's
managers spend time implementing a float management system?
91. Explain what a zero-balance account is, how it is used, and how it affects cash
management.
19-28
92. Each business day, on average, a company writes checks totaling $26,000 to pay its
suppliers. The usual clearing time for the checks is 5 days. Meanwhile, the company is
receiving payments from its customers each day, in the form of checks, totaling $40,000. The
cash from the payments is available to the firm after 2 days. What is the amount of the firm's
average net float?
A. $30,00
B. $50,000
C. $80,000
D. $110,000
E. $130,000
93. Purple Feet Wine, Inc. receives an average of $6,000 in checks per day. The delay in
clearing is typically 3 days. The current interest rate is 0.025 percent per day. Assume 30 days
per month. What is the highest daily fee the company should be willing to pay to eliminate its
float entirely?
A. $1.50
B. $3.00
C. $3.75
D. $4.50
E. $6.00
94. Your neighbor goes to the post office once a month and picks up two checks, one for
$18,000 and one for $4,000. The larger check takes 4 days to clear after it is deposited; the
smaller one takes 6 days. Assume 30 days per month. What is the weighted average delay?
A. 4.21 days
B. 4.36 days
C. 4.78 days
D. 5.00 days
E. 6.00 days
19-29
95. Your firm has an average receipt size of $60. A bank has approached you concerning a
lockbox service that will decrease your total collection time by 1 day. You typically receive
28,000 checks per day. The daily interest rate is 0.016 percent. What is the NPV of the
lockbox project if the bank charges a fee of $210 per day?
A. $367,500
B. $427,500
C. $903,350
D. $1,412,500
E. $1,680,000
96. A mail-order firm processes 5,000 checks per month. Of these, 55 percent are for $55 and
45 percent are for $65. The $55 checks are delayed 2 days on average; the $65 checks are
delayed 5 days on average. Assume each month has 30 days. The interest rate is 6 percent per
year. How much should the firm be willing to pay to reduce the weighted average float by 1.4
days?
A. $4,165
B. $13,883
C. $41,650
D. $138,883
E. $416,500
97. Paper Submarine Manufacturing is investigating a lockbox system to reduce its collection
time. It has determined the following:
The total collection time will be reduced by 2 days if the lockbox system is adopted. What is
the NPV of adopting the lockbox system?
A. $600,000
B. $775,000
C. $975,000
D. $1,200,000
E. $1,425,000
19-30
98. Home Roasted Turkeys disburses checks every 4 weeks that average $70,000 and take 5
days to clear. How much interest can the company earn if it delays transfer of funds from an
interest-bearing account that pays 0.02 percent per day for these 5 days? Ignore the effects of
compound interest. Assume 52 weeks in a year.
A. $36
B. $91
C. $182
D. $364
E. $910
99. Never Again Enterprises has an agreement with The Worth Bank whereby the bank
handles $3.12 million in collections a day and requires a $1,000,000 compensating balance.
Never Again is contemplating canceling the agreement and dividing its eastern region so that
two other banks will handle its business. Banks A and B will each handle $1.56 million of
collections a day, and each requires a compensating balance of $1,550,000. Never Again's
financial management expects that collections will be accelerated by one day if the eastern
region is divided. The T-bill rate is 5 percent annually. What is the amount of the annual net
savings if this plan is adopted?
A. $10,200
B. $51,000
C. $76,500
D. $102,000
E. $125,000
19-31
100. Mountaintop Inns, a Kentucky company, has determined that a majority of its customers
are located in the Pennsylvania area. It therefore is considering using a lockbox system
offered by a bank located in Pittsburgh, Pennsylvania. The bank has estimated that use of the
system will reduce collection time by one day. In addition to the variable charge shown below,
there is also a fixed charge of $4,320 per year for the lockbox system. Assume a year has 365
days. What is the NPV of the lockbox system given the following information?
A. -$156,727
B. -$131,301
C. -$74,208
D. $11,507
E. $26,433
101. Cow Chips, Inc., a large fertilizer distributor based in California, is planning to use a
lockbox system to speed up collections from its customers located on the East Coast. A
Philadelphia-area bank will provide this service for an annual fee of $25,000 plus 10 cents per
transaction. The estimated reduction in collection and processing time is one day. The average
customer payment in this region is $8,200. Treasury bills are currently yielding 5 percent per
year. Assume a year has 365 days. Approximately how many customers each day, on average,
are needed to make the system profitable for Cow Chips, Inc.?
A. 56
B. 67
C. 74
D. 83
E. 89
19-32
Chapter 19 Cash and Liquidity Management Answer Key
1. Yesterday, the president of RB Enterprises received a phone call from DLK, a competitor.
DLK is a sole proprietorship. An unexpected family situation has caused the owner to
suddenly want to retire and relocate closer to his family. Thus, the assets of DLK are being
offered to RB Enterprises at a bargain basement price. While RB Enterprises had not
anticipated purchasing these assets, it was decided that the opportunity was too good to pass
up. This illustrates which of the following needs to hold cash?
A. precautionary
B. transaction
C. speculative
D. compensation
E. float
Refer to section 19.1
AACSB: N/A
Bloom's: Comprehension
Difficulty: Basic
Learning Objective: 19-1
Section: 19.1
Topic: Speculative motive
19-33
2. GT Motors regularly issues short-term debt to finance its daily operations. Suddenly, the
credit markets froze and no funds were available for borrowing. Fortunately, the firm had
some cash reserves saved that it was able to use to fund its operations until additional credit
was available. The need to retain cash for situations such as this is referred to as which one of
the following motives for holding cash?
A. speculative
B. float
C. compensating
D. precautionary
E. transaction
AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: 19.1
Topic: Precautionary motive
3. The cash found in a cash drawer that a check-out clerk uses to make change is an example
of which of the following motives for holding cash?
A. speculative
B. daily float
D. precautionary
E. transaction
AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: 19.1
Topic: Transaction motive
19-34
4. Float is defined as the:

A. amount of cash a firm can immediately withdraw from its bank account.
B. difference between book cash and bank cash.
C. change in a firm's cash balance from one accounting period to the next.
D. amount of cash a firm has on hand.
E. cash balance according to a firm's records.
AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: 19.2
Topic: Float
5. A lockbox is a:
A. special safe used by a firm for overnight storage of any cash or undeposited checks.
B. special safe used by a firm that can only be opened at prespecified times of the day.
C. box located in a bank's vault that is rented by a firm and used to hold unprocessed checks.
D. special post office box which can only be opened by prespecified postal inspectors for
direct delivery to the addressee.
E. post office box strategically located so that a firm's receivables can be collected faster.
AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: 19.3
Topic: Lockbox
19-35
6. The Presque Isle Center has branch operations in three states. Each branch deals with a
local bank. However, all excess funds in these branch bank accounts are transferred on a daily
basis to the firm's primary bank located near the firm's home office. This routine of
transferring cash to the primary bank on a regular basis is referred to as:
A. cash concentration.
B. strategic cash disbursement.
C. transfer flotation.
D. payables management.
E. float management.
AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: 19.3
Topic: Cash concentration
7. An account into which funds are deposited only in an amount equal to the value of the
checks presented for payment that day is called a _____ account.
A. lockbox
B. concentration
C. zero-balance
D. compensating balance
E. revolving
AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: 19.4
Topic: Zero-balance accounts
19-36
8. An account into which a firm transfers funds, usually from a master account, in an amount
sufficient to cover the checks presented for payment that day is called a _____ account.
A. lockbox
B. cleanup
D. revolving
E. controlled disbursement
AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: 19.4
Topic: Controlled disbursement account
9. The Snow Hut has analyzed the carrying and shortage costs associated with its cash
holdings and determined that the firm should ideally maintain a cash balance of $3,600. This
$3,600 represents which one of the following to the firm?
A. target cash balance
B. concentration balance
C. available balance
D. selected cash amount
E. compensating balance
Refer to section 19.A
AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: 19.A
Topic: Target cash balance
19-37
10. Adjustment costs is another name for which one of the following?
A. borrowing costs
B. shortage costs
C. cash transfer costs
D. cash wire costs
E. excess cash costs
AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: 19.A
Topic: Adjustment costs
11. Why do firms need liquidity?

I. to meet compensating balance requirements
II. to take advantage of an opportunity that suddenly arises
III. to conduct daily business activities
IV. to be prepared for a financial emergency
A. I and II only
B. III and IV only
C. I, III, and IV only
AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: 19.1
Topic: Motives for liquidity
19-38
12. Cash management primarily involves:

A. optimizing a firm's collections and disbursements of cash.
B. maximizing the income a firm earns on its cash reserves.
C. reconciling a firm's book balance with its bank balance.
D. determining the optimal level of liquidity a firm should maintain.
E. determining the best method of raising capital.
AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: 19.1
Topic: Cash management
13. Disbursements float:

A. occurs when a deposit is recorded but the funds are unavailable.
B. causes the book balance to exceed the bank balance.
C. has tended to increase since the enactment of the Check Clearing Act for the 21st Century.
D. is a recommended source of funds for short-term investments.
E. is eliminated when payments are made electronically.
AACSB: N/A
Difficulty: Basic
Section: 19.2
Topic: Disbursement float
19-39
14. Collection float:

A. is more desirable to firms than disbursement float.
B. is totally eliminated by the installation of a lockbox system.
C. exists when a firm's available balance exceeds its book balance.
D. can be avoided by collecting payments electronically at the time of sale.
E. is eliminated by implementing a concentration banking system.
AACSB: N/A
Difficulty: Basic
Section: 19.2
Topic: Collection float

A. Net float decreases every time a firm issues a check to pay one of its suppliers.
B. A positive net float indicates that collection float exceeds disbursements float.
C. Firms prefer a zero net float over a positive net float.
D. Net float is equal to collection float minus disbursement float.
E. Net float is equal to a firm's available balance minus its book balance.
AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: 19.2
Topic: Net float
19-40
16. Check kiting is:

A. used by most firms as an ethical means of handling its cash reserves.
B. the process of withdrawing all funds from a bank account as soon as the funds are
available.
C. the central core of a good cash management system.
D. using uncollected cash to invest in short-term, liquid assets.
E. increasingly popular due to recent banking law changes.
AACSB: Ethics
Bloom's: Knowledge
Difficulty: Basic
Section: 19.2
Topic: Ethical issue
17. Which of the following will reduce collection time?

I. billing customers electronically rather than by mail
II. accepting debit cards but not checks as payment for a sale
III. offering cash discounts for early payment
IV. reducing the processing delay by one day
A. I and II only
B. I and III only
C. I, II, and III only
AACSB: N/A
Difficulty: Basic
Section: 19.3
Topic: Collection time
19-41
18. Which of the following should help reduce the total collection time for a firm?
I. opening a post office box so mail can be received earlier in the morning
II. assigning additional staff in the morning to process incoming payments
III. providing a discount for customers who pay electronically
IV. establishing preauthorized payments from customers
A. I and II only
B. III and IV only
C. II, III, and IV only
D. I, II, and IV only
AACSB: N/A
Difficulty: Basic
Section: 19.3
19. Which one of the following collection times is correctly described?

A. The processing delay starts when a firm mails out a billing statement and ends when the
payment is received from a customer.
B. Mailing time begins when a firm mails out a billing statement and ends when the payment
is received.
C. Collection time begins when a firm mails out a billing statement and ends when the cash
payment for that billing is available to the firm.
D. Availability delay begins when a firm deposits a customer's check into its bank account
and ends when the cash from that payment is available to the firm.
E. Processing delay begins when a firm mails out billing statements and ends when the firm
deposits the payment for that statement into its bank account.
AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: 19.3
19-42
20. A lockbox system:

A. entails the use of a bank which is centrally located to collect payments on a nationwide
basis.
B. is designed to deposit a customer's check into the firm's bank account prior to recording the
receipt of that check to a customer's account.
C. is used to reduce the disbursement float of a firm.
D. is efficient regardless of the locations selected for lockbox destinations.
E. automatically records payments to a customer's account when the customer's check is
received at the lockbox location.
AACSB: N/A
Difficulty: Basic
Section: 19.3
Topic: Lockbox
21. Lockboxes:
A. should be geographically located close to a firm's primary customers.
B. should be located in remote locations to increase the net disbursement float.
C. offer no additional benefit to a firm now that the Check Clearing Act for the 21st Century
has been enacted.
D. tend to be negative net present value projects for firms with a large number of sizeable
transactions.
E. tend to also be used as concentration accounts.
AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: 19.3
Topic: Lockbox
19-43
22. Cash concentration accounts:

A. tend to increase the funds available for short-term investing.
B. tend to increase the complexity of a firm's cash management system.
C. that utilize wire transfers rather than automated clearing house transfers are less expensive
to maintain.
D. receive checks directly from all of a firm's customers.
E. are all zero-balance accounts.
AACSB: N/A
Difficulty: Basic
Section: 19.3

A. Funds received via automated clearinghouse transfers are available that day.
B. A depository transfer check is the most costly means of transferring funds into a cash
concentration account.
C. The means selected to transfer funds into a concentration account depends primarily upon
the size of the transfers.
D. Concentration accounts are used to transfer funds to lockbox locations as needed.
E. The most expedient means of transferring funds into a concentration account is a wire
transfer.
AACSB: N/A
Difficulty: Basic
Section: 19.3
19-44
24. A cash concentration account:

A. is frequently used as a source of funds for short-term investments.
B. cannot be used to cover a compensating balance requirement.
C. cannot be used to transfer funds into zero-balance accounts.
D. is generally the only bank account a firm needs to efficiently manage its cash.
E. is another name for a controlled disbursement account.
AACSB: N/A
Difficulty: Basic
Section: 19.3
25. The main purpose of a cash concentration account is to:

A. decrease collection float.
B. decrease disbursement float.
C. consolidate funds.
D. replace a lockbox system.
E. cover compensating balance requirements.
AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: 19.3
19-45
26. Which one of the following statements is correct concerning a cash management system
that employs both lockboxes and a concentration bank account?
A. All customer payments must be submitted to a lockbox.
B. The party which collects the checks from the lockbox is responsible for recording the
payment on the customer's account.
C. Payments received in a lockbox are transferred immediately to the concentration account.
D. The firm's cash manager determines how the funds in the concentration account are
disbursed.
E. The concentration account must be zeroed out on a daily basis.
AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: 19.3
27. A zero-balance account:

A. is used to cover the compensating balance requirement of a line of credit agreement.
B. is only used to deposit funds received at local lockboxes.
C. is funded on an as-needed basis only.
D. is limited to handling payroll disbursements.
E. requires a compensating balance.
AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: 19.4
19-46
28. Which one of the following statements is correct concerning zero-balance accounts?
A. Each zero-balance account is offset by a compensating balance account.
B. Zero-balance accounts are used for depositing incoming funds.
C. A master account must be used in conjunction with a zero-balance account.
D. Zero-balance accounts are used solely in conjunction with a lockbox system.
E. Zero-balance accounts are still required to maintain a minimal balance.
AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: 19.4

A. The money market refers to securities that mature in two years or less.
B. Banks are prohibited from investing cash surpluses on behalf of their customers on a shortterm basis.
C. Short-term securities tend to have a high degree of interest rate risk.
D. A cyclical firm may purchase marketable securities as part of its short-term financing plan.
E. Corporations are not permitted to invest in money market mutual funds but can invest in
bank money market accounts.
AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: 19.5
Topic: Management of cash surplus
19-47
30. Which two of the following are the primary reasons why firms temporarily accumulate
large cash surpluses?
I. cyclical activities
II. desire to invest funds
III. daily operations
IV. fixed asset purchases
A. I and III only
B. II and IV only
C. I and II only
D. III and IV only
E. I and IV only
AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: 19.5
Topic: Management of cash surplus

A. Money market accounts are low-risk, high-return investments.
B. The rate of return earned on short-term securities tends to exceed that earned on long-term
securities.
C. U.S. Treasury bills are well suited for short-term investments.
D. The income earned on U.S. Treasury bills is exempt from all taxation.
E. Short-term investments tend to have high levels of default risk.
AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: 19.5
Topic: Short-term securities
19-48
32. Municipal bonds:

A. are less liquid than U.S. Treasury bills.
B. produce income that is subject to federal income taxation.
C. generally pay a higher coupon than corporate bonds.
D. are also referred to as commercial paper.
E. are issued by the federal government.
AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: 19.5
33. Money market securities have which of the following characteristics?

I. long maturities
II. low default risk
III. high degree of liquidity
IV. low rates of return
A. I and III only
B. II and III only
C. I and IV only
AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: 19.5
19-49
34. A jumbo CD:

A. is issued by the federal government.
B. generally matures between 2 and 5 years.
C. is a loan of $100,000 or more to a municipality.
D. is a loan of $1 million or more on a short-term basis.
E. is a short-term loan of $100,000 or more to a commercial bank.
AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: 19.5
35. Brown Trucking is buying a U.S. Treasury bill today with the understanding that the seller
will buy it back tomorrow at a slightly higher price. This investment is known as a:
A. commercial paper transaction.
B. repurchase agreement.
C. private certificate of deposit.
D. revenue anticipation note.
E. bill anticipation note.
AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: 19.5
19-50
36. A repurchase agreement generally has a maximum life of:

A. 1 day.
B. a few days.
C. one month.
D. one to three months.
E. three to six months.
AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: 19.5
37. A money market preferred stock:

A. has a floating dividend.
B. is sold only under a repurchase agreement.
C. is a special form of commercial paper.
D. has more price volatility than an ordinary preferred.
E. has its interest rate reset daily.
AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: 19.5
19-51
38. Which of the following costs related to holding cash are minimized when the level of cash
a firm holds is optimized?
A. opportunity costs
B. trading costs
C. total costs
D. both trading and opportunity costs
E. trading costs, opportunity costs, and total costs
AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: 19.A
Topic: Cash balance
39. Which of the following statements related to the BAT model is correct?
I. The BAT model is used to determine the target cash balance for a firm.
II. The BAT model is rarely used in business due to its complex nature.
III. The BAT model is a model that helps eliminate a firm's collection float.
IV. One disadvantage of the BAT model is the fact that it assumes all cash outflows are known
with certainty.
A. I and II only
B. III and IV only
C. II and III only
D. I and III only
E. I and IV only
AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: 19.A
Topic: BAT model
19-52
40. Which of the following variables are included in the BAT model?
I. upper cash limit
II. interest rate on marketable securities
III. opportunity cost of holding cash
IV. fixed cost of each securities trade
A. II only
B. I and III only
C. II and IV only
E. I, III, and IV only
AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: 19.A
Topic: BAT model
41. The BAT model is used to:

A. maximize the benefits of leverage.
B. determine the optimal cash position of a firm.
C. eliminate all daily cash surpluses.
D. analyze the cash balance given fluctuating cash inflows and outflows.
E. maximize the opportunity costs of holding cash.
AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: 19.A
Topic: BAT model
19-53
42. The Miller-Orr model assumes that:

A. the cash balance is depleted at regular intervals.
B. all cash flows are known with certainty.
C. the average change in the daily cash flows is positive.
D. management will set both the lower and the upper desired levels of cash.
E. the cash balance fluctuates in a random manner.
AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: 19.A
Topic: Miller-Orr model
43. The Miller-Orr model:

A. recommends selling securities in an amount equal to (U* - C) when the cash balance
reaches L.
B. requires that marketable securities be sold whenever the cash balance falls below the target
level.
C. bases the optimal level of cash solely on the opportunity costs of holding cash.
D. supports the argument that the target cash balance declines as order costs increase.
E. advocates investing an amount described as (U* - C) in marketable securities when the
cash balance reaches U*.
AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: 19.A
19-54
44. Which of the following statements is correct?

A. A firm has a greater likelihood of needing an unexpected loan when its cash flows are
relatively constant over time.
B. The cost of borrowing affects the target cash balance of a firm.
C. Management's desire to maintain a low cash balance has no effect on the borrowing needs
of a firm.
D. The target cash balance increases as the interest rate rises.
E. The target cash balance decreases as the order costs increase.
AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: 19.A
Topic: Target cash balance
45. The Hobby Shop has a checking account with a ledger balance of $692. The firm has
$1,063 in uncollected deposits and $846 in outstanding checks. What is the amount of the
disbursement float on this account?
A. $0
B. $217
C. $846
D. $909
E. $1,063
Disbursement float = $846
AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Section: 19.2
19-55
46. On an average day, Plastics Enterprises writes 42 checks with an average amount of $587.
These checks clear the bank in an average of 2 days. What is the average amount of the
disbursement float?
A. $1,174
B. $5,805
C. $24,654
D. $49,308
E. $73,962
Disbursement float = 42 $587 2 = $49,308
AACSB: Analytic
Difficulty: Basic
Section: 19.2
47. On average, your firm receives 62 checks a day from customers. These checks, on
average, are worth $39.90 each and clear the bank in 1.5 days. In addition, your firm disburses
38 checks a day with an average amount of $89.50. These checks clear your bank in 2 days.
What is the average amount of the collection float?
A. $2,473.80
B. $3,401.00
C. $3,710.70
D. $5,101.50
E. $6,802.00
Collection float = 62 $39.90 1.5 = $3,710.70
AACSB: Analytic
Difficulty: Basic
Section: 19.2
19-56
48. When Chris balanced her business checkbook, she had an adjusted bank balance of
$11,418. She had 2 outstanding deposits worth $879 each and 11 checks outstanding with a
total value of $3,648. What is the amount of the collection float on this account?
A. -$1,890
B. $1,758
C. $3,648
D. $5,406
E. $6,012
Collection float = $879 2 = $1,758
AACSB: Analytic
Difficulty: Basic
Section: 19.2
49. Your company has an available balance of $7,911. A deposit of $2,480 that was made this
morning is not yet included in the bank's balance. There are also 4 checks outstanding with a
value of $325 each. What is the net float?
C. net float of $6,731
Net collection float = $2,480 - (4 $325) = $1,180
AACSB: Analytic
Difficulty: Basic
Section: 19.2
Topic: Net float
19-57
50. A firm has $16,718 in outstanding checks that have not cleared the bank. The firm also
has $13,450 in deposits that have been recorded by the firm but not by the bank. The current
available balance is $11,407. What is the status of the net float?
C. net collection float of $13,450
Net disbursement float = $16,718 - $13,450 = $3,268
AACSB: Analytic
Difficulty: Basic
Section: 19.2
Topic: Net float
51. Your firm generally receives 4 checks a month. The check amounts and the collection
delay for each check is shown below. Given this information what is the amount of the
average daily float? Assume a 30 day month.
A. $1,070
B. $2,333
C. $2,640
D. $2,900
E. $3,416
Average daily float = [($1,200 2) + ($3,900 1) + ($5,800 3) + ($4,200 2)/30 = $1,070
AACSB: Analytic
Difficulty: Basic
Section: 19.2
Topic: Average daily float
19-58
52. Hoyes Lumber generally receives 3 checks a month. The check amounts and the collection
delay for each check are shown below. Given this information, what is the amount of the
average daily float? Assume each month has 30 days.
A. $1,386.67
B. $1,407.19
C. $4,750.00
D. $6,833.33
E. $6,933.33
Average daily float = [($6,100 3) + ($5,500 1) + ($8,900 2)]/30 = $1,386.67
AACSB: Analytic
Difficulty: Basic
Section: 19.2
19-59
53. The Blue Star generally receives only 3 checks a month. The check amounts and the
A. $971.43
B. $1,456.67
C. $3,351.33
D. $5,666.67
E. $6,800.00
Average daily float = [($9,100 2) + ($2,900 3) + ($8,400 2]/30 = $1,456.67
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Basic
Section: 19.2
19-60
54. The Food Wholesaler generally receives 4 checks a month. The check amounts and the
A. $3,963.89
B. $21,750.00
C. $22,236.67
D. $28,133.33
E. $35,675.00
Average daily float = [($67,200 3) + ($91,600 1) + ($54,200 2) + ($88,500 3)]/30 =
$22,236.67
AACSB: Analytic
Difficulty: Basic
Section: 19.2
19-61
55. Hot Tub Builders sells to three retail outlets. Each retailer pays once a month in the
amounts shown below. The collection delay associated with each payment is also given
below. What is the amount of the average daily receipts if you assume each month has 30
days?
A. $2,389.70
B. $8,190.00
C. $14,608.13
D. $23,896.97
E. $81,900.00
($38,700 + $149,800 + $57,200)/30 = $8,190
AACSB: Analytic
Difficulty: Basic
Section: 19.2
Topic: Average daily receipts
19-62
56. Atlas Builders deals strictly with five customers. The average amount each customer pays
per month along with the collection delay associated with each payment is shown below.
Given this information, what is the amount of the average daily receipts? Assume every
month has 30 days.
A. $1,143.33
B. $2,546.67
C. $2,983.33
D. $6,166.67
E. $6,860.00
Average daily receipts = ($6,800 + $8,500 + $2,000 + $9,500 + $7,500)/30 = $1,143.33
AACSB: Analytic
Difficulty: Basic
Section: 19.2
19-63
57. National Exporters deals strictly with two customers. The average amount each customer
Given this information, what is the amount of the average daily receipts? Assume that every
month has 30 days.
A. $2,653.33
B. $3,006.33
C. $5,306.67
D. $7,811.67
E. $8,600.00
Average daily receipts = ($86,400 + $72,800)/30 = $5,306.67
AACSB: Analytic
Difficulty: Basic
Section: 19.2
19-64
58. Cross Country Trucking provides transportation services exclusively for four customers.
The average amount each customer pays per month along with the collection delay associated
with each payment is shown below. Given this information, what is the weighted average
delay? Assume each month has 30 days.
A. 2.11 days
B. 2.27 days
C. 2.46 days
D. 2.50 days
E. 2.78 days
Total monthly collections = $64,000 + $88,200 + $96,500 + $47,900 = $296,600
Weighted average delay = [($64,000/$296,600) 2] + [($88,200/$296,600) 3] +
[($96,500/$296,600) 2] + [($47,900/$296,600) 3] = 2.46 days
AACSB: Analytic
Difficulty: Basic
Section: 19.2
Topic: Weighted average delay
19-65
59. High Brow Express deals strictly with two customers. The average amount each customer
Given this information, what is the weighted average delay? Assume that every month has 30
days.
A. 1.79 days
B. 1.84 days
C. 2.00 days
D. 2.07 days
E. 2.16 days
Total monthly collections = $419,000 + $575,000 = $994,000
Weighted average delay = [($419,000/$994,000) 1] + [($575,000/$994,000) 3] = 2.16
days
AACSB: Analytic
Difficulty: Basic
Section: 19.2
19-66
60. The Metallurgical Specialty Co. deals strictly with four customers. The average amount
each customer pays per month along with the collection delay associated with each payment
is shown below. Given this information, what is the weighted average delay? Assume each
month has 30 days.
A. 1.98 days
B. 2.04 days
C. 2.09 days
D. 2.16 days
E. 2.23 days
Total monthly collections = $287,000 + $416,000 + $139,000 + $233,000 = $1,075,000
Weighted average delay = [($287,000/$1,075,000) 4] + [($416,000/$1,075,000) 1] +
[($139,000/$1,075,000) 1] + [($233,000/$1,075,000) 3] = 2.23 days
AACSB: Analytic
Difficulty: Basic
Section: 19.2
19-67
61. On an average day, Goose Down Feathers receives $2,400 in checks from customers.
0.04 percent. What is the present value of the float? Assume each month has 30 days.
A. $115.20
B. $618.40
C. $2,400.00
D. $4,080.00
E. $4,256.50
Present value of the float = $2,400 1.7 = $4,080
AACSB: Analytic
Difficulty: Basic
Section: 19.2
Topic: Cost of float
62. On an average day, Town Center Hardware receives $2,420 in checks from customers.
0.025 percent. What is the maximum amount this store should pay to completely eliminate its
A. $1,152.38
B. $1,288.15
C. $2,109.16
D. $4,637.33
E. $5,082.00
Maximum cost = Present value of the float = $2,420 2.1 = $5,082.00
AACSB: Analytic
Difficulty: Basic
Section: 19.2
19-68
63. On an average day, your firm receives $11,800 in checks from customers. These checks
clear the bank in an average of 2.1 days. The applicable daily interest rate is 0.015 percent.
What is the highest daily fee your firm should pay to completely eliminate the collection
float? Assume each month has 30 days.
A. $3.42
B. $3.72
C. $17.78
D. $34.18
E. $37.20
Maximum daily fee = $11,800 2.1 0.00015 = $3.72
AACSB: Analytic
Difficulty: Basic
Section: 19.2
Topic: Maximum daily fee
64. On an average day, Wilson & Wilson receives $7,800 in checks from customers. These
checks clear the bank in an average of 1.7 days. The applicable daily interest rate is 0.022
percent. What is the highest daily fee this firm should pay to completely eliminate its
A. $1.72
B. $2.92
C. $17.20
D. $24.30
E. $29.17
Maximum daily fee = $7,800 1.7 0.00022 = $2.92
AACSB: Analytic
Difficulty: Basic
Section: 19.2
Topic: Maximum daily fee
19-69
65. Your average customer is located 4.3 mailing days away from your firm. You have
determined that, on average, it is taking your staff 1.5 days to process payments received from
customers. In addition, it takes an average of 2.2 days for your funds to be available for use
once you have made your bank deposit. What is your firm's collection time?
A. 2.2 days
B. 3.7 days
C. 4.3 days
D. 5.8 days
E. 8.0 days
Collection time = 4.3 + 1.5 + 2.2 = 8 days
AACSB: Analytic
Difficulty: Basic
Section: 19.3
66. It takes your firm 4.5 days to prepare and mail out all the monthly statements to your
customers. On average, the mail time between your firm and your customers is 2.6 days.
Customer checks take an average of 1.8 days to clear the bank. You have determined that your
total average collection time is 6.1 days. How long, on average, does it take your firm to
process the payments from customers?
A. 1.7 days
B. 2.6 days
C. 4.4 days
D. 4.8 days
E. 6.2 days
Processing time = 6.1 - 2.6 - 1.8 = 1.7 days
AACSB: Analytic
Difficulty: Basic
Section: 19.3
19-70
67. Currently, your firm requires 2 days to process the checks which customers mail in to pay
for their credit purchases. The average mail time associated with these payments is 2.3 days
and the check clearing time is 2.1 days. If your firm adopts a lockbox system, the mail time
will be cut in half. In addition, if employees are reassigned, checks could be processed the
same day they are received. How long will your collection time be if both the lockbox system
and the job reassignments are implemented?
A. 3.85 days
B. 4.10 days
C. 4.25 days
D. 4.40 days
E. 4.55 days
Collection time = (2.3 0.5) + 1 + 2.1 = 4.25 days
AACSB: Analytic
Difficulty: Basic
Section: 19.3
percent. What is the anticipated amount of the daily savings if this system is implemented?
A. $2.61
B. $3.29
C. $4.45
D. $5.32
E. $5.78
Daily savings = 320 $99 1.2 0.00014 = $5.32
AACSB: Analytic
Difficulty: Basic
Section: 19.3
Topic: Lockbox daily savings
19-71
69. Roger's Distributors receives an average of 216 checks a day. The average amount per
check is $629. The firm is considering a lockbox system which it anticipates will reduce the
average collection time by 1.5 days. The daily interest rate on Treasury bills is 0.011 percent.
What is the amount of the expected daily savings of the lockbox system?
A. $2.04
B. $6.92
C. $14.95
D. $18.10
E. $22.42
Daily savings = 216 $629 1.5 0.00011 = $22.42
AACSB: Analytic
Difficulty: Basic
Section: 19.3
Topic: Lockbox daily savings
70. Hand Tools, Inc. receives an average of 611 checks a day. The average amount per check
is $425. The firm is considering a lockbox system which it anticipates will reduce the average
collection time by 1 day. The bank charges $0.275 a check for this service. The daily interest
rate on Treasury bills is 0.013 percent. What is the average daily cost of the lockbox system?
A. $31.16
B. $54.19
C. $168.03
D. $180.11
E. $199.19
Daily cost = 611 $0.275 = $168.03
AACSB: Analytic
Difficulty: Basic
Section: 19.3
Topic: Lockbox daily cost
19-72
percent. The bank charge per check is $0.22. What is the anticipated daily cost of the lockbox
system?
A. $3.48
B. $6.25
C. $12.60
D. $29.92
E. $36.17
Daily cost = 136 $0.22 = $29.92
AACSB: Analytic
Difficulty: Basic
Section: 19.3
Topic: Lockbox daily cost
to reduce the average collection time by 2.8 days. On an average day, your firm receives
2,419 checks with an average value of $1,287 each. The daily interest rate on Treasury bills is
0.016 percent. The bank charge per check is $0.30. What is the net present value of this
A. -$4,535,625
B. -$2,611,575
C. $187,419
D. $4,181,483
E. $13,252,733
Net present value = [2,419 $1,287 2.8] - [(2,419 $0.30)/.00016] = $4,181,483
AACSB: Analytic
Bloom's: Analysis
Difficulty: Intermediate
Section: 19.3
Topic: Lockbox net present value
19-73
73. Rosewell International receives an average of 268 checks a day with an average amount
per check of $820. The firm is considering a lockbox system which it anticipates will reduce
the average collection time by 1.4 days. The bank charges $0.21 a check for this service. The
daily interest rate on Treasury bills is 0.02 percent. What is the net present value of this
A. -$61,640
B. -$26,264,
C. $26,264
D. $30,820
E. $61,640
Net present value = [268 $820 1.4] - [(268 $0.21)/.0002] = $26,264
AACSB: Analytic
Bloom's: Analysis
Section: 19.3
Topic: Lockbox net present value
74. The Eliot Co. needs $185,000 a week to pay bills. The standard deviation of the weekly
disbursements is $17,600. The firm has established a lower cash balance limit of $75,000. The
applicable interest rate is 5.5 percent and the fixed cost of transferring funds is $47. Based on
the BAT model, what is the optimal initial cash balance?
A. $90,668
B. $97,515
C. $104,141
D. $128,224
E. $136,509
Optimal initial cash balance =
AACSB: Analytic
Bloom's: Analysis
Section: 19.A
Topic: BAT model
19-74
75. Theo's Bar & Grill needs $147,000 a week to pay bills. The standard deviation of the
$45. Based on the BAT model, what is the optimal average cash balance?
A. $36,199
B. $49,568
C. $70,100
D. $99,136
E. $112,400
Optimal average cash balance =
AACSB: Analytic
Bloom's: Analysis
Section: 19.A
Topic: BAT model
76. Parkway Express needs $318,000 a week to pay bills. The standard deviation of the
$65. Based on the BAT model, what is the opportunity cost of holding cash?
A. $3,873
B. $4,918
C. $5,207
D. $109,283
E. $110,440
Opportunity cost =
AACSB: Analytic
Bloom's: Analysis
Section: 19.A
Topic: BAT model
19-75
77. Penco Supply spends $428,000 a week to pay bills and maintains a lower cash balance
limit of $75,000. The standard deviation of its disbursements is $18,900. The applicable
interest rate is 5 percent and the fixed cost of transferring funds is $65. What is the firm's
optimal initial cash balance based on the BAT model?
A. $150,600
B. $158,929
C. $170,096
D. $221,506
E. $240,553
AACSB: Analytic
Bloom's: Analysis
Section: 19.A
Topic: BAT model
$45,000. The standard deviation of your disbursements is $12,100. The applicable interest rate
is 4.5 percent and the fixed cost of transferring funds is $55. What is your opportunity cost of
holding cash based on the BAT model?
A. $1,318
B. $1,864
C. $2,204
D. $2,311
E. $3,709
Opportunity cost =
AACSB: Analytic
Bloom's: Analysis
Section: 19.A
Topic: BAT model
19-76
79. Rosie O'Grady's spends $98,000 a week to pay bills and maintains a lower cash balance
interest rate is 4.8 percent and the fixed cost of transferring funds is $50. What is this firm's
total cost of holding cash based on the BAT model?
A. $1,431
B. $2,862
C. $3,034
D. $4,912
E. $4,946

Opportunity cost =
Trading cost = [52/($103,037.21/$98,000)] $50 = $2,472.893
Total cost = $2,472.893 + $2,472.893 = $4,946
AACSB: Analytic
Bloom's: Analysis
Section: 19.A
Topic: BAT model
19-77
$150,000. The standard deviation of your disbursements is $28,700. The applicable interest
rate is 5 percent and the fixed cost of transferring funds is $60. What is your optimal average
cash balance based on the BAT model?
A. $103,900
B. $146,500
C. $182,200
D. $207,800
E. $249,900
Optimal average cash balance =
AACSB: Analytic
Bloom's: Analysis
Section: 19.A
Topic: BAT model
81. The Cow Pie Spreader Co. spends $214,000 a week to pay bills and maintains a lower
What is the firm's cash balance target based on the Miller-Orr model?
A. $208,511
B. $247,560
C. $251,006
D. $254,545
E. $258,878
Cash balance target = $175,000 + [0.75 $49 ($16,0002/.00025)]1/3 = $208,511
AACSB: Analytic
Bloom's: Analysis
Section: 19.A
19-78
82. The Blue Moon Hotel and Spa spends $359,000 a week to pay bills and maintains a lower
What is the hotel's optimal upper cash limit based on the Miller-Orr model?
A. $430,836
B. $447,905
C. $528,700
D. $739,459
E. $861,672
Cash balance target = $250,000 + [0.75 $60 ($46,8002/.00045)]1/3 = $310,278.70
Upper cash limit = 3 $310,278.70 - (2 $250,000) = $430,836
AACSB: Analytic
Bloom's: Analysis
Section: 19.A
83. Donaldson, Inc. spends $94,000 a week to pay bills and maintains a lower cash balance
A. $78,778
B. $82,623
C. $231,969
D. $236,334
E. $247,868
Average cash balance = [(4 $74,466.94) - $50,000]/3 = $82,623
AACSB: Analytic
Bloom's: Analysis
Section: 19.A
19-79
84. The Burger Stop spends $52,000 a week to pay bills and maintains a lower cash balance
A. $79,116
B. $83,208
C. $110,315
D. $237,348
E. $249,624
Average cash balance = [(4 $77,405.96) - $60,000]/3 = $83,208
AACSB: Analytic
Bloom's: Analysis
Section: 19.A
$50,000. The standard deviation of the disbursements is $8,600. The applicable weekly
interest rate is 0.054 percent and the fixed cost of transferring funds is $65. What is your cash
balance target based on the Miller-Orr model?
A. $48,156
B. $49,990
C. $54,884
D. $68,830
E. $75,726
Cash balance target = $50,000 + [.75 $65 ($8,6002/.00054)]1/3 = $68,830
AACSB: Analytic
Bloom's: Analysis
Section: 19.A
19-80
86. Travel Inn Express spends $109,000 a week to pay bills and maintains a lower cash
balance limit of $125,000. The standard deviation of the disbursements is $14,400. The
What is the inn's cash balance target based on the Miller-Orr model?
A. $28,492
B. $31,359
C. $153,492
D. $156,359
E. $225,417
Cash balance target = $125,000 + [0.75 $58 ($14,4002/.00039)]1/3 = $153,492
AACSB: Analytic
Bloom's: Analysis
Section: 19.A
Essay Questions
87. Explain how a lockbox system operates and why a firm might consider implementing such
a system.
A lockbox system entails opening post office boxes in various geographic locations. These
locations are selected such that they are close to the firm's key customers. At each of those
sites, a representative from a local bank collects the incoming checks and deposits them into
the firm's account. The information on the deposits is forwarded to the firm so customer
accounts can be credited for the payments. The firm transfers funds from these remote bank
accounts into one or more centralized bank accounts on a routine basis. A lockbox system
reduces mailing and processing times, and creates a one-time cash inflow for the firm.
Feedback: Refer to section 19.3
AACSB: Reflective thinking

Difficulty: Basic
Section: 19.3
Topic: Lockbox systems
19-81
88. Explain how the Check Clearing Act for the 21st Century affects both collection and
disbursement float.
Check 21 eliminated the need to present an original check to the check writer's bank to
receive payment. Now, the bank receiving the check as a deposit can electronically transmit a
copy of the check to the check writer's bank and receive immediate payment. This reduces
both collection and disbursement float times.

Difficulty: Basic
Section: 19.2
Topic: Check Clearing Act for the 21st Century
89. Explain how the unethical use of uncollected funds has been impacted by the growth of
on-line retailing and banking.
Whenever cash is moved electronically, both collection and disbursement float disappears.
Reducing float limits the ability of a firm to earn income by investing uncollected cash.
AACSB: Reflective thinking and Ethics

Difficulty: Basic
Section: 19.2
Topic: Internet banking
19-82
90. Float management systems may provide only minimal benefits to a firm. Given that most
firms have other projects with higher positive net present values, why should a firm's
managers spend time implementing a float management system?
Students should explain that any project with a positive net present value adds value to the
overall firm and should be implemented. Generally speaking, the majority of employee or
management time required by a float management system is spent on the implementation of
the system. Once the system is in place, management and employee time required for float
management tends to be rather minimal.

Difficulty: Basic
Section: 19.2
Topic: NPV of float management
91. Explain what a zero-balance account is, how it is used, and how it affects cash
management.
A zero-balance account is a checking account which is frequently used either for payroll or
accounts payable purposes. Funds are transferred from a master account into the zero-balance
account only as needed to cover checks presented for payment. All excess funds are held in
the master account. By concentrating the firm's safety stock of cash in one account, the firm
can better utilize its funds.

Difficulty: Basic
Section: 19.4
19-83
92. Each business day, on average, a company writes checks totaling $26,000 to pay its
suppliers. The usual clearing time for the checks is 5 days. Meanwhile, the company is
receiving payments from its customers each day, in the form of checks, totaling $40,000. The
cash from the payments is available to the firm after 2 days. What is the amount of the firm's
average net float?
A. $30,00
B. $50,000
C. $80,000
D. $110,000
E. $130,000
Net float = 5($26,000) - 2($40,000) = $50,000
AACSB: Analytic
Difficulty: Basic
EOC #: 19-2
Section: 19.2
Topic: Net float
93. Purple Feet Wine, Inc. receives an average of $6,000 in checks per day. The delay in
clearing is typically 3 days. The current interest rate is 0.025 percent per day. Assume 30 days
per month. What is the highest daily fee the company should be willing to pay to eliminate its
float entirely?
A. $1.50
B. $3.00
C. $3.75
D. $4.50
E. $6.00
Maximum daily fee = ($6,000 3) 0.00025 = $4.50
AACSB: Analytic
Difficulty: Basic
EOC #: 19-3
Section: 19.2
19-84
94. Your neighbor goes to the post office once a month and picks up two checks, one for
$18,000 and one for $4,000. The larger check takes 4 days to clear after it is deposited; the
smaller one takes 6 days. Assume 30 days per month. What is the weighted average delay?
A. 4.21 days
B. 4.36 days
C. 4.78 days
D. 5.00 days
E. 6.00 days
Total monthly receipts = $18,000 + $4,000 = $22,000
Weighted average delay = [($18,000/$22,000) 4] + [($4,000/$22,000) 6] = 4.36 days
AACSB: Analytic
Difficulty: Basic
EOC #: 19-4
Section: 19.2
95. Your firm has an average receipt size of $60. A bank has approached you concerning a
lockbox service that will decrease your total collection time by 1 day. You typically receive
28,000 checks per day. The daily interest rate is 0.016 percent. What is the NPV of the
lockbox project if the bank charges a fee of $210 per day?
A. $367,500
B. $427,500
C. $903,350
D. $1,412,500
E. $1,680,000
NPV of service = $60(28,000) - ($210/0.00016) = $367,500
AACSB: Analytic
Difficulty: Basic
EOC #: 19-5
Section: 19.3
Topic: Lockbox NPV
19-85
96. A mail-order firm processes 5,000 checks per month. Of these, 55 percent are for $55 and
45 percent are for $65. The $55 checks are delayed 2 days on average; the $65 checks are
delayed 5 days on average. Assume each month has 30 days. The interest rate is 6 percent per
year. How much should the firm be willing to pay to reduce the weighted average float by 1.4
days?
A. $4,165
B. $13,883
C. $41,650
D. $138,883
E. $416,500
Maximum payment = Average daily float = 1.4{[(0.55 5,000 $55) + (0.45 5,000
$65)]/30} = $13,883
AACSB: Analytic
Difficulty: Basic
EOC #: 19-6
Section: 19.2
19-86
97. Paper Submarine Manufacturing is investigating a lockbox system to reduce its collection
time. It has determined the following:
The total collection time will be reduced by 2 days if the lockbox system is adopted. What is
the NPV of adopting the lockbox system?
A. $600,000
B. $775,000
C. $975,000
D. $1,200,000
E. $1,425,000
NPV = (2 300 $4,000) - [($0.65 300)/0.0002] = $1,425,000
AACSB: Analytic
Difficulty: Basic
EOC #: 19-7
Section: 19.3
Topic: Lockbox NPV
19-87
98. Home Roasted Turkeys disburses checks every 4 weeks that average $70,000 and take 5
days to clear. How much interest can the company earn if it delays transfer of funds from an
interest-bearing account that pays 0.02 percent per day for these 5 days? Ignore the effects of
compound interest. Assume 52 weeks in a year.
A. $36
B. $91
C. $182
D. $364
E. $910
Interest = $70,000 (5) (52/4) (0.0002) = $910
AACSB: Analytic
Difficulty: Basic
EOC #: 19-9
Section: 19.3
Topic: Value of delay
99. Never Again Enterprises has an agreement with The Worth Bank whereby the bank
handles $3.12 million in collections a day and requires a $1,000,000 compensating balance.
Never Again is contemplating canceling the agreement and dividing its eastern region so that
two other banks will handle its business. Banks A and B will each handle $1.56 million of
collections a day, and each requires a compensating balance of $1,550,000. Never Again's
financial management expects that collections will be accelerated by one day if the eastern
region is divided. The T-bill rate is 5 percent annually. What is the amount of the annual net
savings if this plan is adopted?
A. $10,200
B. $51,000
C. $76,500
D. $102,000
E. $125,000
NPV = $3,120,000 - [2($1,550,000) - $1,000,000] = $1,020,000
Net savings = 0.05($1,020,000) = $51,000
AACSB: Analytic
Difficulty: Basic
EOC #: 19-10
Section: 19.3
Topic: NPV of float reduction
19-88
100. Mountaintop Inns, a Kentucky company, has determined that a majority of its customers
are located in the Pennsylvania area. It therefore is considering using a lockbox system
offered by a bank located in Pittsburgh, Pennsylvania. The bank has estimated that use of the
system will reduce collection time by one day. In addition to the variable charge shown below,
there is also a fixed charge of $4,320 per year for the lockbox system. Assume a year has 365
days. What is the NPV of the lockbox system given the following information?
A. -$156,727
B. -$131,301
C. -$74,208
D. $11,507
E. $26,433
NPV = (1 750 $1,800) - [($0.30 750)/(1.061/365 - 1)] - [$4,320/0.06] = -$131,301
AACSB: Analytic
Bloom's: Analysis
EOC #: 19-11
Section: 19.3
Topic: Lockbox NPV
19-89
101. Cow Chips, Inc., a large fertilizer distributor based in California, is planning to use a
lockbox system to speed up collections from its customers located on the East Coast. A
Philadelphia-area bank will provide this service for an annual fee of $25,000 plus 10 cents per
transaction. The estimated reduction in collection and processing time is one day. The average
customer payment in this region is $8,200. Treasury bills are currently yielding 5 percent per
year. Assume a year has 365 days. Approximately how many customers each day, on average,
are needed to make the system profitable for Cow Chips, Inc.?
A. 56
B. 67
C. 74
D. 83
E. 89
NPV = 0 = ($8,200 1 N) - ($0.10 N)/0.000134 - $25,000/0.05
N = 67 customers per day
AACSB: Analytic
Bloom's: Analysis
EOC #: 19-12
Section: 19.3
Topic: Transactions required
19-90

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Chapter 19 - Cash and Liquidity Management

Chapter 19 - Cash and Liquidity Management

4. Float is defined as the:

Chapter 19 - Cash and Liquidity Management

11. Why do firms need liquidity?

Chapter 19 - Cash and Liquidity Management

12. Cash management primarily involves:

13. Disbursements float:

14. Collection float:

15. Which one of the following statements is correct?

16. Check kiting is:

Chapter 19 - Cash and Liquidity Management

17. Which of the following will reduce collection time?

19. Which one of the following collection times is correctly described?

Chapter 19 - Cash and Liquidity Management

20. A lockbox system:

22. Cash concentration accounts:

23. Which one of the following statements is correct?

Chapter 19 - Cash and Liquidity Management

24. A cash concentration account:

25. The main purpose of a cash concentration account is to:

27. A zero-balance account:

Chapter 19 - Cash and Liquidity Management

29. Which one of the following statements is correct?

31. Which one of the following statements is correct?

Chapter 19 - Cash and Liquidity Management

32. Municipal bonds:

33. Money market securities have which of the following characteristics?

34. A jumbo CD:

Chapter 19 - Cash and Liquidity Management

36. A repurchase agreement generally has a maximum life of:

37. A money market preferred stock:

Chapter 19 - Cash and Liquidity Management

41. The BAT model is used to:

42. The Miller-Orr model assumes that:

43. The Miller-Orr model:

Chapter 19 - Cash and Liquidity Management

44. Which of the following statements is correct?

Chapter 19 - Cash and Liquidity Management

Chapter 19 - Cash and Liquidity Management

Chapter 19 - Cash and Liquidity Management

Chapter 19 - Cash and Liquidity Management

Chapter 19 - Cash and Liquidity Management

Chapter 19 - Cash and Liquidity Management

Chapter 19 - Cash and Liquidity Management

Chapter 19 - Cash and Liquidity Management

Chapter 19 - Cash and Liquidity Management

Chapter 19 - Cash and Liquidity Management

Chapter 19 - Cash and Liquidity Management

Chapter 19 - Cash and Liquidity Management

Chapter 19 - Cash and Liquidity Management

Chapter 19 - Cash and Liquidity Management

Chapter 19 - Cash and Liquidity Management

Chapter 19 - Cash and Liquidity Management

Chapter 19 - Cash and Liquidity Management

Multiple Choice Questions

Chapter 19 - Cash and Liquidity Management

Chapter 19 - Cash and Liquidity Management

Chapter 19 - Cash and Liquidity Management

Chapter 19 - Cash and Liquidity Management

Chapter 19 Cash and Liquidity Management Answer Key

Multiple Choice Questions

Chapter 19 - Cash and Liquidity Management

Chapter 19 - Cash and Liquidity Management