Chap 019

Chapter 19 - Cash and Liquidity Management
19-1
Chapter 19 Cash and Liquidity Management Answer Key

Multiple Choice Questions

1. Yesterday, the president of R !nterprises re"ei#ed a phone "a$$ from %LK, a "ompetitor.
%LK is a so$e proprietorship. An une&pe"ted fami$y situation has "aused the owner to
sudden$y want to retire and re$o"ate "$oser to his fami$y. 'hus, the assets of %LK are (eing
offered to R !nterprises at a (argain (asement pri"e. )hi$e R !nterprises had not
anti"ipated pur"hasing these assets, it was de"ided that the opportunity was too good to pass
up. 'his i$$ustrates whi"h of the fo$$owing needs to ho$d "ash*
A. pre"autionary
. transa"tion
C. spe"u$ati#e
%. "ompensation
!. f$oat
Refer to se"tion 19.1

AACSB: N/A
Bloom's: Comprehension
Difficulty: Basic
Learning Objectie: !"#!
Section: !"$!
%opic: Speculatie motie

19-+
+. ,' Motors regu$ar$y issues short-term de(t to finan"e its dai$y operations. -udden$y, the
"redit mar.ets fro/e and no funds were a#ai$a($e for (orrowing. 0ortunate$y, the firm had
some "ash reser#es sa#ed that it was a($e to use to fund its operations unti$ additiona$ "redit
was a#ai$a($e. 'he need to retain "ash for situations su"h as this is referred to as whi"h one of
the fo$$owing moti#es for ho$ding "ash*
A. spe"u$ati#e
. f$oat
C. "ompensating
D. pre"autionary
!. transa"tion

AACSB: N/A
Bloom's: &no'le(ge
Difficulty: Basic
Section: !"$!
%opic: )recautionary motie

1. 'he "ash found in a "ash drawer that a "he".-out "$er. uses to ma.e "hange is an e&amp$e
of whi"h of the fo$$owing moti#es for ho$ding "ash*
A. spe"u$ati#e
. dai$y f$oat
C. "ompensating (a$an"e
%. pre"autionary
E. transa"tion

AACSB: N/A
Bloom's: &no'le(ge
Difficulty: Basic
Section: !"$!
%opic: %ransaction motie

19-1
2. 0$oat is defined as the3
A. amount of "ash a firm "an immediate$y withdraw from its (an. a""ount.
B. differen"e (etween (oo. "ash and (an. "ash.
C. "hange in a firm4s "ash (a$an"e from one a""ounting period to the ne&t.
%. amount of "ash a firm has on hand.
!. "ash (a$an"e a""ording to a firm4s re"ords.
Refer to se"tion 19.+

AACSB: N/A
Bloom's: &no'le(ge
Difficulty: Basic
Section: !"$*
%opic: +loat

5. A $o".(o& is a3
A. spe"ia$ safe used (y a firm for o#ernight storage of any "ash or undeposited "he".s.
. spe"ia$ safe used (y a firm that "an on$y (e opened at prespe"ified times of the day.
C. (o& $o"ated in a (an.4s #au$t that is rented (y a firm and used to ho$d unpro"essed "he".s.
%. spe"ia$ post offi"e (o& whi"h "an on$y (e opened (y prespe"ified posta$ inspe"tors for
dire"t de$i#ery to the addressee.
E. post offi"e (o& strategi"a$$y $o"ated so that a firm4s re"ei#a($es "an (e "o$$e"ted faster.

AACSB: N/A
Bloom's: &no'le(ge
Difficulty: Basic
Learning Objectie: !"#*
Section: !"$,
%opic: Loc-bo.

19-2
6. 'he 7resque 8s$e Center has (ran"h operations in three states. !a"h (ran"h dea$s with a
$o"a$ (an.. 9owe#er, a$$ e&"ess funds in these (ran"h (an. a""ounts are transferred on a dai$y
(asis to the firm4s primary (an. $o"ated near the firm4s home offi"e. 'his routine of
transferring "ash to the primary (an. on a regu$ar (asis is referred to as3
A. "ash "on"entration.
. strategi" "ash dis(ursement.
C. transfer f$otation.
%. paya($es management.
!. f$oat management.

AACSB: N/A
Bloom's: &no'le(ge
Difficulty: Basic
Section: !"$,
%opic: Cash concentration

:. An a""ount into whi"h funds are deposited on$y in an amount equa$ to the #a$ue of the
"he".s presented for payment that day is "a$$ed a ;;;;; a""ount.
A. $o".(o&
. "on"entration
C. /ero-(a$an"e
%. "ompensating (a$an"e
!. re#o$#ing

AACSB: N/A
Bloom's: &no'le(ge
Difficulty: Basic
Section: !"$/
%opic: 0ero#balance accounts

19-5
<. An a""ount into whi"h a firm transfers funds, usua$$y from a master a""ount, in an amount
suffi"ient to "o#er the "he".s presented for payment that day is "a$$ed a ;;;;; a""ount.
A. $o".(o&
. "$eanup
C. "ompensating (a$an"e
%. re#o$#ing
E. "ontro$$ed dis(ursement

AACSB: N/A
Bloom's: &no'le(ge
Difficulty: Basic
Section: !"$/
%opic: Controlle( (isbursement account

9. 'he -now 9ut has ana$y/ed the "arrying and shortage "osts asso"iated with its "ash
ho$dings and determined that the firm shou$d idea$$y maintain a "ash (a$an"e of =1,6>>. 'his
=1,6>> represents whi"h one of the fo$$owing to the firm*
A. target "ash (a$an"e
. "on"entration (a$an"e
C. a#ai$a($e (a$an"e
%. se$e"ted "ash amount
!. "ompensating (a$an"e
Refer to se"tion 19.A

AACSB: N/A
Bloom's: &no'le(ge
Difficulty: Basic
Learning Objectie: !"#,
Section: !"$A
%opic: %arget cash balance

19-6
1>. Ad?ustment "osts is another name for whi"h one of the fo$$owing*
A. (orrowing "osts
B. shortage "osts
C. "ash transfer "osts
%. "ash wire "osts
!. e&"ess "ash "osts

AACSB: N/A
Bloom's: &no'le(ge
Difficulty: Basic
Section: !"$A
%opic: A(justment costs

11. )hy do firms need $iquidity*
8. to meet "ompensating (a$an"e requirements
88. to ta.e ad#antage of an opportunity that sudden$y arises
888. to "ondu"t dai$y (usiness a"ti#ities
8@. to (e prepared for a finan"ia$ emergen"y
A. 8 and 88 on$y
. 888 and 8@ on$y
C. 8, 888, and 8@ on$y
%. 88, 888, and 8@ on$y
E. 8, 88, 888, and 8@

AACSB: N/A
Bloom's: &no'le(ge
Difficulty: Basic
Section: !"$!
%opic: 1oties for li2ui(ity

19-:
1+. Cash management primari$y in#o$#es3
A. optimi/ing a firm4s "o$$e"tions and dis(ursements of "ash.
. ma&imi/ing the in"ome a firm earns on its "ash reser#es.
C. re"on"i$ing a firm4s (oo. (a$an"e with its (an. (a$an"e.
%. determining the optima$ $e#e$ of $iquidity a firm shou$d maintain.
!. determining the (est method of raising "apita$.

AACSB: N/A
Bloom's: &no'le(ge
Difficulty: Basic
Section: !"$!
%opic: Cash management

11. %is(ursements f$oat3
A. o""urs when a deposit is re"orded (ut the funds are una#ai$a($e.
. "auses the (oo. (a$an"e to e&"eed the (an. (a$an"e.
C. has tended to in"rease sin"e the ena"tment of the Che". C$earing A"t for the +1
st
Century.
%. is a re"ommended sour"e of funds for short-term in#estments.
E. is e$iminated when payments are made e$e"troni"a$$y.

AACSB: N/A
Difficulty: Basic
Section: !"$*
%opic: Disbursement float

19-<
12. Co$$e"tion f$oat3
A. is more desira($e to firms than dis(ursement f$oat.
. is tota$$y e$iminated (y the insta$$ation of a $o".(o& system.
C. e&ists when a firm4s a#ai$a($e (a$an"e e&"eeds its (oo. (a$an"e.
D. "an (e a#oided (y "o$$e"ting payments e$e"troni"a$$y at the time of sa$e.
!. is e$iminated (y imp$ementing a "on"entration (an.ing system.

AACSB: N/A
Difficulty: Basic
Section: !"$*
%opic: Collection float

15. )hi"h one of the fo$$owing statements is "orre"t*
A. Aet f$oat de"reases e#ery time a firm issues a "he". to pay one of its supp$iers.
. A positi#e net f$oat indi"ates that "o$$e"tion f$oat e&"eeds dis(ursements f$oat.
C. 0irms prefer a /ero net f$oat o#er a positi#e net f$oat.
%. Aet f$oat is equa$ to "o$$e"tion f$oat minus dis(ursement f$oat.
E. Aet f$oat is equa$ to a firm4s a#ai$a($e (a$an"e minus its (oo. (a$an"e.

AACSB: N/A
Bloom's: &no'le(ge
Difficulty: Basic
Section: !"$*
%opic: Net float

19-9
16. Che". .iting is3
A. used (y most firms as an ethi"a$ means of hand$ing its "ash reser#es.
. the pro"ess of withdrawing a$$ funds from a (an. a""ount as soon as the funds are
a#ai$a($e.
C. the "entra$ "ore of a good "ash management system.
D. using un"o$$e"ted "ash to in#est in short-term, $iquid assets.
!. in"reasing$y popu$ar due to re"ent (an.ing $aw "hanges.

AACSB: 3thics
Bloom's: &no'le(ge
Difficulty: Basic
Section: !"$*
%opic: 3thical issue

1:. )hi"h of the fo$$owing wi$$ redu"e "o$$e"tion time*
8. (i$$ing "ustomers e$e"troni"a$$y rather than (y mai$
88. a""epting de(it "ards (ut not "he".s as payment for a sa$e
888. offering "ash dis"ounts for ear$y payment
8@. redu"ing the pro"essing de$ay (y one day
A. 8 and 88 on$y
. 8 and 888 on$y
C. 8, 88, and 888 on$y
%. 88, 888, and 8@ on$y
E. 8, 88, 888, and 8@

AACSB: N/A
Difficulty: Basic
Section: !"$,
%opic: Collection time

19-1>
1<. )hi"h of the fo$$owing shou$d he$p redu"e the tota$ "o$$e"tion time for a firm*
8. opening a post offi"e (o& so mai$ "an (e re"ei#ed ear$ier in the morning
88. assigning additiona$ staff in the morning to pro"ess in"oming payments
888. pro#iding a dis"ount for "ustomers who pay e$e"troni"a$$y
8@. esta($ishing preauthori/ed payments from "ustomers
A. 8 and 88 on$y
. 888 and 8@ on$y
C. 88, 888, and 8@ on$y
%. 8, 88, and 8@ on$y
E. 8, 88, 888, and 8@

AACSB: N/A
Difficulty: Basic
Section: !"$,

19. )hi"h one of the fo$$owing "o$$e"tion times is "orre"t$y des"ri(ed*
A. 'he pro"essing de$ay starts when a firm mai$s out a (i$$ing statement and ends when the
payment is re"ei#ed from a "ustomer.
. Mai$ing time (egins when a firm mai$s out a (i$$ing statement and ends when the payment
is re"ei#ed.
C. Co$$e"tion time (egins when a firm mai$s out a (i$$ing statement and ends when the "ash
payment for that (i$$ing is a#ai$a($e to the firm.
D. A#ai$a(i$ity de$ay (egins when a firm deposits a "ustomer4s "he". into its (an. a""ount
and ends when the "ash from that payment is a#ai$a($e to the firm.
!. 7ro"essing de$ay (egins when a firm mai$s out (i$$ing statements and ends when the firm
deposits the payment for that statement into its (an. a""ount.

AACSB: N/A
Bloom's: &no'le(ge
Difficulty: Basic
Section: !"$,

19-11
+>. A $o".(o& system3
A. entai$s the use of a (an. whi"h is "entra$$y $o"ated to "o$$e"t payments on a nationwide
(asis.
B. is designed to deposit a "ustomer4s "he". into the firm4s (an. a""ount prior to re"ording the
re"eipt of that "he". to a "ustomer4s a""ount.
C. is used to redu"e the dis(ursement f$oat of a firm.
%. is effi"ient regard$ess of the $o"ations se$e"ted for $o".(o& destinations.
!. automati"a$$y re"ords payments to a "ustomer4s a""ount when the "ustomer4s "he". is
re"ei#ed at the $o".(o& $o"ation.

AACSB: N/A
Difficulty: Basic
Section: !"$,
%opic: Loc-bo.

+1. Lo".(o&es3
A. shou$d (e geographi"a$$y $o"ated "$ose to a firm4s primary "ustomers.
. shou$d (e $o"ated in remote $o"ations to in"rease the net dis(ursement f$oat.
C. offer no additiona$ (enefit to a firm now that the Che". C$earing A"t for the +1
st
Century
has (een ena"ted.
%. tend to (e negati#e net present #a$ue pro?e"ts for firms with a $arge num(er of si/ea($e
transa"tions.
!. tend to a$so (e used as "on"entration a""ounts.

AACSB: N/A
Bloom's: &no'le(ge
Difficulty: Basic
Section: !"$,
%opic: Loc-bo.

19-1+
++. Cash "on"entration a""ounts3
A. tend to in"rease the funds a#ai$a($e for short-term in#esting.
. tend to in"rease the "omp$e&ity of a firm4s "ash management system.
C. that uti$i/e wire transfers rather than automated "$earing house transfers are $ess e&pensi#e
to maintain.
%. re"ei#e "he".s dire"t$y from a$$ of a firm4s "ustomers.
!. are a$$ /ero-(a$an"e a""ounts.

AACSB: N/A
Difficulty: Basic
Section: !"$,

+1. )hi"h one of the fo$$owing statements is "orre"t*
A. 0unds re"ei#ed #ia automated "$earinghouse transfers are a#ai$a($e that day.
. A depository transfer "he". is the most "ost$y means of transferring funds into a "ash
"on"entration a""ount.
C. 'he means se$e"ted to transfer funds into a "on"entration a""ount depends primari$y upon
the si/e of the transfers.
%. Con"entration a""ounts are used to transfer funds to $o".(o& $o"ations as needed.
!. 'he most e&pedient means of transferring funds into a "on"entration a""ount is a wire
transfer.

AACSB: N/A
Difficulty: Basic
Section: !"$,

19-11
+2. A "ash "on"entration a""ount3
A. is frequent$y used as a sour"e of funds for short-term in#estments.
. "annot (e used to "o#er a "ompensating (a$an"e requirement.
C. "annot (e used to transfer funds into /ero-(a$an"e a""ounts.
%. is genera$$y the on$y (an. a""ount a firm needs to effi"ient$y manage its "ash.
!. is another name for a "ontro$$ed dis(ursement a""ount.

AACSB: N/A
Difficulty: Basic
Section: !"$,

+5. 'he main purpose of a "ash "on"entration a""ount is to3
A. de"rease "o$$e"tion f$oat.
. de"rease dis(ursement f$oat.
C. "onso$idate funds.
%. rep$a"e a $o".(o& system.
!. "o#er "ompensating (a$an"e requirements.

AACSB: N/A
Bloom's: &no'le(ge
Difficulty: Basic
Section: !"$,

19-12
+6. )hi"h one of the fo$$owing statements is "orre"t "on"erning a "ash management system
that emp$oys (oth $o".(o&es and a "on"entration (an. a""ount*
A. A$$ "ustomer payments must (e su(mitted to a $o".(o&.
. 'he party whi"h "o$$e"ts the "he".s from the $o".(o& is responsi($e for re"ording the
payment on the "ustomer4s a""ount.
C. 7ayments re"ei#ed in a $o".(o& are transferred immediate$y to the "on"entration a""ount.
D. 'he firm4s "ash manager determines how the funds in the "on"entration a""ount are
dis(ursed.
!. 'he "on"entration a""ount must (e /eroed out on a dai$y (asis.

AACSB: N/A
Bloom's: &no'le(ge
Difficulty: Basic
Section: !"$,

+:. A /ero-(a$an"e a""ount3
A. is used to "o#er the "ompensating (a$an"e requirement of a $ine of "redit agreement.
. is on$y used to deposit funds re"ei#ed at $o"a$ $o".(o&es.
C. is funded on an as-needed (asis on$y.
%. is $imited to hand$ing payro$$ dis(ursements.
!. requires a "ompensating (a$an"e.

AACSB: N/A
Bloom's: &no'le(ge
Difficulty: Basic
Section: !"$/

19-15
+<. )hi"h one of the fo$$owing statements is "orre"t "on"erning /ero-(a$an"e a""ounts*
A. !a"h /ero-(a$an"e a""ount is offset (y a "ompensating (a$an"e a""ount.
. Bero-(a$an"e a""ounts are used for depositing in"oming funds.
C. A master a""ount must (e used in "on?un"tion with a /ero-(a$an"e a""ount.
%. Bero-(a$an"e a""ounts are used so$e$y in "on?un"tion with a $o".(o& system.
!. Bero-(a$an"e a""ounts are sti$$ required to maintain a minima$ (a$an"e.

AACSB: N/A
Bloom's: &no'le(ge
Difficulty: Basic
Section: !"$/

+9. )hi"h one of the fo$$owing statements is "orre"t*
A. 'he money mar.et refers to se"urities that mature in two years or $ess.
. an.s are prohi(ited from in#esting "ash surp$uses on (eha$f of their "ustomers on a short-
term (asis.
C. -hort-term se"urities tend to ha#e a high degree of interest rate ris..
D. A "y"$i"a$ firm may pur"hase mar.eta($e se"urities as part of its short-term finan"ing p$an.
!. Corporations are not permitted to in#est in money mar.et mutua$ funds (ut "an in#est in
(an. money mar.et a""ounts.

AACSB: N/A
Bloom's: &no'le(ge
Difficulty: Basic
Section: !"$4
%opic: 1anagement of cash surplus

19-16
1>. )hi"h two of the fo$$owing are the primary reasons why firms temporari$y a""umu$ate
$arge "ash surp$uses*
8. "y"$i"a$ a"ti#ities
88. desire to in#est funds
888. dai$y operations
8@. fi&ed asset pur"hases
A. 8 and 888 on$y
. 88 and 8@ on$y
C. 8 and 88 on$y
%. 888 and 8@ on$y
E. 8 and 8@ on$y

AACSB: N/A
Bloom's: &no'le(ge
Difficulty: Basic
Section: !"$4
%opic: 1anagement of cash surplus

11. )hi"h one of the fo$$owing statements is "orre"t*
A. Money mar.et a""ounts are $ow-ris., high-return in#estments.
. 'he rate of return earned on short-term se"urities tends to e&"eed that earned on $ong-term
se"urities.
C. C.-. 'reasury (i$$s are we$$ suited for short-term in#estments.
%. 'he in"ome earned on C.-. 'reasury (i$$s is e&empt from a$$ ta&ation.
!. -hort-term in#estments tend to ha#e high $e#e$s of defau$t ris..

AACSB: N/A
Bloom's: &no'le(ge
Difficulty: Basic
Section: !"$4
%opic: Short#term securities

19-1:
1+. Muni"ipa$ (onds3
A. are $ess $iquid than C.-. 'reasury (i$$s.
. produ"e in"ome that is su(?e"t to federa$ in"ome ta&ation.
C. genera$$y pay a higher "oupon than "orporate (onds.
%. are a$so referred to as "ommer"ia$ paper.
!. are issued (y the federa$ go#ernment.

AACSB: N/A
Bloom's: &no'le(ge
Difficulty: Basic
Section: !"$4

11. Money mar.et se"urities ha#e whi"h of the fo$$owing "hara"teristi"s*
8. $ong maturities
88. $ow defau$t ris.
888. high degree of $iquidity
8@. $ow rates of return
A. 8 and 888 on$y
. 88 and 888 on$y
C. 8 and 8@ on$y
D. 88, 888, and 8@ on$y
!. 8, 88, 888, and 8@

AACSB: N/A
Bloom's: &no'le(ge
Difficulty: Basic
Section: !"$4

19-1<
12. A ?um(o C%3
A. is issued (y the federa$ go#ernment.
. genera$$y matures (etween + and 5 years.
C. is a $oan of =1>>,>>> or more to a muni"ipa$ity.
%. is a $oan of =1 mi$$ion or more on a short-term (asis.
E. is a short-term $oan of =1>>,>>> or more to a "ommer"ia$ (an..

AACSB: N/A
Bloom's: &no'le(ge
Difficulty: Basic
Section: !"$4

15. rown 'ru".ing is (uying a C.-. 'reasury (i$$ today with the understanding that the se$$er
wi$$ (uy it (a". tomorrow at a s$ight$y higher pri"e. 'his in#estment is .nown as a3
A. "ommer"ia$ paper transa"tion.
B. repur"hase agreement.
C. pri#ate "ertifi"ate of deposit.
%. re#enue anti"ipation note.
!. (i$$ anti"ipation note.

AACSB: N/A
Bloom's: &no'le(ge
Difficulty: Basic
Section: !"$4

19-19
16. A repur"hase agreement genera$$y has a ma&imum $ife of3
A. 1 day.
B. a few days.
C. one month.
%. one to three months.
!. three to si& months.

AACSB: N/A
Bloom's: &no'le(ge
Difficulty: Basic
Section: !"$4

1:. A money mar.et preferred sto".3
A. has a f$oating di#idend.
. is so$d on$y under a repur"hase agreement.
C. is a spe"ia$ form of "ommer"ia$ paper.
%. has more pri"e #o$ati$ity than an ordinary preferred.
!. has its interest rate reset dai$y.

AACSB: N/A
Bloom's: &no'le(ge
Difficulty: Basic
Section: !"$4

19-+>
1<. )hi"h of the fo$$owing "osts re$ated to ho$ding "ash are minimi/ed when the $e#e$ of "ash
a firm ho$ds is optimi/ed*
A. opportunity "osts
. trading "osts
C. tota$ "osts
%. (oth trading and opportunity "osts
!. trading "osts, opportunity "osts, and tota$ "osts

AACSB: N/A
Bloom's: &no'le(ge
Difficulty: Basic
Section: !"$A
%opic: Cash balance

19. )hi"h of the fo$$owing statements re$ated to the A' mode$ is "orre"t*
8. 'he A' mode$ is used to determine the target "ash (a$an"e for a firm.
88. 'he A' mode$ is rare$y used in (usiness due to its "omp$e& nature.
888. 'he A' mode$ is a mode$ that he$ps e$iminate a firm4s "o$$e"tion f$oat.
8@. Dne disad#antage of the A' mode$ is the fa"t that it assumes a$$ "ash outf$ows are .nown
with "ertainty.
A. 8 and 88 on$y
. 888 and 8@ on$y
C. 88 and 888 on$y
%. 8 and 888 on$y
E. 8 and 8@ on$y

AACSB: N/A
Bloom's: &no'le(ge
Difficulty: Basic
Section: !"$A
%opic: BA% mo(el

19-+1
2>. )hi"h of the fo$$owing #aria($es are in"$uded in the A' mode$*
8. upper "ash $imit
88. interest rate on mar.eta($e se"urities
888. opportunity "ost of ho$ding "ash
8@. fi&ed "ost of ea"h se"urities trade
A. 88 on$y
. 8 and 888 on$y
C. 88 and 8@ on$y
D. 88, 888, and 8@ on$y
!. 8, 888, and 8@ on$y

AACSB: N/A
Bloom's: &no'le(ge
Difficulty: Basic
Section: !"$A
%opic: BA% mo(el

21. 'he A' mode$ is used to3
A. ma&imi/e the (enefits of $e#erage.
B. determine the optima$ "ash position of a firm.
C. e$iminate a$$ dai$y "ash surp$uses.
%. ana$y/e the "ash (a$an"e gi#en f$u"tuating "ash inf$ows and outf$ows.
!. ma&imi/e the opportunity "osts of ho$ding "ash.

AACSB: N/A
Bloom's: &no'le(ge
Difficulty: Basic
Section: !"$A
%opic: BA% mo(el

19-++
2+. 'he Mi$$er-Drr mode$ assumes that3
A. the "ash (a$an"e is dep$eted at regu$ar inter#a$s.
. a$$ "ash f$ows are .nown with "ertainty.
C. the a#erage "hange in the dai$y "ash f$ows is positi#e.
%. management wi$$ set (oth the $ower and the upper desired $e#e$s of "ash.
E. the "ash (a$an"e f$u"tuates in a random manner.

AACSB: N/A
Bloom's: &no'le(ge
Difficulty: Basic
Section: !"$A
%opic: 1iller#Orr mo(el

21. 'he Mi$$er-Drr mode$3
A. re"ommends se$$ing se"urities in an amount equa$ to ECF - CG when the "ash (a$an"e
rea"hes L.
. requires that mar.eta($e se"urities (e so$d whene#er the "ash (a$an"e fa$$s (e$ow the target
$e#e$.
C. (ases the optima$ $e#e$ of "ash so$e$y on the opportunity "osts of ho$ding "ash.
%. supports the argument that the target "ash (a$an"e de"$ines as order "osts in"rease.
E. ad#o"ates in#esting an amount des"ri(ed as ECF - CG in mar.eta($e se"urities when the
"ash (a$an"e rea"hes CF.

AACSB: N/A
Bloom's: &no'le(ge
Difficulty: Basic
Section: !"$A

19-+1
22. )hi"h of the fo$$owing statements is "orre"t*
A. A firm has a greater $i.e$ihood of needing an une&pe"ted $oan when its "ash f$ows are
re$ati#e$y "onstant o#er time.
B. 'he "ost of (orrowing affe"ts the target "ash (a$an"e of a firm.
C. Management4s desire to maintain a $ow "ash (a$an"e has no effe"t on the (orrowing needs
of a firm.
%. 'he target "ash (a$an"e in"reases as the interest rate rises.
!. 'he target "ash (a$an"e de"reases as the order "osts in"rease.

AACSB: N/A
Bloom's: &no'le(ge
Difficulty: Basic
Section: !"$A
%opic: %arget cash balance

25. 'he 9o((y -hop has a "he".ing a""ount with a $edger (a$an"e of =69+. 'he firm has
=1,>61 in un"o$$e"ted deposits and =<26 in outstanding "he".s. )hat is the amount of the
dis(ursement f$oat on this a""ount*
A. =>
. =+1:
C. =<26
%. =9>9
!. =1,>61
%is(ursement f$oat H =<26

AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Section: !"$*

19-+2
26. Dn an a#erage day, 7$asti"s !nterprises writes 2+ "he".s with an a#erage amount of =5<:.
'hese "he".s "$ear the (an. in an a#erage of + days. )hat is the a#erage amount of the
dis(ursement f$oat*
A. =1,1:2
. =5,<>5
C. =+2,652
D. =29,1><
!. =:1,96+
%is(ursement f$oat H 2+ =5<: + H =29,1><

AACSB: Analytic
Difficulty: Basic
Section: !"$*

2:. Dn a#erage, your firm re"ei#es 6+ "he".s a day from "ustomers. 'hese "he".s, on
a#erage, are worth =19.9> ea"h and "$ear the (an. in 1.5 days. 8n addition, your firm dis(urses
1< "he".s a day with an a#erage amount of =<9.5>. 'hese "he".s "$ear your (an. in + days.
)hat is the a#erage amount of the "o$$e"tion f$oat*
A. =+,2:1.<>
. =1,2>1.>>
C. =1,:1>.:>
%. =5,1>1.5>
!. =6,<>+.>>
Co$$e"tion f$oat H 6+ =19.9> 1.5 H =1,:1>.:>

AACSB: Analytic
Difficulty: Basic
Section: !"$*

19-+5
2<. )hen Chris (a$an"ed her (usiness "he".(oo., she had an ad?usted (an. (a$an"e of
=11,21<. -he had + outstanding deposits worth =<:9 ea"h and 11 "he".s outstanding with a
tota$ #a$ue of =1,62<. )hat is the amount of the "o$$e"tion f$oat on this a""ount*
A. -=1,<9>
B. =1,:5<
C. =1,62<
%. =5,2>6
!. =6,>1+
Co$$e"tion f$oat H =<:9 + H =1,:5<

AACSB: Analytic
Difficulty: Basic
Section: !"$*

29. Your "ompany has an a#ai$a($e (a$an"e of =:,911. A deposit of =+,2<> that was made this
morning is not yet in"$uded in the (an.4s (a$an"e. 'here are a$so 2 "he".s outstanding with a
#a$ue of =1+5 ea"h. )hat is the net f$oat*
A. net "o$$e"tion f$oat of =1,1<>
. net "o$$e"tion f$oat of =+,2<>
C. net f$oat of =6,:11
%. net dis(ursement f$oat of =1,1>>
!. net dis(ursement f$oat of =+,2<>
Aet "o$$e"tion f$oat H =+,2<> - E2 =1+5G H =1,1<>

AACSB: Analytic
Difficulty: Basic
Section: !"$*
%opic: Net float

19-+6
5>. A firm has =16,:1< in outstanding "he".s that ha#e not "$eared the (an.. 'he firm a$so
has =11,25> in deposits that ha#e (een re"orded (y the firm (ut not (y the (an.. 'he "urrent
a#ai$a($e (a$an"e is =11,2>:. )hat is the status of the net f$oat*
A. net "o$$e"tion f$oat of =<,11<
. net "o$$e"tion f$oat of =+,>21
C. net "o$$e"tion f$oat of =11,25>
D. net dis(ursement f$oat of =1,+6<
!. net dis(ursement f$oat of =5,111
Aet dis(ursement f$oat H =16,:1< - =11,25> H =1,+6<

AACSB: Analytic
Difficulty: Basic
Section: !"$*
%opic: Net float

51. Your firm genera$$y re"ei#es 2 "he".s a month. 'he "he". amounts and the "o$$e"tion
de$ay for ea"h "he". is shown (e$ow. ,i#en this information what is the amount of the
a#erage dai$y f$oat* Assume a 1> day month.

A. =1,>:>
. =+,111
C. =+,62>
%. =+,9>>
!. =1,216
A#erage dai$y f$oat H IE=1,+>> +G J E=1,9>> 1G J E=5,<>> 1G J E=2,+>> +GK1> H =1,>:>

AACSB: Analytic
Difficulty: Basic
Section: !"$*
%opic: Aerage (aily float

19-+:
5+. 9oyes Lum(er genera$$y re"ei#es 1 "he".s a month. 'he "he". amounts and the "o$$e"tion
de$ay for ea"h "he". are shown (e$ow. ,i#en this information, what is the amount of the
a#erage dai$y f$oat* Assume ea"h month has 1> days.

A. =1,1<6.6:
. =1,2>:.19
C. =2,:5>.>>
%. =6,<11.11
!. =6,911.11
A#erage dai$y f$oat H IE=6,1>> 1G J E=5,5>> 1G J E=<,9>> +GLK1> H =1,1<6.6:

AACSB: Analytic
Difficulty: Basic
Section: !"$*

19-+<
51. 'he $ue -tar genera$$y re"ei#es on$y 1 "he".s a month. 'he "he". amounts and the
"o$$e"tion de$ay for ea"h "he". are shown (e$ow. ,i#en this information, what is the amount
of the a#erage dai$y f$oat* Assume e#ery month has 1> days.

A. =9:1.21
B. =1,256.6:
C. =1,151.11
%. =5,666.6:
!. =6,<>>.>>
A#erage dai$y f$oat H IE=9,1>> +G J E=+,9>> 1G J E=<,2>> +LK1> H =1,256.6:

AACSB: Analytic
Bloom's: &no'le(ge
Difficulty: Basic
Section: !"$*

19-+9
52. 'he 0ood )ho$esa$er genera$$y re"ei#es 2 "he".s a month. 'he "he". amounts and the
"o$$e"tion de$ay for ea"h "he". are shown (e$ow. ,i#en this information, what is the amount
of the a#erage dai$y f$oat* Assume e#ery month has 1> days.

A. =1,961.<9
. =+1,:5>.>>
C. =++,+16.6:
%. =+<,111.11
!. =15,6:5.>>
A#erage dai$y f$oat H IE=6:,+>> 1G J E=91,6>> 1G J E=52,+>> +G J E=<<,5>> 1GLK1> H
=++,+16.6:

AACSB: Analytic
Difficulty: Basic
Section: !"$*

19-1>
55. 9ot 'u( ui$ders se$$s to three retai$ out$ets. !a"h retai$er pays on"e a month in the
amounts shown (e$ow. 'he "o$$e"tion de$ay asso"iated with ea"h payment is a$so gi#en
(e$ow. )hat is the amount of the a#erage dai$y re"eipts if you assume ea"h month has 1>
days*

A. =+,1<9.:>
B. =<,19>.>>
C. =12,6><.11
%. =+1,<96.9:
!. =<1,9>>.>>
E=1<,:>> J =129,<>> J =5:,+>>GK1> H =<,19>

AACSB: Analytic
Difficulty: Basic
Section: !"$*
%opic: Aerage (aily receipts

19-11
56. At$as ui$ders dea$s stri"t$y with fi#e "ustomers. 'he a#erage amount ea"h "ustomer pays
per month a$ong with the "o$$e"tion de$ay asso"iated with ea"h payment is shown (e$ow.
,i#en this information, what is the amount of the a#erage dai$y re"eipts* Assume e#ery
month has 1> days.

A. =1,121.11
. =+,526.6:
C. =+,9<1.11
%. =6,166.6:
!. =6,<6>.>>
A#erage dai$y re"eipts H E=6,<>> J =<,5>> J =+,>>> J =9,5>> J =:,5>>GK1> H =1,121.11

AACSB: Analytic
Difficulty: Basic
Section: !"$*

19-1+
5:. Aationa$ !&porters dea$s stri"t$y with two "ustomers. 'he a#erage amount ea"h "ustomer
pays per month a$ong with the "o$$e"tion de$ay asso"iated with ea"h payment is shown (e$ow.
,i#en this information, what is the amount of the a#erage dai$y re"eipts* Assume that e#ery
month has 1> days.

A. =+,651.11
. =1,>>6.11
C. =5,1>6.6:
%. =:,<11.6:
!. =<,6>>.>>
A#erage dai$y re"eipts H E=<6,2>> J =:+,<>>GK1> H =5,1>6.6:

AACSB: Analytic
Difficulty: Basic
Section: !"$*

19-11
5<. Cross Country 'ru".ing pro#ides transportation ser#i"es e&"$usi#e$y for four "ustomers.
'he a#erage amount ea"h "ustomer pays per month a$ong with the "o$$e"tion de$ay asso"iated
with ea"h payment is shown (e$ow. ,i#en this information, what is the weighted a#erage
de$ay* Assume ea"h month has 1> days.

A. +.11 days
. +.+: days
C. +.26 days
%. +.5> days
!. +.:< days
'ota$ month$y "o$$e"tions H =62,>>> J =<<,+>> J =96,5>> J =2:,9>> H =+96,6>>
)eighted a#erage de$ay H IE=62,>>>K=+96,6>>G +L J IE=<<,+>>K=+96,6>>G 1L J
IE=96,5>>K=+96,6>>G +L J IE=2:,9>>K=+96,6>>G 1L H +.26 days

AACSB: Analytic
Difficulty: Basic
Section: !"$*
%opic: 5eighte( aerage (elay

19-12
59. 9igh row !&press dea$s stri"t$y with two "ustomers. 'he a#erage amount ea"h "ustomer
pays per month a$ong with the "o$$e"tion de$ay asso"iated with ea"h payment is shown (e$ow.
,i#en this information, what is the weighted a#erage de$ay* Assume that e#ery month has 1>
days.

A. 1.:9 days
. 1.<2 days
C. +.>> days
%. +.>: days
E. +.16 days
'ota$ month$y "o$$e"tions H =219,>>> J =5:5,>>> H =992,>>>
)eighted a#erage de$ay H IE=219,>>>K=992,>>>G 1L J IE=5:5,>>>K=992,>>>G 1L H +.16
days

AACSB: Analytic
Difficulty: Basic
Section: !"$*

19-15
6>. 'he Meta$$urgi"a$ -pe"ia$ty Co. dea$s stri"t$y with four "ustomers. 'he a#erage amount
ea"h "ustomer pays per month a$ong with the "o$$e"tion de$ay asso"iated with ea"h payment
is shown (e$ow. ,i#en this information, what is the weighted a#erage de$ay* Assume ea"h
month has 1> days.

A. 1.9< days
. +.>2 days
C. +.>9 days
%. +.16 days
E. +.+1 days
'ota$ month$y "o$$e"tions H =+<:,>>> J =216,>>> J =119,>>> J =+11,>>> H =1,>:5,>>>
)eighted a#erage de$ay H IE=+<:,>>>K=1,>:5,>>>G 2L J IE=216,>>>K=1,>:5,>>>G 1L J
IE=119,>>>K=1,>:5,>>>G 1L J IE=+11,>>>K=1,>:5,>>>G 1L H +.+1 days

AACSB: Analytic
Difficulty: Basic
Section: !"$*

19-16
61. Dn an a#erage day, ,oose %own 0eathers re"ei#es =+,2>> in "he".s from "ustomers.
'hese "he".s "$ear the (an. in an a#erage of 1.: days. 'he app$i"a($e dai$y interest rate is
>.>2 per"ent. )hat is the present #a$ue of the f$oat* Assume ea"h month has 1> days.
A. =115.+>
. =61<.2>
C. =+,2>>.>>
D. =2,><>.>>
!. =2,+56.5>
7resent #a$ue of the f$oat H =+,2>> 1.: H =2,><>

AACSB: Analytic
Difficulty: Basic
Section: !"$*
%opic: Cost of float

6+. Dn an a#erage day, 'own Center 9ardware re"ei#es =+,2+> in "he".s from "ustomers.
'hese "he".s "$ear the (an. in an a#erage of +.1 days. 'he app$i"a($e dai$y interest rate is
>.>+5 per"ent. )hat is the ma&imum amount this store shou$d pay to "omp$ete$y e$iminate its
"o$$e"tion f$oat* Assume ea"h month has 1> days.
A. =1,15+.1<
. =1,+<<.15
C. =+,1>9.16
%. =2,61:.11
E. =5,><+.>>
Ma&imum "ost H 7resent #a$ue of the f$oat H =+,2+> +.1 H =5,><+.>>

AACSB: Analytic
Difficulty: Basic
Section: !"$*

19-1:
61. Dn an a#erage day, your firm re"ei#es =11,<>> in "he".s from "ustomers. 'hese "he".s
"$ear the (an. in an a#erage of +.1 days. 'he app$i"a($e dai$y interest rate is >.>15 per"ent.
)hat is the highest dai$y fee your firm shou$d pay to "omp$ete$y e$iminate the "o$$e"tion
f$oat* Assume ea"h month has 1> days.
A. =1.2+
B. =1.:+
C. =1:.:<
%. =12.1<
!. =1:.+>
Ma&imum dai$y fee H =11,<>> +.1 >.>>>15 H =1.:+

AACSB: Analytic
Difficulty: Basic
Section: !"$*
%opic: 1a.imum (aily fee

62. Dn an a#erage day, )i$son M )i$son re"ei#es =:,<>> in "he".s from "ustomers. 'hese
"he".s "$ear the (an. in an a#erage of 1.: days. 'he app$i"a($e dai$y interest rate is >.>++
per"ent. )hat is the highest dai$y fee this firm shou$d pay to "omp$ete$y e$iminate its
"o$$e"tion f$oat* Assume ea"h month has 1> days.
A. =1.:+
B. =+.9+
C. =1:.+>
%. =+2.1>
!. =+9.1:
Ma&imum dai$y fee H =:,<>> 1.: >.>>>++ H =+.9+

AACSB: Analytic
Difficulty: Basic
Section: !"$*
%opic: 1a.imum (aily fee

19-1<
65. Your a#erage "ustomer is $o"ated 2.1 mai$ing days away from your firm. You ha#e
determined that, on a#erage, it is ta.ing your staff 1.5 days to pro"ess payments re"ei#ed from
"ustomers. 8n addition, it ta.es an a#erage of +.+ days for your funds to (e a#ai$a($e for use
on"e you ha#e made your (an. deposit. )hat is your firm4s "o$$e"tion time*
A. +.+ days
. 1.: days
C. 2.1 days
%. 5.< days
E. <.> days
Co$$e"tion time H 2.1 J 1.5 J +.+ H < days

AACSB: Analytic
Difficulty: Basic
Section: !"$,

66. 8t ta.es your firm 2.5 days to prepare and mai$ out a$$ the month$y statements to your
"ustomers. Dn a#erage, the mai$ time (etween your firm and your "ustomers is +.6 days.
Customer "he".s ta.e an a#erage of 1.< days to "$ear the (an.. You ha#e determined that your
tota$ a#erage "o$$e"tion time is 6.1 days. 9ow $ong, on a#erage, does it ta.e your firm to
pro"ess the payments from "ustomers*
A. 1.: days
. +.6 days
C. 2.2 days
%. 2.< days
!. 6.+ days
7ro"essing time H 6.1 - +.6 - 1.< H 1.: days

AACSB: Analytic
Difficulty: Basic
Section: !"$,

19-19
6:. Current$y, your firm requires + days to pro"ess the "he".s whi"h "ustomers mai$ in to pay
for their "redit pur"hases. 'he a#erage mai$ time asso"iated with these payments is +.1 days
and the "he". "$earing time is +.1 days. 8f your firm adopts a $o".(o& system, the mai$ time
wi$$ (e "ut in ha$f. 8n addition, if emp$oyees are reassigned, "he".s "ou$d (e pro"essed the
same day they are re"ei#ed. 9ow $ong wi$$ your "o$$e"tion time (e if (oth the $o".(o& system
and the ?o( reassignments are imp$emented*
A. 1.<5 days
. 2.1> days
C. 2.+5 days
%. 2.2> days
!. 2.55 days
Co$$e"tion time H E+.1 >.5G J 1 J +.1 H 2.+5 days

AACSB: Analytic
Difficulty: Basic
Section: !"$,

6<. You are "onsidering imp$ementing a $o".(o& system for your firm. 'he system is e&pe"ted
to redu"e the a#erage "o$$e"tion time (y 1.+ days. Dn an a#erage day, your firm re"ei#es 1+>
"he".s with an a#erage #a$ue of =99 ea"h. 'he dai$y interest rate on 'reasury (i$$s is >.>12
per"ent. )hat is the anti"ipated amount of the dai$y sa#ings if this system is imp$emented*
A. =+.61
. =1.+9
C. =2.25
D. =5.1+
!. =5.:<
%ai$y sa#ings H 1+> =99 1.+ >.>>>12 H =5.1+

AACSB: Analytic
Difficulty: Basic
Section: !"$,
%opic: Loc-bo. (aily saings

19-2>
69. Roger4s %istri(utors re"ei#es an a#erage of +16 "he".s a day. 'he a#erage amount per
"he". is =6+9. 'he firm is "onsidering a $o".(o& system whi"h it anti"ipates wi$$ redu"e the
a#erage "o$$e"tion time (y 1.5 days. 'he dai$y interest rate on 'reasury (i$$s is >.>11 per"ent.
)hat is the amount of the e&pe"ted dai$y sa#ings of the $o".(o& system*
A. =+.>2
. =6.9+
C. =12.95
%. =1<.1>
E. =++.2+
%ai$y sa#ings H +16 =6+9 1.5 >.>>>11 H =++.2+

AACSB: Analytic
Difficulty: Basic
Section: !"$,
%opic: Loc-bo. (aily saings

:>. 9and 'oo$s, 8n". re"ei#es an a#erage of 611 "he".s a day. 'he a#erage amount per "he".
is =2+5. 'he firm is "onsidering a $o".(o& system whi"h it anti"ipates wi$$ redu"e the a#erage
"o$$e"tion time (y 1 day. 'he (an. "harges =>.+:5 a "he". for this ser#i"e. 'he dai$y interest
rate on 'reasury (i$$s is >.>11 per"ent. )hat is the a#erage dai$y "ost of the $o".(o& system*
A. =11.16
. =52.19
C. =16<.>1
%. =1<>.11
!. =199.19
%ai$y "ost H 611 =>.+:5 H =16<.>1

AACSB: Analytic
Difficulty: Basic
Section: !"$,
%opic: Loc-bo. (aily cost

19-21
:1. You are "onsidering imp$ementing a $o".(o& system for your firm. 'he system is e&pe"ted
to redu"e the a#erage "o$$e"tion time (y 1.1 days. Dn an a#erage day, your firm re"ei#es 116
"he".s with an a#erage #a$ue of =+19 ea"h. 'he dai$y interest rate on 'reasury (i$$s is >.>+1
per"ent. 'he (an. "harge per "he". is =>.++. )hat is the anti"ipated dai$y "ost of the $o".(o&
system*
A. =1.2<
. =6.+5
C. =1+.6>
D. =+9.9+
!. =16.1:
%ai$y "ost H 116 =>.++ H =+9.9+

AACSB: Analytic
Difficulty: Basic
Section: !"$,
%opic: Loc-bo. (aily cost

:+. You are "onsidering imp$ementing a $o".(o& system for your firm. 'he system is e&pe"ted
to redu"e the a#erage "o$$e"tion time (y +.< days. Dn an a#erage day, your firm re"ei#es
+,219 "he".s with an a#erage #a$ue of =1,+<: ea"h. 'he dai$y interest rate on 'reasury (i$$s is
>.>16 per"ent. 'he (an. "harge per "he". is =>.1>. )hat is the net present #a$ue of this
$o".(o& arrangement*
A. -=2,515,6+5
. -=+,611,5:5
C. =1<:,219
D. =2,1<1,2<1
!. =11,+5+,:11
Aet present #a$ue H I+,219 =1,+<: +.<L - IE+,219 =>.1>GK.>>>16L H =2,1<1,2<1

AACSB: Analytic
Bloom's: Analysis
Difficulty: 6nterme(iate
Section: !"$,
%opic: Loc-bo. net present alue

19-2+
:1. Rosewe$$ 8nternationa$ re"ei#es an a#erage of +6< "he".s a day with an a#erage amount
per "he". of =<+>. 'he firm is "onsidering a $o".(o& system whi"h it anti"ipates wi$$ redu"e
the a#erage "o$$e"tion time (y 1.2 days. 'he (an. "harges =>.+1 a "he". for this ser#i"e. 'he
dai$y interest rate on 'reasury (i$$s is >.>+ per"ent. )hat is the net present #a$ue of this
$o".(o& arrangement*
A. -=61,62>
. -=+6,+62,
C. =+6,+62
%. =1>,<+>
!. =61,62>
Aet present #a$ue H I+6< =<+> 1.2L - IE+6< =>.+1GK.>>>+L H =+6,+62

AACSB: Analytic
Bloom's: Analysis
Section: !"$,
%opic: Loc-bo. net present alue

:2. 'he !$iot Co. needs =1<5,>>> a wee. to pay (i$$s. 'he standard de#iation of the wee.$y
dis(ursements is =1:,6>>. 'he firm has esta($ished a $ower "ash (a$an"e $imit of =:5,>>>. 'he
app$i"a($e interest rate is 5.5 per"ent and the fi&ed "ost of transferring funds is =2:. ased on
the A' mode$, what is the optima$ initia$ "ash (a$an"e*
A. =9>,66<
. =9:,515
C. =1>2,121
D. =1+<,++2
!. =116,5>9
Dptima$ initia$ "ash (a$an"e H

AACSB: Analytic
Bloom's: Analysis
Section: !"$A
%opic: BA% mo(el

19-21
:5. 'heo4s ar M ,ri$$ needs =12:,>>> a wee. to pay (i$$s. 'he standard de#iation of the
wee.$y dis(ursements is =9,6>>. 'he firm has esta($ished a $ower "ash (a$an"e $imit of
=2>,>>>. 'he app$i"a($e interest rate is 1.5 per"ent and the fi&ed "ost of transferring funds is
=25. ased on the A' mode$, what is the optima$ a#erage "ash (a$an"e*
A. =16,199
. =29,56<
C. =:>,1>>
%. =99,116
!. =11+,2>>
Dptima$ a#erage "ash (a$an"e H

AACSB: Analytic
Bloom's: Analysis
Section: !"$A
%opic: BA% mo(el

:6. 7ar.way !&press needs =11<,>>> a wee. to pay (i$$s. 'he standard de#iation of the
wee.$y dis(ursements is =11,>>>. 'he firm has esta($ished a $ower "ash (a$an"e $imit of
=6>,>>>. 'he app$i"a($e interest rate is 2.5 per"ent and the fi&ed "ost of transferring funds is
=65. ased on the A' mode$, what is the opportunity "ost of ho$ding "ash*
A. =1,<:1
B. =2,91<
C. =5,+>:
%. =1>9,+<1
!. =11>,22>
Dpportunity "ost H

AACSB: Analytic
Bloom's: Analysis
Section: !"$A
%opic: BA% mo(el

19-22
::. 7en"o -upp$y spends =2+<,>>> a wee. to pay (i$$s and maintains a $ower "ash (a$an"e
$imit of =:5,>>>. 'he standard de#iation of its dis(ursements is =1<,9>>. 'he app$i"a($e
interest rate is 5 per"ent and the fi&ed "ost of transferring funds is =65. )hat is the firm4s
optima$ initia$ "ash (a$an"e (ased on the A' mode$*
A. =15>,6>>
. =15<,9+9
C. =1:>,>96
%. =++1,5>6
E. =+2>,551

AACSB: Analytic
Bloom's: Analysis
Section: !"$A
%opic: BA% mo(el

:<. Your firm spends =52,>>> a wee. to pay (i$$s and maintains a $ower "ash (a$an"e $imit of
=25,>>>. 'he standard de#iation of your dis(ursements is =1+,1>>. 'he app$i"a($e interest rate
is 2.5 per"ent and the fi&ed "ost of transferring funds is =55. )hat is your opportunity "ost of
ho$ding "ash (ased on the A' mode$*
A. =1,11<
B. =1,<62
C. =+,+>2
%. =+,111
!. =1,:>9
Dpportunity "ost H

AACSB: Analytic
Bloom's: Analysis
Section: !"$A
%opic: BA% mo(el

19-25
:9. Rosie D4,rady4s spends =9<,>>> a wee. to pay (i$$s and maintains a $ower "ash (a$an"e
$imit of =95,>>>. 'he standard de#iation of the dis(ursements is =12,6>>. 'he app$i"a($e
interest rate is 2.< per"ent and the fi&ed "ost of transferring funds is =5>. )hat is this firm4s
tota$ "ost of ho$ding "ash (ased on the A' mode$*
A. =1,211
. =+,<6+
C. =1,>12
%. =2,91+
E. =2,926
Dpportunity "ost H
'rading "ost H I5+KE=1>1,>1:.+1K=9<,>>>GL =5> H =+,2:+.<91
'ota$ "ost H =+,2:+.<91 J =+,2:+.<91 H =2,926

AACSB: Analytic
Bloom's: Analysis
Section: !"$A
%opic: BA% mo(el

19-26
<>. Your firm spends =126,>>> a wee. to pay (i$$s and maintains a $ower "ash (a$an"e $imit of
=15>,>>>. 'he standard de#iation of your dis(ursements is =+<,:>>. 'he app$i"a($e interest
rate is 5 per"ent and the fi&ed "ost of transferring funds is =6>. )hat is your optima$ a#erage
"ash (a$an"e (ased on the A' mode$*
A. =1>1,9>>
. =126,5>>
C. =1<+,+>>
%. =+>:,<>>
!. =+29,9>>
Dptima$ a#erage "ash (a$an"e H

AACSB: Analytic
Bloom's: Analysis
Section: !"$A
%opic: BA% mo(el

<1. 'he Cow 7ie -preader Co. spends =+12,>>> a wee. to pay (i$$s and maintains a $ower
"ash (a$an"e $imit of =1:5,>>>. 'he standard de#iation of the dis(ursements is =16,>>>. 'he
app$i"a($e wee.$y interest rate is >.>+5 per"ent and the fi&ed "ost of transferring funds is =29.
)hat is the firm4s "ash (a$an"e target (ased on the Mi$$er-Drr mode$*
A. =+><,511
. =+2:,56>
C. =+51,>>6
%. =+52,525
!. =+5<,<:<
Cash (a$an"e target H =1:5,>>> J I>.:5 =29 E=16,>>>
+
K.>>>+5GL
1K1
H =+><,511

AACSB: Analytic
Bloom's: Analysis
Section: !"$A

19-2:
<+. 'he $ue Moon 9ote$ and -pa spends =159,>>> a wee. to pay (i$$s and maintains a $ower
"ash (a$an"e $imit of =+5>,>>>. 'he standard de#iation of the dis(ursements is =26,<>>. 'he
app$i"a($e wee.$y interest rate is >.>25 per"ent and the fi&ed "ost of transferring funds is =6>.
)hat is the hote$4s optima$ upper "ash $imit (ased on the Mi$$er-Drr mode$*
A. =21>,<16
. =22:,9>5
C. =5+<,:>>
%. =:19,259
!. =<61,6:+
Cash (a$an"e target H =+5>,>>> J I>.:5 =6> E=26,<>>
+
K.>>>25GL
1K1
H =11>,+:<.:>
Cpper "ash $imit H 1 =11>,+:<.:> - E+ =+5>,>>>G H =21>,<16

AACSB: Analytic
Bloom's: Analysis
Section: !"$A

<1. %ona$dson, 8n". spends =92,>>> a wee. to pay (i$$s and maintains a $ower "ash (a$an"e
$imit of =5>,>>>. 'he standard de#iation of the dis(ursements is =11,>>>. 'he app$i"a($e
wee.$y interest rate is >.>25 per"ent and the fi&ed "ost of transferring funds is =5+. )hat is
your optima$ a#erage "ash (a$an"e (ased on the Mi$$er-Drr mode$*
A. =:<,::<
B. =<+,6+1
C. =+11,969
%. =+16,112
!. =+2:,<6<
Cash (a$an"e target H =5>,>>> J I>.:5 =5+ E=11,>>>
+
K.>>>25GL
1K1
H =:2,266.92
A#erage "ash (a$an"e H IE2 =:2,266.92G - =5>,>>>LK1 H =<+,6+1

AACSB: Analytic
Bloom's: Analysis
Section: !"$A

19-2<
<2. 'he urger -top spends =5+,>>> a wee. to pay (i$$s and maintains a $ower "ash (a$an"e
$imit of =6>,>>>. 'he standard de#iation of the dis(ursements is =:,5>>. 'he app$i"a($e
wee.$y interest rate is >.>2 per"ent and the fi&ed "ost of transferring funds is =5>. )hat is
your optima$ a#erage "ash (a$an"e (ased on the Mi$$er-Drr mode$*
A. =:9,116
B. =<1,+><
C. =11>,115
%. =+1:,12<
!. =+29,6+2
Cash (a$an"e target H =6>,>>> J I>.:5 =5> E=:,5>>
+
K.>>>2GL
1K1
H =::,2>5.96
A#erage "ash (a$an"e H IE2 =::,2>5.96G - =6>,>>>LK1 H =<1,+><

AACSB: Analytic
Bloom's: Analysis
Section: !"$A

<5. Your firm spends =2<,>>> a wee. to pay (i$$s and maintains a $ower "ash (a$an"e $imit of
=5>,>>>. 'he standard de#iation of the dis(ursements is =<,6>>. 'he app$i"a($e wee.$y
interest rate is >.>52 per"ent and the fi&ed "ost of transferring funds is =65. )hat is your "ash
(a$an"e target (ased on the Mi$$er-Drr mode$*
A. =2<,156
. =29,99>
C. =52,<<2
D. =6<,<1>
!. =:5,:+6
Cash (a$an"e target H =5>,>>> J I.:5 =65 E=<,6>>
+
K.>>>52GL
1K1
H =6<,<1>

AACSB: Analytic
Bloom's: Analysis
Section: !"$A

19-29
<6. 'ra#e$ 8nn !&press spends =1>9,>>> a wee. to pay (i$$s and maintains a $ower "ash
(a$an"e $imit of =1+5,>>>. 'he standard de#iation of the dis(ursements is =12,2>>. 'he
app$i"a($e wee.$y interest rate is >.>19 per"ent and the fi&ed "ost of transferring funds is =5<.
)hat is the inn4s "ash (a$an"e target (ased on the Mi$$er-Drr mode$*
A. =+<,29+
. =11,159
C. =151,29+
%. =156,159
!. =++5,21:
Cash (a$an"e target H =1+5,>>> J I>.:5 =5< E=12,2>>
+
K.>>>19GL
1K1
H =151,29+

AACSB: Analytic
Bloom's: Analysis
Section: !"$A

Essay Questions

<:. !&p$ain how a $o".(o& system operates and why a firm might "onsider imp$ementing su"h
a system.
A $o".(o& system entai$s opening post offi"e (o&es in #arious geographi" $o"ations. 'hese
$o"ations are se$e"ted su"h that they are "$ose to the firm4s .ey "ustomers. At ea"h of those
sites, a representati#e from a $o"a$ (an. "o$$e"ts the in"oming "he".s and deposits them into
the firm4s a""ount. 'he information on the deposits is forwarded to the firm so "ustomer
a""ounts "an (e "redited for the payments. 'he firm transfers funds from these remote (an.
a""ounts into one or more "entra$i/ed (an. a""ounts on a routine (asis. A $o".(o& system
redu"es mai$ing and pro"essing times, and "reates a one-time "ash inf$ow for the firm.
0eed(a".3 Refer to se"tion 19.1

AACSB: 7eflectie thin-ing
Difficulty: Basic
Section: !"$,
%opic: Loc-bo. systems

19-5>
<<. !&p$ain how the Che". C$earing A"t for the +1
st
Century affe"ts (oth "o$$e"tion and
dis(ursement f$oat.
Che". +1 e$iminated the need to present an origina$ "he". to the "he". writer4s (an. to
re"ei#e payment. Aow, the (an. re"ei#ing the "he". as a deposit "an e$e"troni"a$$y transmit a
"opy of the "he". to the "he". writer4s (an. and re"ei#e immediate payment. 'his redu"es
(oth "o$$e"tion and dis(ursement f$oat times.
0eed(a".3 Refer to se"tion 19.+

Difficulty: Basic
Section: !"$*
%opic: Chec- Clearing Act for the *!st Century

<9. !&p$ain how the unethi"a$ use of un"o$$e"ted funds has (een impa"ted (y the growth of
on-$ine retai$ing and (an.ing.
)hene#er "ash is mo#ed e$e"troni"a$$y, (oth "o$$e"tion and dis(ursement f$oat disappears.
Redu"ing f$oat $imits the a(i$ity of a firm to earn in"ome (y in#esting un"o$$e"ted "ash.

AACSB: 7eflectie thin-ing an( 3thics
Difficulty: Basic
Section: !"$*
%opic: 6nternet ban-ing

19-51
9>. 0$oat management systems may pro#ide on$y minima$ (enefits to a firm. ,i#en that most
firms ha#e other pro?e"ts with higher positi#e net present #a$ues, why shou$d a firm4s
managers spend time imp$ementing a f$oat management system*
-tudents shou$d e&p$ain that any pro?e"t with a positi#e net present #a$ue adds #a$ue to the
o#era$$ firm and shou$d (e imp$emented. ,enera$$y spea.ing, the ma?ority of emp$oyee or
management time required (y a f$oat management system is spent on the imp$ementation of
the system. Dn"e the system is in p$a"e, management and emp$oyee time required for f$oat
management tends to (e rather minima$.

Difficulty: Basic
Section: !"$*
%opic: N)8 of float management

91. !&p$ain what a /ero-(a$an"e a""ount is, how it is used, and how it affe"ts "ash
management.
A /ero-(a$an"e a""ount is a "he".ing a""ount whi"h is frequent$y used either for payro$$ or
a""ounts paya($e purposes. 0unds are transferred from a master a""ount into the /ero-(a$an"e
a""ount on$y as needed to "o#er "he".s presented for payment. A$$ e&"ess funds are he$d in
the master a""ount. y "on"entrating the firm4s safety sto". of "ash in one a""ount, the firm
"an (etter uti$i/e its funds.
0eed(a".3 Refer to se"tion 19.2

Difficulty: Basic
Section: !"$/

19-5+
Multiple Choice Questions

9+. !a"h (usiness day, on a#erage, a "ompany writes "he".s tota$ing =+6,>>> to pay its
supp$iers. 'he usua$ "$earing time for the "he".s is 5 days. Meanwhi$e, the "ompany is
re"ei#ing payments from its "ustomers ea"h day, in the form of "he".s, tota$ing =2>,>>>. 'he
"ash from the payments is a#ai$a($e to the firm after + days. )hat is the amount of the firm4s
a#erage net f$oat*
A. =1>,>>
B. =5>,>>>
C. =<>,>>>
%. =11>,>>>
!. =11>,>>>
Aet f$oat H 5E=+6,>>>G - +E=2>,>>>G H =5>,>>>

AACSB: Analytic
Difficulty: Basic
3OC 9: !"#*
Section: !"$*
%opic: Net float

91. 7urp$e 0eet )ine, 8n". re"ei#es an a#erage of =6,>>> in "he".s per day. 'he de$ay in
"$earing is typi"a$$y 1 days. 'he "urrent interest rate is >.>+5 per"ent per day. Assume 1> days
per month. )hat is the highest dai$y fee the "ompany shou$d (e wi$$ing to pay to e$iminate its
f$oat entire$y*
A. =1.5>
. =1.>>
C. =1.:5
D. =2.5>
!. =6.>>
Ma&imum dai$y fee H E=6,>>> 1G >.>>>+5 H =2.5>

AACSB: Analytic
Difficulty: Basic
3OC 9: !"#,
Section: !"$*

19-51
92. Your neigh(or goes to the post offi"e on"e a month and pi".s up two "he".s, one for
=1<,>>> and one for =2,>>>. 'he $arger "he". ta.es 2 days to "$ear after it is depositedN the
sma$$er one ta.es 6 days. Assume 1> days per month. )hat is the weighted a#erage de$ay*
A. 2.+1 days
B. 2.16 days
C. 2.:< days
%. 5.>> days
!. 6.>> days
'ota$ month$y re"eipts H =1<,>>> J =2,>>> H =++,>>>
)eighted a#erage de$ay H IE=1<,>>>K=++,>>>G 2L J IE=2,>>>K=++,>>>G 6L H 2.16 days

AACSB: Analytic
Difficulty: Basic
3OC 9: !"#/
Section: !"$*

95. Your firm has an a#erage re"eipt si/e of =6>. A (an. has approa"hed you "on"erning a
$o".(o& ser#i"e that wi$$ de"rease your tota$ "o$$e"tion time (y 1 day. You typi"a$$y re"ei#e
+<,>>> "he".s per day. 'he dai$y interest rate is >.>16 per"ent. )hat is the A7@ of the
$o".(o& pro?e"t if the (an. "harges a fee of =+1> per day*
A. =16:,5>>
. =2+:,5>>
C. =9>1,15>
%. =1,21+,5>>
!. =1,6<>,>>>
A7@ of ser#i"e H =6>E+<,>>>G - E=+1>K>.>>>16G H =16:,5>>

AACSB: Analytic
Difficulty: Basic
3OC 9: !"#4
Section: !"$,
%opic: Loc-bo. N)8

19-52
96. A mai$-order firm pro"esses 5,>>> "he".s per month. Df these, 55 per"ent are for =55 and
25 per"ent are for =65. 'he =55 "he".s are de$ayed + days on a#erageN the =65 "he".s are
de$ayed 5 days on a#erage. Assume ea"h month has 1> days. 'he interest rate is 6 per"ent per
year. 9ow mu"h shou$d the firm (e wi$$ing to pay to redu"e the weighted a#erage f$oat (y 1.2
days*
A. =2,165
B. =11,<<1
C. =21,65>
%. =11<,<<1
!. =216,5>>
Ma&imum payment H A#erage dai$y f$oat H 1.2OIE>.55 5,>>> =55G J E>.25 5,>>>
=65GLK1>P H =11,<<1

AACSB: Analytic
Difficulty: Basic
3OC 9: !"#:
Section: !"$*

19-55
9:. 7aper -u(marine Manufa"turing is in#estigating a $o".(o& system to redu"e its "o$$e"tion
time. 8t has determined the fo$$owing3

'he tota$ "o$$e"tion time wi$$ (e redu"ed (y + days if the $o".(o& system is adopted. )hat is
the A7@ of adopting the $o".(o& system*
A. =6>>,>>>
. =::5,>>>
C. =9:5,>>>
%. =1,+>>,>>>
E. =1,2+5,>>>
A7@ H E+ 1>> =2,>>>G - IE=>.65 1>>GK>.>>>+L H =1,2+5,>>>

AACSB: Analytic
Difficulty: Basic
3OC 9: !"#;
Section: !"$,
%opic: Loc-bo. N)8

19-56
9<. 9ome Roasted 'ur.eys dis(urses "he".s e#ery 2 wee.s that a#erage =:>,>>> and ta.e 5
days to "$ear. 9ow mu"h interest "an the "ompany earn if it de$ays transfer of funds from an
interest-(earing a""ount that pays >.>+ per"ent per day for these 5 days* 8gnore the effe"ts of
"ompound interest. Assume 5+ wee.s in a year.
A. =16
. =91
C. =1<+
%. =162
E. =91>
8nterest H =:>,>>> E5G E5+K2G E>.>>>+G H =91>

AACSB: Analytic
Difficulty: Basic
3OC 9: !"#"
Section: !"$,
%opic: 8alue of (elay

99. Ae#er Again !nterprises has an agreement with 'he )orth an. where(y the (an.
hand$es =1.1+ mi$$ion in "o$$e"tions a day and requires a =1,>>>,>>> "ompensating (a$an"e.
Ae#er Again is "ontemp$ating "an"e$ing the agreement and di#iding its eastern region so that
two other (an.s wi$$ hand$e its (usiness. an.s A and wi$$ ea"h hand$e =1.56 mi$$ion of
"o$$e"tions a day, and ea"h requires a "ompensating (a$an"e of =1,55>,>>>. Ae#er Again4s
finan"ia$ management e&pe"ts that "o$$e"tions wi$$ (e a""e$erated (y one day if the eastern
region is di#ided. 'he '-(i$$ rate is 5 per"ent annua$$y. )hat is the amount of the annua$ net
sa#ings if this p$an is adopted*
A. =1>,+>>
B. =51,>>>
C. =:6,5>>
%. =1>+,>>>
!. =1+5,>>>
A7@ H =1,1+>,>>> - I+E=1,55>,>>>G - =1,>>>,>>>L H =1,>+>,>>>
Aet sa#ings H >.>5E=1,>+>,>>>G H =51,>>>

AACSB: Analytic
Difficulty: Basic
3OC 9: !"#!<
Section: !"$,
%opic: N)8 of float re(uction

19-5:
1>>. Mountaintop 8nns, a Kentu".y "ompany, has determined that a ma?ority of its "ustomers
are $o"ated in the 7ennsy$#ania area. 8t therefore is "onsidering using a $o".(o& system
offered (y a (an. $o"ated in 7itts(urgh, 7ennsy$#ania. 'he (an. has estimated that use of the
system wi$$ redu"e "o$$e"tion time (y one day. 8n addition to the #aria($e "harge shown (e$ow,
there is a$so a fi&ed "harge of =2,1+> per year for the $o".(o& system. Assume a year has 165
days. )hat is the A7@ of the $o".(o& system gi#en the fo$$owing information*

A. -=156,:+:
B. -=111,1>1
C. -=:2,+><
%. =11,5>:
!. =+6,211
A7@ H E1 :5> =1,<>>G - IE=>.1> :5>GKE1.>6
1K165
- 1GL - I=2,1+>K>.>6L H -=111,1>1

AACSB: Analytic
Bloom's: Analysis
3OC 9: !"#!!
Section: !"$,
%opic: Loc-bo. N)8

19-5<
1>1. Cow Chips, 8n"., a $arge ferti$i/er distri(utor (ased in Ca$ifornia, is p$anning to use a
$o".(o& system to speed up "o$$e"tions from its "ustomers $o"ated on the !ast Coast. A
7hi$ade$phia-area (an. wi$$ pro#ide this ser#i"e for an annua$ fee of =+5,>>> p$us 1> "ents per
transa"tion. 'he estimated redu"tion in "o$$e"tion and pro"essing time is one day. 'he a#erage
"ustomer payment in this region is =<,+>>. 'reasury (i$$s are "urrent$y yie$ding 5 per"ent per
year. Assume a year has 165 days. Appro&imate$y how many "ustomers ea"h day, on a#erage,
are needed to ma.e the system profita($e for Cow Chips, 8n".*
A. 56
B. 6:
C. :2
%. <1
!. <9
A7@ H > H E=<,+>> 1 AG - E=>.1> AGK>.>>>112 - =+5,>>>K>.>5
A H 6: "ustomers per day

AACSB: Analytic
Bloom's: Analysis
3OC 9: !"#!*
Section: !"$,
%opic: %ransactions re2uire(

19-59

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Chapter 19 - Cash and Liquidity Management

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