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1. The need to retain cash for short term financing needs until additional credit will be
available is referred to as which one of the following motives for holding cash?
A. transaction
B. speculative
C. compensating
D. precautionary
2. A construction firm that accumulates cash in anticipation of a significant drop in lumber
costs is an example of the __________ motive for holding cash.
A. hedging
B. building
C. transaction
D. speculative
3. 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. post office box strategically located so that a firm's receivables can be collected faster.
D. special post office box which can only be opened by prespecified postal inspectors for
direct delivery to the addressee.
4. Why do firms need liquidity?
to meet compensating balance requirements
to take advantage of an opportunity that suddenly arises
to conduct daily business activities
to be prepared for a financial emergency
A. I and II only
B. I, III, and IV only
C. II, III, and IV only
D. I, II, III, and IV
5. 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.
6. Which of the following generally have maturities of one year or less?
A. Treasury bills
B. Money market mutual fund
C. Commercial paper

D. Both A and C
7. The primary concern in the management of cash and marketable securities for an operating
company is to:
A. be profitable.
B. balance liquidity needs against investment opportunities.
C. keep enough cash on hand to buy a competitor if it becomes available.
D. both A and C.

8. Which one of the following statements regarding net float is TRUE?

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. Net float is equal to collection float minus disbursement float.
D. Net float is equal to a firm's available balance minus its book balance.
9. Which one of the following statements is TRUE?
A. The money market refers to securities that mature in two years or less.
B. Short-term securities tend to have a high degree of interest rate risk.
C. A cyclical firm may purchase marketable securities as part of its short-term financing plan.
D. Corporations are not permitted to invest in money market mutual funds but can invest in
bank money market accounts.
10. Which of the following factors influences the choice of marketable securities that a firm
would invest its excess cash balances in?
Interest rate risk
II. Liquidity
III. Yield
IV. Currency
A. I, II, and III only
B. II, III, and IV only
C. I, III, and IV only
D. I, II, III and IV

11. Which of the following will reduce collection time?

billing customers electronically rather than by mail
accepting debit cards but not checks as payment for a sale
offering cash discounts for early payment
reducing the processing delay by one day
A. I and II only
B. I and III only
C. I, II, and III only
D. I, II, III, and IV

12. 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
A. $3.29
B. $4.45
C. $5.32
D. $5.78
13. 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?
14. 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?
15. Discuss why holding cash is better than marketable securities.