1.

Firms hold cash balances in order to complete transactions that are necessary in business operations
and as compensation to banks for providing loans and services. TRUE

2. Two of the primary motives for a firm to hold cash are the transaction motive and the precautionary
motive. TRUE

3. A firm's target cash balance should be set as the smaller of (1) its transaction balance plus a
precautionary (safety stock) balance or (2) its required compensating balance. FALSE

4. For a firm that makes heavy use of float, being able to forecast its collections and disbursement check
clearings is essential. TRUE

5. Lockbox arrangements are one way for a firm to speed up the receipt of payments from customers.
TRUE

6. Target cash balances are generally not affected by compensating balance requirements except during
periods of high interest rates and tight money. FALSE

7. The primary purpose of compensating balances required of borrowers is to compensate the bank in
the event the borrower defaults on the loan. FALSE

8. Fixed dividend preferred stock is a good candidate for marketable security holdings designed to
provide liquidity because 70 percent of the dividends are excludable from taxable income, hence the
preferred would provide a relatively high after-tax rate of return. FALSE

9. The term "interest rate price risk" refers to the probability that a firm will be unable to continue
making interest payments on its debt. FALSE

10. The benefits of a sound cash management program are not sensitive to interest rates. FALSE

11. If there are large fluctuations in a firm's cash flows, or if there are large costs associated with selling
securities, then the firm should hold relatively small average cash balances. FALSE

12. The average accounts receivables balance is determined jointly by the volume of credit sales and the
days sales outstanding. TRUE