Course Code and Title: ACED 7 – Financial Management

Lesson Number: 12

Topic: Cash and Marketable Securities Management

Learning Objectives:
After studying Chapter 12, you should be able to:
1. Understand the concept of cash management.
2. Learn the objectives of cash management
3. Identify the reasons for holding cash balances.
4. Know how to determine the target cash balance using
a) Cash budget
b) Cash Break-even Chart
c) Optimal Cash Balance
5. Understand the other factors that influence the target cash balance.
6. Know the cash management techniques to manage properly the cash flows of the firm.
7. Understand the objective of marketable securities management.
8. Realize the reason for holding marketable securities.
9. Identify the factors influencing the choice of marketable securities.
10. Learn the types of marketable securities.
Pre-assessment:
Write T if the statement is true and F if the statement is false.

_____1. Cash is considered a nonearning asset.

_____2. Effective cash management will help improve profitability.
_____3. A large-scale firm can go full cash basis in managing the business.
_____4. Marketable securities cannot be utilized by large firms.
_____5. A good mix of both cash and marketable securities will improve company’s profitability.
 CHAPTER 12
CASH AND MARKETABLE SECURITIES MANAGEMENT
INTRODUCTION
Managing cash is becoming even more sophisticated in the global and electronic age of the 21st
century as finance managers try to squeeze the last peso of profit out using various cash
management strategies. Despite whatever lifelong teachings about the virtues of having cash, the
corporate financial manager actively seeks to keep this nonearning asset to a minimum.
Minimizing cash balances as well as having accurate knowledge of when cash moves into and
out of the company can improve overall corporate profitability. However, a business firm would
not want to get caught without cash when it is needed. Cash management involves control over
the receipts and payments of cash so as to minimize nonearning cash balances.
OBJECTIVE OF CASH MANAGEMENT
The basic objective in cash management is to keep the investment in cash as low as possible
while still keeping the firm operating efficiently and effectively.
A financial officer can use the following strategies in monitoring cash balances:
1. Accelerate cash inflows by optimizing mechanisms for collecting cash
2. Monitor the cash disbursement needs or payments schedule
3. Minimize the amount of idle cash or funds committed to transactions and precautionary
balances; and
4. Avoid; misappropriation and handling losses in the normal course of business
To achieve the above objectives, proper planning of cash flows is needed. Effective cash
management generally encompasses proper management of cash which entails among others
the following:
a. Improving forecasts of cash flows
b. Using floats
c. Synchronizing cash inflows and outflows
d. Accelerating collections
e. Controlling disbursements
f. Obtaining additional funds when and where they are needed
REASONS FOR HOLDING CASH BALANCES
A business enterprise may keep part of its capital tied up in cash for several reasons. These are:
1. Transaction Facilitation. This involves the use of cash to pay for planned business
expenditures such as supplies, payrolls, taxes, suppliers' bills, and interest on debts, cash
dividends and acquisitions of long-term fixed assets.

2. Precautionary Motive. Although the firm expects cash to come in from day-to-day
operations and other financing activities, the inflows and outflows are not usually perfectly
synchronized. It will need to keep enough cash for emergency purposes. Precautionary
cash balances are more likely to be important in seasonal or cyclical industries where cash
inflows are more uncertain. Firms with precautionary needs usually rely on unused lines
of bank credit.
 3. Compliance with Creditors' Covenant. Another major reason for holding cash is to be
able to comply the requirement of lending institutions and other creditors of keeping a
certain percentage of borrowed funds in their bank accounts (e.g., compensating balance).

4. Investment Opportunities. Having excess cash may allow the firm to take advantage of
investment opportunities that would otherwise be impossible to transact. Example is when
a block of raw materials is offered at discounted prices if purchased on cash basis.

To determine how much cash to keep on hand, firms must know the trade-off between the
opportunity costs associated with holding too much cash against the shortage costs of not having
enough ash.
DETERMINING THE TARGET CASH BALANCE
The target cash balance may be derived with the use of the following approaches, namely:
1. Cash Budget
2. Cash Break-even Chart
3. Optimal Cash Balance using the
a) Baumol Model
b) Miller-Orr Model
CASH BUDGET
The cash budget is the tool used to present the expected cash inflows and cash outflows.
CASH BREAK-EVEN CHART (Figure 12-1)
This chart shows the relationship between the company's cash needs and cash sources.
It indicates the minimum amount of cash that should be maintained to enable the company to
meet its obligations. To illustrate, the following data are available for XYZ Company.
XYZ Company manufactures plastic which it sells to other industrial users. The monthly
production capacity of the company is 1,200,000 kilos. Selling price is P2 per kilo.
Its cash requirements have been determined as follows:
a) Fixed monthly payments amounting to 250,000; while
b) Variable cash payments are 50% of sales.
Required:
1. Determine the Cash Break-even point (mathematical approach).
2. Prepare a Cash Break-even Chart to project the relationship between the company's cash
needs and cash sources.
Solution:
OPTIMAL CASH BALANCE
The Baumol Model
In most medium or large-sized corporations, liquidity management has assumed a greater
role over the past decade. Since cash v is needed for both transactions and precautionary needs
in all companies, it must be available in some form, (cash, marketable securities, borrowing
capacity) all of the time. The liquidity managers must utilize some formal models or techniques to
maintain the optimal amount at each moment in time because too much liquidity brings down the
rate of return on total assets employed and too little liquidity jeopardizes the very existence of the
firm itself. In managing the level of cash (currency plus demand deposits) for transaction purposes
versus near cash (marketable securities), the following costs must be considered:
Fixed and variable brokerage fees, and
Opportunity costs such as interest foregone by holding cash instead of near cash.
One of the models that can be used to help determine the optimal cash balance is the “Baumol
model”. This model balances the opportunity cost of holding cash against the transactions costs
associated with replenishing the cash account by selling off marketable securities or by
borrowing.
The optimal cash balance can be found by using the following variables and equations:
1. The total costs of cash balances consist of a holding (or opportunity) cost plus a
transaction cost:

Where:

C = amount of cash raise by selling marketable securities or by borrowing.

C/2 = average cash balance
C* = optimal amount of cash to be raise by selling marketable securities or by borrowing
C*/2 = optimal average cash balance
F = fixed costs of making a securities trade or of obtaining a loan
total amount of net new cash needed for transactions during the period (usually a
T = year)
k = opportunity cost of holding cash, net equal to the rate of return foregone on
marketable securities or the cost of borrowing to hold cash

2. The minimum costs of cash balances are achieved when C is set equal to C*, the optimal
cash transfer or optimal cash replenishment level. The formula to find C* is as follows:
Figure 12-2 shows the graphical approach in determining the Target cash balance.

Illustrative Case I. Determinations of Optimal Average cash Balance for Baumol Model
To illustrate, consider a business with total payments of P10 million for one year, cost per
transaction of P100, and the interest rate on marketable securities is 8 percent. The optimal
cash balance is calculated as follows:

The firm may also want to hold a safety stock of cash to reduce the probability of a cash
shortage to some specified level. The Baumol model is simple in many respects. Other models
have been developed to deal both with uncertainty in the cash flows and with trends. All of these
models, including the Baumol models, can provide a useful starting point for establishing a target
cash balance, but all of them have limitations and must be applied with judgment.
The Miller-Orr Model
The Miller-Orr model takes a different approach to calculating the optimal cash management
strategy. It assumes that the distribution of daily net cash flows is normally distributed and allows
for both cash inflows and outflows. This model bases its computations where:

L = the lower control limit

F = the trading cost for marketable securities per transaction
σ = the standard deviation in net daily cash flows
iday = the daily interest rate on marketable securities
Z* = optimal cash return point
H* = upper control limit for cash balances

To compute for Z*, the following formula is applied:

To compute for H*, the following formula is used:

Note that the firm determines L and the firm can set to a non-zero number to recognize
the use of safety stock. The optimal cash return point Z* is comparable to the replenishment level
C* in Baumol's model but with one key difference.
Since Baumol's model only allowed for cash disbursement, C* was always “replenished
to” from a level of zero.
In the Miller-Orr model, Z* Will be the replenishment level to which cash is replenished
when the cash level hits L, but it will also be the return level that cash is brought back down to
when cash hits Il*.
Illustrative Case II. Calculation of Optimal Return Point and Upper Limit for Miller-Orr Model
Suppose that ABC Inco, would like to maintain its cash account at a minimum level of P
100,000, but expects the standard deviation in net daily cash flows to be P5,000; the effective
annual rate on marketable securities will be 8 percent per year, and the trading cost per sale or
purchase of marketable securities will be P200 per transaction. What will be ABC"s optimal cash
return point and upper limit?
Solution:
The daily interest rate on marketable securities will equal to:
 As shown in the above computation, the firm will reduce cash to P 126,101.72 by buying
marketable securities when the cash balance gets up to PI 78,305.16, and it will increase cash to
P126,101.72 by selling marketable securities when the cash balance gets down to P 100,000.
OTHER FACTORS INFLUENCING THE TARGET CASH BALANCE
1. Option to incur short-term borrowing to meet unexpected demands for cash. If the
probability of an unexpected demand for cash causing the firm to borrow in the short-term is low
enough, or if the amount of interest to be earned by investing in longer-term securities is higher
than that to be earned on marketable securities, then it might be worth it for the firm to risk
occasionally paying a relatively high interest rate on short-term borrowing.
2. Transaction Costs and Time Element. Transaction costs as well as time associated with
trading securities have fallen so dramatically low that many business firms decide to sell
marketable securities as needed in order to meet any unforeseen demand for cash during the
day.
3. Many firms must keep certain average minimum balances-in their deposit accounts as part of
borrowing agreements with their bank. Some firms occasionally meet unforeseen demand for
cash that causes their deposit account to temporarily fall below the minimum compensating
balance. To offset this, they keep a corresponding amount of excess cash in the account in a later
period. Thus, enabling them to cover up the earlier deficiency and meeting the required average
minimum balance.
CASH MANAGEMENT TECHNIQUES
Although cash management activities are performed jointly by the firm and its depository bank,
the financial manager is primarily responsible for the effectiveness of the cash management
program.
A major business enterprise may have hundreds or even thousands of bank accounts and since
it is impractical to think that inflows and outflows will balance in each account, the finance
department should be able to develop and implement a system where funds can be transferred
from where they currently are, to where they are needed, to arrange loans, to cover net cash
shortage and to invest cash surpluses without delay.
Effective cash management encompasses the proper management of cash inflows and outflows,
which involve:
1. Synchronizing cash flows
2. Using floats
3. Accelerating cash collections
4. Getting available funds to where they are needed
5. Controlling disbursements
SYNCHRONIZING CASH FLOWS
Synchronized cash flows is a situation in which inflows coincide with outflows thereby
permitting a firm to hold low transactions balances. A thorough review of the cash flow
analysis, cash conversion cycle and cash budget discussed in the previous chapters
would be most helpful.
By improving the forecasts of cash receipts and disbursements and arranging things so that cash
receipts coincide or occur at an earlier time than the timing of required cash outflows, firms can
reduce their cash balance to meet transactional requirements to a minimum. If the firm is able to
reduce its cash balance, bank loans will be reduced together with the corresponding interest
expense, thus boosting profits.
USING FLOATS
Float is defined as the difference between the balance shown in a firm's books and the
balance on the banks record. It arises from the delays in mailing, processing and clearing checks
through the banking system.
Once a check is received and a deposit is made, the deposited funds are not available for
use until the check has cleared the banking system (about 3 to 6 days) and credited to the
corporate bank account. This works both for checks written to pay suppliers as well as checks
deposited from customers. This means float can be managed to some extent through a
combination of disbursement and collection strategies.
Disbursement float represents the value of the checks the firm has written but which are
still being processed and thus have not been deducted from the firm's account balance by the
bank. For example, suppose a firm writes on the average checks amounting to P50,000 each
day, and it takes 5 days for these checks to clear and to be deducted from the firm's bank account.
This will cause the firm's own checkbook to show a balance of P250,000 smaller than the balance
on the bank's records.
Collections float represents the amount of checks that have been received but which have not
yet been credited to the firm's account by the bank.
Suppose that the firm also receives checks in the amount of P50,000 but it loses four days while
they are being deposited and cleared. This will result in P200,000 of collections float.
In total, the firm's net float, the difference between P250,000 positive disbursement float and the
P200,000 negative collection float, will be P50,000. If the net float is positive, that is, disbursement
float is more than collection float, then the available bank balance exceeds the book balance. A
firm with a positive net float can use it to its advantage and maintain a smaller cash balance than
it would have in the absence of the float.
But the firm must be able to forecast its disbursements and collections accurately in order to make
much heavy use of float. Basically, the size of a firm's net float is a function of its ability to speed
up collections on checks received and to slow down collections on checks written. Efficient firms
go to great lengths to speed up the processing of incoming checks thus putting the funds to work
faster and they try to stretch their own payments out as long as possible.
ACCELERATING CASH COLLECTIONS
The finance manager should take steps for speedy recovery from debtors and for this purpose,
proper internal control should be installed in the firm. Once the credit sales have been effected,
there should be a built-in mechanism for timely recovery from the debtors such as:
1. Prompt billing and periodic statements prepared to show the outstanding bills.

2. Incentives such as trade and cash discounts offered to the customers for early/prompt
payments. These should be well communicated to them.

3. Prompt deposit. Once the checks/drafts are received from customers, no delay should
occur in depositing these receipts with the bank.

4. Direct deposit to firm's bank account. Customers may also be advised to deposit their
checks or cash directly into the bank account of the firm and furnish details to the firm.

5. Electronic depository transfer or payment by wire. With the developments taking place
in the computer technology, the present booking system is also being switched over to the
computer network of banks to offer efficient banking services and cash management
services to their customers. The network will be linked to the different branches, banks
and the transfer of funds will take place very fast that will result to substantial reduction of
float.

6. Maintenance of regional collection office.

The above techniques can minimize the time lag between the time the customers send the checks
to the firm and the time when the firm can make use of the funds. This system of cash collection
will accelerate the cash inflows of the firm.
SLOWING DISBURSEMENTS
Any action on the part of the finance officer which slows the disbursement of funds lessens
the use for cash balance. This can be done by:
1. Centralized processing of payables. This permits the finance manager to evaluate the
payments coming due for the entire firm and to schedule the availability of funds to meet
these needs on a company-wide basis. It also results to more efficient monitoring of
payables and float balances. Care however should be taken so as not to create ill will
among suppliers of goods and services or raise the company's cost if bills are not paid on
time.
2. Zero balance accounts (ZBA). These are special disbursement accounts having a zero
peso balance on which checks are written. As checks are presented to a ZBA for payment,
funds are automatically transferred from the master account.
 3. Delaying payment. If one is not going to take advantage of any Offered trade discount
for early payment, pay on the last day of the credit period.
4. “Play the float”. This involves taking advantage of the time it takes for the company's
check to clear the banking system.
5. Frequent payroll. Instead of paying the workers weekly, they may just be paid semi-
monthly.
REDUCING THE NEED FOR PRECAUTIONARY BALANCE
Since the transaction and precautionary motives are the important determinants of the
cash requirement, factors influencing their combined level in the firm must be analyzed.
There are techniques that are available for reducing the need for precautionary balances. These
include:
1. More accurate cash budgeting. Most critical is the accuracy of the cash budget or
forecast. The closer the fit between cash inflows and outflows, the more certain the
forecasts the less need for precautionary balances.
2. Lines of credit. This is a pre-arranged loan where the company can withdraw anytime
within the period agreed upon.
3. Temporary investments. Investments in highly liquid securities may be maintained
instead of holding idle precautionary cash balances.
Illustrative Case Ill. Acceleration of Cash Receipts
Abubot Fashion Designs is evaluating a special processing system as a cash receipts
acceleration device. In a typical year, this firm receives remittances totaling P 7 lilillion by check.
The firm will record and process 4,000 checks over the same time period. First National Bank has
informed the management of Abubot Fashion Designs that it will process checks and associated
documents through the special processing system for a unit cost of PO.25 per check. Abubot
Fashion Designs' financial manager has projected that cash freed by adoption of the system can
be invested in a portfolio of near-cash assets that will yield an annual before-tax return of 8
percent. Abubot Fashion Designs' financial analysts use a 365-day year in their procedures.
Required:
a. What reduction in check collection is necessary for Abubot Fashion Designs to be neither
better nor worse off for Ivaving adopted the proposed system?
b. How would your solution to (a) be affected if Abubot Fashion Designs could invest the
freed balances only at an expected annual return of 5.5 percent?
c. What is the logical explanation for the differences in your answers to (a) and (b) above?
Solution:
a. Initially, it is necessary to calculate Abubot Fashion Designs’ average remittance check
amount and the daily opportunity cost of carrying cash. The average check size is

The daily opportunity cost of carrying cash is

Next, the days saved in the collection process can be evaluated according to the general format
of

Abubot Fashion Designs therefore will experience a financial gain if it implements the
special processing system and by doing so will speed up its collection by more than 0.6517 days.
b. Here the daily opportunity cost of carrying cash is

For Abubot Fashion Designs to break-even, should it choose to install the special processing
system, cash collections must be accelerated by 0.9480 days, as follows:

c. The break-even cash-acceleration period of 0.9480 days is greater than the 0.6517 days
found in (a). This is due to the lower yield available on near-cash assets of 5.5 percent
annually, versus 8.0 percent. Since the alternative rate of return on the freed-up balances
is lower in the second situation, more funds must be invested to cover the cost of operating
the special processing system. The greater cash-acceleration period generates this
increased level of required funds.
Illustrative Case IV. Valuing Float Reduction
Next year, Miguel Motors expects its gross revenues from sales to be P80 million. The
firm's treasurer has projected that its marketable securities portfolio will earn 6.50 percent over
the coming budget year. What is the value of one day's float reduction to the company? Miguel
Motors uses a 365-day year in all of its financial analysis procedures.
Solution:
The company will earn P14,247 per year if it is able to invest its one day sales at 6.5%.
MARKETABLE SECURITIES MANAGEMENT
OBJECTIVE OF MARKETABLE SECURITIES MANAGEMENT
Realistically, management of cash and marketable securities cannot be separated.
Management of one implies management of the other.
The firm may hold excess funds in anticipation of a cash outlay. When funds are being
held for other than immediate transaction purposes, they should be converted from cash into
interest-earning marketable securities. Marketable securities which should be of highest
investment grade usually consist of treasury bills, commercial paper, certification of time deposits
from commercial banks, and money market notes.
REASONS FOR HOLDING MARKETABLE SECURITIES
There are several basic reasons for holding marketable securities such as
1. They serve as a substitute for cash balances. Many firms prefer to hold marketable
securities as a substitute for transaction balances, precautionary balances, for speculative
balances or for all three. In most cases, however, the securities are held primarily for
precautionary purposes or as a guard against a possible shortage of bank credit.

2. They are held as a temporary investment where a return is earned while funds are
temporarily idle.

3. They are built up to meet known financial requirements such as tax payments,
maturing bond issue and so on.
FACTORS INFLUENCING THE CHOICE OF MARKETABLE SECURITIES
Among the factors that will influence the choice of marketable securities are:
1. Risks such as
a. Default risk. The risk that the issuer of the security cannot pay the principal or interest at
due dates. The funds invested in short-term marketable instruments should be safe and
secure as regards repayment of principal and interest as and when it matures since the
return on short-term investments is offered less than long-term investments, the
acceptable risk level is required to be lesser commensurate with lower return. Some of the
investments like commercial paper are offered with credit ratings. The government
treasury bills, banker's acceptance and certificate of deposits carry minimum default risk.

b. Interest rate risk. The risk of declines in market values of the security due to rising interest
rates.

c. Inflation risk. The risk that inflation will reduce the "real" Value of the investment. In
periods of rising prices, inflation risk is lower on investments (e.g., common stock, real
estate) whose returns tend to rise with inflation than on investment whose returns are
fixed.
 d. Marketability (liquidity) risk. This refers to the risk that securities cannot be sold at close
to the quoted market price and is closely associated with liquidity risk. The liquidity is the
basic objective of investment in these instruments. It should offer the facility of quick sale
in the market as and when need arises for cash, with low transaction cost, without loss of
time and no erosion of amounts invested with fall in price of investments.

e. Event risk. The probability that some event (such as merger, recapitalization or a leverage
buyout) will occur and suddenly will increase a firm's default risk. Bonds issued by
regulated companies as banks or electric utilities generally have lesser event risk that
bonds issued by industrial and service companies. Treasury securities usually do not carry
any risk, barring national disaster. Also, long-term securities are affected more by
unfavorable events than are short-term securities.
2. Maturity. Marketable securities held should mature or can be sold at the same time cash is
required. Firms generally invest in marketable securities that have relatively short maturities. The
maturity periods of different investments should match with the payment obligations like dividend
payments, tax payments, and capital expenditure and interest payments on debt instruments.
Many firms restrict their temporary investments to those maturing in less than 90 days. Short-term
investments relatively carry lesser return than long-term investments, since the default risk and
interest rate risk are minimized with short-term instruments.
3. Yield or returns on securities. Generally, the higher a security's risk, the higher its required
return. Corporate investors, like other investors must make a trade-off between risk and return
when choosing marketable securities. Because these securities are generally held either for a
specific need or for use in emergencies, the portfolio should consist of highly liquid short-term
securities issued by the government or very strong corporations. Treasurers should not sacrifice
safety for higher rates of return.
TYPES OF MARKETABLE SECURITIES
1. Money Market Instruments. These are the most suitable investment for idle funds. The
money market is the market for short-term debt instruments. Money market instruments
are high-grade securities characterized by a high-degree of safety of principal and maturity
of one year or less. The two major types of money market instruments are
• Discount Paper. A money market instrument which sells for less than its par or face
value. The difference between the security’s purchase price and par value represents
the investor's income. At maturity, the investor receives the face value or par value of
the instrument.
• Interest-bearing securities. These are instruments which pay interest based on the
par value or face value of the security and the period (days/months) of investment.\

2. Treasury Bills. These are short-term government securities with a maturity of one year
or less, issued at a discount from face value often called risk-free security. These
securities are tax exempt with high degree of marketability.

3. Other Short-term Commercial Papers Issued by Finance Companies, Banks and

Other Corporations. These are typically unsecured and maturities range from a few days
to 270 days Commercial paper is usually discounted but it can be interest bearing.
4. Negotiable Certificates of Deposit. Certificate of deposits are short-term loans to
commercial banks with maturities ranging from a few weeks to several years. Certificate
of deposits contain some default and interest rate risks but can easily be sold prior to
maturity.

5. Repurchase Agreements (REPOS). These are sale of government securities (e.g.,

treasury bills) or other securities by a bank or securities dealer with an agreement to
repurchase. REPOS usually involve a very short-term overnight to a few days. These are
attractive to corporations because of the flexibility or maturities. These agreements have
little risk because of their short maturity and the commitment of the borrower to repurchase
the securities as a fixed or higher specified price.

6. Banker's Acceptance. A time draft drawn on, and accepted by a bank usually used as a
source of financing in international trade. Banker's acceptances are sold as discount paper
with maturities ranging from a few weeks to 9 months. The yields on acceptance are
competitive because of low default risk owing to as many as three parties who may be
liable for payment at maturity.

7. Money Market Mutual Fund. This is an open-ended mutual fund that invests in money-
market instruments. Money market mutual funds (MMMF) sell shares to investors and
then accumulate the funds to acquire money market instruments. These funds allow small
investors to participate directly in high-yielding securities that are often denominated in
large amounts. The MMMF shares are highly liquid because they can be sold back to the
fund at any time. Returns or yields depend on the money market instruments held in the
portfolio of the fund.
Activity:
Write T if the statement is true and F if the statement is false.

_____1. The objective of a finance manager in a large-scale firm is to minimize cash balances
while keeping the firm operating efficiently and effectively.
_____2. Creditors does not require a firm to maintain a constant cash balance.
_____3. Marketable securities cannot substitute as cash balances.
_____4. There are no risks involved in using marketable securities.
_____5. A finance manager should maintain an exact amount of cash in a firm.

Reinforcement:
Choose the letter of the correct answer:

1. Statement 1: One way of monitoring cash balances is to minimize the amount of idle
cash or funds committed to transactions and precautionary balances.
Statement 2: Cash is considered as a nonearning asset.
a. Statement 1 is True, Statement 2 is False
b. Statement 1 is False, Statement 2 is True
c. Both statements are True
d. Both statements are False
2. The following incorporates proper management of cash, except for one:
a. Using floats
b. Controlling disbursements
c. Decelerating collections
d. Improving forecasts for cash flows
3. The following are reasons of a finance manager in maintaining cash balances, except for
one:
a. Precautionary Motive
b. Compliance with Creditor’s Covenant
c. Investment Opportunities
d. Company Raffle to Directors
4. Statement 1: A company does not need to keep excess cash for emergency purposes.
Statement 2: A company should hold cash when required by lending institutions.
a. Statement 1 is True, Statement 2 is False
b. Statement 1 is False, Statement 2 is True
c. Both statements are True
d. Both statements are False
5. Statement 1: A company can opt for cash payment when acquiring long-term assets
when allowed by the seller.
Statement 2: A company can obtain materials at a lower price when paying on a cash
basis.
a. Statement 1 is True, Statement 2 is False
b. Statement 1 is False, Statement 2 is True
c. Both statements are True
d. Both statements are False
6. What is a cash break-even point of a firm when it has a monthly fixed payment of
P600,000 variable sales of 25%, and fully used its full production capacity of 1,000,000
units at P1 per unit?
a. P666,666.67
b. P600,000.00
c. P800,000.00
 d. P1,000,000.00
7. Statement 1: The Miller-Orr Model balances the opportunity cost of holding cash against
the transaction sots associated with replenishing the cash account by selling off
marketable securities or by borrowing.
Statement 2: The Baumol Model assumes the distribution of daily net cash flows.
a. Statement 1 is True, Statement 2 is False
b. Statement 1 is False, Statement 2 is True
c. Both statements are True
d. Both statements are False
8. Statement 1: Disbursement float represents the value of checks the firm as written but
still being processed and thus have not been deducted from the firm’s account balance
by the bank.
Statement 2: The usual clearing time for banks in the Philippines is from 7 to 14 days.
a. Statement 1 is True, Statement 2 is False
b. Statement 1 is False, Statement 2 is True
c. Both statements are True
d. Both statements are False
9. The following are ways to accelerate cash collections, except for one:
a. Prompt withdrawal
b. Prompt deposit
c. Direct deposit to firm’s bank account
d. Prompt billing statements
10. The following are ways to slow disbursements, except for one:
a. Zero balance accounts
b. Centralized processing of trades
c. “Play the float”
d. Delaying payment