Chap007
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Chap007

Course Number: FINANCE 101, Spring 2012

College/University: Herzing

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Chapter 07 - Current Asset Management Chapter 07 Current Asset Management True / False Questions 1. In the management of cash and marketable securities, the primary concern is profitability. True False 2. For modern corporations, the more cash they have, the better off they are. True False 3. Minimizing cash balances can improve overall corporate profitability. True False 4. For most firms, the primary motive...

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07 Chapter - Current Asset Management Chapter 07 Current Asset Management True / False Questions 1. In the management of cash and marketable securities, the primary concern is profitability. True False 2. For modern corporations, the more cash they have, the better off they are. True False 3. Minimizing cash balances can improve overall corporate profitability. True False 4. For most firms, the primary motive for holding cash is the transaction motive. True False 5. Cash balances are usually determined by the amount of cash flowing through the firm on a yearly basis. True False 6. A goal of cash management is to insure that the inflows and outflows of cash are synchronized. True False 7. Sales, receivables, and inventory form the basis of cash flow. True False 7-1 Chapter 07 - Current Asset Management 8. The cash generating process for a firm is continuous, even though cash flow can be sporadic. True False 9. Computerized cash management and electronic funds transfer allow firms to carry smaller cash balances. True False 10. Float is the difference between the cash balance on the corporate books and the amount credited to the corporation by the bank. True False 11. "Float" is the name given for a short-term loan between suppliers and buyers. True False 12. Checks can be cleared only through the Federal Reserve System. True False 13. Unfortunately, float is too complicated to be effectively managed through any combination of disbursement and collection strategies. True False 14. It is possible for companies to operate with negative cash balances on their books. True False 15. A lock-box system is a method of extending disbursements. True False 7-2 Chapter 07 - Current Asset Management 16. A lock-box is used to safeguard the corporation's marketable securities. True False 17. A lock-box is used by the selling corporation to speed up the check collection and checkclearing process. True False 18. "Extended disbursement float" has to do with the length of time a corporation takes to collect bills. True False 19. Cost-benefit is not a consideration in development of a cash management system; only safety and liquidity. True False 20. Electronic funds transfer will likely increase the use of float. True False 21. The use of automated clearinghouses (ACHs) saves money for consumers, corporations and financial institutions by reducing transactions costs. True False 22. It is less expensive to clear a check through the Federal Reserve System than to process an automatic fund transfer through an automated clearinghouse. True False 7-3 Chapter 07 - Current Asset Management 23. The "SWIFT" transfer system was developed to aid regional bank fund transfers within the United States. True False 24. SWIFT has combated the growing issue of electronic fraud with smart card technology that no longer requires users to manually log in to the network and thus eliminates any paper trail. True False 25. Every message routed through SWIFT is encrypted and every money transaction is authorized by another code for security purposes. True False 26. Multinational firms find it difficult to shift funds from one country to another. True False 27. In general, cash management at the international level employs the same techniques as domestic cash management. True False 28. Eurodollars are U.S. dollars held on deposit by foreign banks. True False 29. Stretching out the maturity of marketable securities can rarely result in a loss. True False 7-4 Chapter 07 - Current Asset Management 30. The investment of excess short-term funds is usually diversified between short- and longterm marketable securities. True False 31. Cash management becomes more important as the level of short-term interest rates rise. True False 32. Treasury bills are unique in that they trade on a premium basis. True False 33. Because they generally run a surplus budget, government agencies are able to issue securities with slightly lower yields than direct Treasury issues. True False 34. Certificates of deposits purchased in small denominations of $1,000 at the savings and loan are readily marketable. True False 35. Banker's acceptances rank behind treasury bills and commercial paper as a vehicle for short-term investments. True False 36. Small-denomination certificates of deposit are usually more liquid than largedenomination CDs. True False 7-5 Chapter 07 - Current Asset Management 37. The rate on Eurodollar certificates of deposit is usually lower than domestic certificates of deposit. True False 38. Bankers' acceptances are short-term securities that arise from foreign trade. True False 39. The 5 C's of credit include character, capital, capacity, conditions, and collateral. True False 40. One way businesses try to overcome the risk associated with new customers is to access a credit scoring report that will predict the probability of a customer causing credit problems in the future. True False 41. Because of changing economic conditions, it is difficult for companies such as Dun & Bradstreet to devise models predicting payment problems and probability of bankruptcy 12 months in the future. True False 42. Finding out who is ultimately responsible for a bad debt can be helped by Dun & Bradstreet's D-U-N-S (Data Universal Numbers System) that tracks relationships and ownership of businesses within Dun & Bradstreet's information base. True False 43. If a firm averages $2,000 in daily credit sales and offers 60-day terms, the average accounts receivable balance will be $120,000. True False 7-6 Chapter 07 - Current Asset Management 44. Return on investment is the major decision criteria in credit decisions. True False 45. Inventories are usually the most liquid, but lowest-yielding, current asset of a firm. True False 46. Seasonal production allows for maximum efficiency in machinery and manpower use. True False 47. The economic order quantity helps a firm determine the most efficient order size to place. True False 48. The two basic costs associated with inventory are production cost and ordering cost. True False 49. A reduction in carrying costs would increase the economic order quantity. True False 50. Lower ordering costs would tend to increase a firm's economic order quantity. True False 51. If we assume that inventory is used up at a constant rate and safety stock is zero, the average inventory will be 1/2 the order size. True False 7-7 Chapter 07 - Current Asset Management 52. A stock out occurs when a firm runs out of inventory and is unable to sell or deliver the product requested. True False 53. Maintaining a safety stock will guard against an EOQ from occurring. True False 54. Just-in-time inventory systems can leave manufacturers empty handed if suppliers can't keep up with product growth rates. True False 55. Just-in-time inventory management pushes the cost of holding inventory from the manufacturer to the manufacturer's suppliers. True False 56. The use of "float" has dramatically increased since the Check Clearing for the 21st Century Act was passed. True False 57. When considering offering a cash discount, a firm must weigh the benefits of freed up cash with the cost of the cash discount. True False 58. When a potential customer has a mediocre credit history, a firm should not consider allowing them to become a customer. True False 7-8 Chapter 07 - Current Asset Management 59. When selecting marketable securities, the company should always select securities with longer maturities if they offer higher yields. True False 60. If a company would like to reduce their average collection period, they can either reduce offer a cash discount or increase their net terms. True False 61. Level production allows a company to reduce inventory and maximize efficiency as compared to seasonal production. True False Multiple Choice Questions 62. In managing cash and marketable securities, what should be the manager's primary concern? A. Maximization of profit B. Maximization of liquid assets C. Acceptable return on investment D. Liquidity and safety 63. One of the first considerations in cash management is A. to have as much cash as possible on hand. B. synchronization of cash inflows and cash outflows. C. profitability. D. to put any excess cash into accounts receivable. 7-9 Chapter 07 - Current Asset Management 64. Which of the following is not a valid reason for holding cash? A. To meet transaction requirements B. To earn the highest return possible C. To satisfy emergency needs for funds D. To provide a compensating balance for a bank 65. Cash flow does not rely on which of the following? A. The payment patterns of customers B. The monetary policy of the Federal Reserve C. The speed at which suppliers and creditors process checks D. The efficiency of the banking system 66. The difference between the amount of cash on the firm's books and the amount credited to it by the bank is A. an overdraft. B. interest revenue. C. extended disbursement. D. float. 67. "Float" takes place because A. a firm is early in paying its bills. B. the level of cash on the firm's books is equal to the level of cash in the bank. C. a lag exists between writing a check and clearing it through the banking system. D. a customer writes "hot" checks. 68. Which of the following is not a method of speeding up collections? A. Lock-box system. B. Regional collection centers. C. Extended disbursement float. D. All of these are methods for speeding up collections. 7-10 Chapter 07 - Current Asset Management 69. The system whereby funds are moved between computer terminals without use of checks is A. electronic funds transfer. B. float. C. a lock-box system. D. magnetic character recognition. 70. How would electronic funds transfer affect the use of "float"? A. Increase its use somewhat B. Decrease its use somewhat C. Virtually eliminate its use D. Have no effect on its use 71. One of the most popular uses of automated clearing houses is the A. direct deposit of checks. B. transfer of funds between U.S. banks and foreign banks. C. transfer of funds between government agencies. D. collection of accounts receivable from customers. 72. Automated clearinghouses are commonly used by consumers to make direct payments for A. insurance premiums. B. mortgage payments. C. utility bills. D. all of these. 73. One of the major cost savings for consumers using automated clearing houses is A. saving more than $1 billion in postage. B. saving time paying bills through check writing. C. security of having the payments and deposits directly deposited or deducted from your account. D. All of these are true. 7-11 Chapter 07 - Current Asset Management 74. Which of the following is not a true statement about automated clearinghouses (ACHs)? A. Automated clearinghouses are responsible for the check clearing process between commercial banks and the Federal Reserve Banks. B. Commercial transactions using automated clearinghouses have been growing at close to 17% per year since 1989. C. Debits drawn on automated clearinghouses cost less than half that of checks processed through financial institutions. D. The ability to reduce transactions costs and create convenience is driving the growth of automated clearinghouses. 75. Some of the services provided around the clock by SWIFT are A. international payments between banks. B. foreign exchange. C. trade finance transactions. D. all of these. 76. International cash management is more complex than domestic based cash management because of A. difficult liquidity management. B. different banking systems. C. currency risk fluctuations. D. all of these. 77. SWIFT's implementation of the "smart card" is expected to A. decrease the likelihood of electronic fraud. B. remove the need for secret information to be sent through mail. C. guarantee the identity of the sender. D. all of these. 7-12 Chapter 07 - Current Asset Management 78. International cash management systems are more complex than domestic cash management systems because A. many developing countries still use a cash payments system. B. some countries rely on electronic funds transfer more than the U.S. C. liquidity management, involving short-term cash balances and deficits, has to be managed across international boundaries and time zones and is subject to the risks of currency fluctuations. D. none of these. 79. International cash management systems are more complex than domestic cash management systems because of A. the risk involved in currency fluctuations. B. the changing interest rates across countries. C. varying time zones across countries. D. all of these. 80. The corporate sweep account is an account A. that allows companies to maintain zero balances in their checking accounts, with their excess cash moved into an interest earning account. B. that allows companies to write checks on zero balance accounts with the understanding that when the check is presented for payment, money will be moved from the interest bearing account to the appropriate payment account. C. that allows companies to move their lock box collections into an interest bearing checking account. D. a and b are correct. 81. A multinational company may prefer to hold sizeable cash balances in one currency rather than another because A. of high interest rates existing in one country. B. one country's currency may be strong relative to the dollar. C. both a and b D. None of these 7-13 Chapter 07 - Current Asset Management 82. The problem in stretching out the maturity of marketable securities is that A. you are legally locked in until the maturity date. B. longer term securities are often not available. C. there is greater possibility of loss. D. interest rates are generally lower. 83. Which of the following is not a factor influencing the selection of a marketable security? A. Yield B. Maturity C. Float D. Safety 84. Probably the safest and most marketable instrument for short-term investment is A. commercial paper. B. large denomination certificates. C. Treasury notes. D. Treasury bills. 85. Which of the following securities trades on a discount basis? A. Treasury notes B. Treasury bills C. Commercial paper D. Certificates of deposit 86. A firm that wishes to minimize risk when investing idle cash would be least likely to buy A. commercial paper. B. long-term corporate bonds. C. negotiable certificates of deposit. D. Treasury bills of the U.S. government. 7-14 Chapter 07 - Current Asset Management 87. A banker's acceptance A. is a draft drawn on a bank and paid by that bank when presented to it. B. may be accepted by the bank for future payment. C. is traded in a relatively liquid market until maturity. D. all of these. 88. Eurodollar certificate of deposits A. are not marketable investments. B. are used by banks to loan out funds to anyone seeking dollars. C. pay interest rates usually lower than the rates on U.S. treasury bills. D. are European currencies deposited into international U.S. branch banks. 89. In comparison to securities issued by the U.S. Treasury, securities issued by U.S. government agencies like the Federal Land Bank A. are significantly riskier than Treasury securities. B. are much less liquid than Treasury securities. C. yield slightly more than Treasury securities. D. usually require the payment of higher commissions when purchased than Treasury securities. 90. Treasury Inflation Protected Securities (TIPS) A. pay interest semiannually that equals a real rate of return specified by the U.S. Treasury, plus principal at maturity that is adjusted annually to reflect inflation's impact on purchasing power. B. are a useful short-term investment if interest rates should rise quickly because of rapid increases in inflation. C. increase the coupon rate of the security to adjust for changes in inflation. D. a and b are true 7-15 Chapter 07 - Current Asset Management 91. Which of the following securities represents an unsecured promissory note issued by a corporation? A. Certificates of deposit B. Savings accounts C. Commercial paper D. Money market fund 92. Eurodollars A. can only be redeemed at U.S. banks or their branches in European countries. B. are U.S. dollars which have been converted into several European currencies. C. may be borrowed by anyone who wishes to hold dollars. D. can only be redeemed at U.S. banks or their branches in any foreign country. 93. Money market funds are A. accounts that allow small investors to participate in buying large-denomination securities. B. extremely risky but high-yielding accounts used by large corporations to finance operations. C. accounts that allow small investors to buy shares in companies that then buy shares of common stock. D. pools of bonds held by large utility companies. 94. Characteristics of a money market mutual fund include A. the purchase of shares by investors, the proceeds of which are reinvested into liquid shortterm securities. B. a required minimum balance of $2,500. C. the ability to be readily marketable. D. none of these. 95. Characteristics of a money market deposit account include A. a lower risk than money market funds. B. insured by federal agencies. C. generally a limit of three deposits or withdrawals per month. D. all of these 7-16 Chapter 07 - Current Asset Management 96. Which of the following are characteristics of money market investments? A. Money market funds are offered by banks. B. Money market funds are insured up to $100,000 by federal agencies. C. The minimum balance for money market deposit accounts is $5,000. D. None of these 97. Money market funds A. are modeled after money market deposit accounts. B. are insured up to $100,000. C. have a minimum balance of $2,500. D. earn competitive market rates of return. 98. The three primary policy variables to consider when extending credit include all of the following except A. credit standards. B. the level of inflation. C. the terms of trade. D. collection policy. 99. The most subjective and also significant segment of the 5 C's of credit for giving final approval is A. capacity. B. collateral. C. character. D. conditions. 100. Dun & Bradstreet is known for providing A. interest rate information to cash managers. B. credit scoring reports that rank a company's payment habits relative to its peer group. C. cash management systems to corporate treasurers. D. consumer credit reports to credit card companies. 7-17 Chapter 07 - Current Asset Management 101. When developing a credit scoring report, many variables would be considered. Which of the following best represents the major factors Dun & Bradstreet would examine? A. The age of the management team, the dollar amount of sales, net profits, and long-term debt. B. The age of the company, the number of employees, the level of current assets. C. The financial statements, satisfactory or slow payment experiences, negative public records (suits, liens, judgments, bankruptcies). D. The company's cash balances, return on equity, and its average tax rates. 102. Which of the following is not a valid quantitative measure for accounts receivable collection policies? A. Average collection period B. Aging of accounts receivables C. Ratio of debt to equity D. Ratio of bad debts to credit sales 103. Variables important to credit scoring models include A. age of company in years. B. negative public records. C. facility ownership. D. all of these. 104. Inventory is usually divided into three basic categories except A. projected sales. B. work in progress. C. finished goods. D. raw materials. 105. Companies that are mostly influenced by seasonal sales have to make a choice between A. level production and inventory buildup. B. seasonal production and an uneven workforce. C. a stable workforce and a fluctuating workforce. D. All of these. 7-18 Chapter 07 - Current Asset Management 106. The costs of carrying inventory do not include A. the interest on funds tied up in inventory. B. the cost of warehouse space. C. ordering costs. D. insurance and handling costs. 107. For a given firm, holding other factors constant, ordering costs per unit generally A. decline as average inventory increases. B. increase in proportion to increases in inventory. C. are considered fixed costs. D. are negotiated. 108. The economic order quantity A. determines the reorder point. B. provides the lowest inventory costs. C. determines the safety stock. D. all of these. 109. The economic order quantity A. assumes that inventory usage is seasonal. B. assumes that delivery times of each order are consistent. C. considers stock-outs D. all of these. 110. When using the economic order quantity model A. ordering costs increase as the level of inventory increases. B. carrying costs decrease as the level of inventory increases. C. costs are minimized when total carrying costs and total ordering costs are equal. D. none of these 7-19 Chapter 07 - Current Asset Management 111. Hedging A. is a way to protect your accounts receivable position. B. increases risk. C. is a legal agreement to buy or sell a financial futures contract. D. can be carried out with a futures contract. 112. The amount of safety stock that a firm carries depends upon A. the predictability of inventory usage. B. the time period necessary to fill inventory orders. C. the riskiness of the storage facility. D. a and b are correct 113. A Just-In-Time (JIT) inventory management program has all but which of the following requirements? A. Quality production B. Large safety stocks C. Close ties between suppliers, manufacturers, and customers D. Minimizing inventory levels 114. Cost savings from JIT inventory management include(s) A. reduced overhead expenses. B. lower inventory financing costs. C. greater productivity. D. all of these. 115. All of the following are benefits of just-in-time inventory ordering systems except A. reduces warehouse space. B. saves utility and manpower costs. C. reduces inventory costs. D. prevents stock outs. 7-20 Chapter 07 - Current Asset Management 116. If average daily remittances are $6 million, and "extended disbursement float" adds 2 days to the disbursement schedule, how much should the firm be willing to pay for a cash management system if the firm earns 7% on excess funds. A. $500,000 B. $1,500,000 C. $0 D. $840,000 117. Price Corp. is considering selling to a group of new customers and creating new annual sales of $90,000. 5% will be uncollectible. The collection cost on these accounts is 3% of new sales, the cost of producing and selling is 80% of sales and the firm is in the 30% tax bracket. What is the profit on new sales? A. $7,560 B. $9,660 C. $7,245 D. none of these. 118. Waldron Inc. is considering selling to a group of new customers that will bring in credit sales of $24,000 with a return on sales of 5%. The only new investment will be in accounts receivable. Waldron has a turnover ratio of 6 to 1 between sales and accounts receivable. What is the return on investment? A. 3% B. 25% C. 5% D. none of these 119. Modos Company has deposited $3,500 in checks received from customers. It has written $1,400 in checks to its suppliers. The initial bank and book balance was $600. If $1,600 of its customer's checks have cleared but only $600 of its own, calculate its float. A. $1,200 B. $1,100 C. $300 D. $700 7-21 Chapter 07 - Current Asset Management 120. Massa Machine Tool expects total sales of $60,000. The price per unit is $10. The firm estimates an ordering cost of $25 per order, with an inventory cost of $0.70 per unit. What is the optimum order size? A. 327 units B. 655 units C. 447 units D. 207 units 121. Assuming that we can earn a 10% return on accounts receivable, which of the following actions to finance an increase in our accounts receivable balance would be optimal? A. An increase in bank loans that would cost us 8%. B. A decrease in inventories which are earning a 16% return. C. A reduction in marketable securities which are earning a return of 14%. D. An increase in accounts payable that would cost our firm 15%. 122. If a company can implement cash management systems and save 3 days by reducing remittance time and 1 day by increasing disbursement time based on $2,000,000 in average daily remittances and $2,500,000 in average daily disbursements and their return on freed up funds is 10%, what is the max they should spend on the system? A. $2,000,000 B. $650,000 C. $850,000 D. $1,000,000 123. All of the following are methods of controlling receivables except: A. offer a cash discount B. reduce net terms C. use DBIS D. reduce cash sales 7-22 Chapter 07 - Current Asset Management 124. Level production offers all of the following benefits except: A. lower overtime usage B. maximum efficiency C. greater storage space D. higher use of capacity 125. We expect that we can receive annual incremental income after taxes of $25,000 which includes an adjustment for uncollectible accounts. What is the maximum commitment to A/R we should be willing to assume if our firm's minimum required after-tax return is 8%? A. $36,000 B. $312,500 C. $168,000 D. $180,000 126. All of the following are examples of carrying costs except: A. interest expense B. warehouse space C. shipping costs D. insurance premiums 127. The inventory decision model provides which type of information A. optimal total inventory B. optimal safety stock C. optimal order size D. optimal carrying cost per unit 128. Warren Enterprises expects 20,000 unit sales, has ordering costs of $20 per order, carrying costs of $1.00 per unit and desires to keep 100 units in safety stock. Assuming level production, what is their average inventory? A. 200-300 B. 301-400 C. 401-500 D. 501-600 7-23 Chapter 07 - Current Asset Management Matching Questions 129. Match the following with the items below: 1. Automated clearing house 2. bankers' acceptance 3. Dun & Bradstreet 4. certificates of deposit 5. lock-box 6. Eurodollars 7. compensating balance 8. Treasury notes 9. Treasury bills 10. commercial paper 11. float 12. cost-benefit analysis The difference between the corporation's recorded cash balance on its books and the amount credited to the corporation by the bank. Is offered by banks and savings and loans for the deposit of funds at a given interest rate over a specified time period. Intermediate term obligations of the federal government with maturities from one to seven years. A credit-rating agency that publishes information on over three million business establishments. Short-term obligations of the federal government with maturities up to one year. A procedure used to expedite cash flows to a business having accounts receivable. An unsecured promissory note issued by large corporations to investors. A study of the positive and negative results that can be derived from a given course of action. A short-term security that arises from foreign trade. U.S. dollars held on deposit by foreign banks and loaned out to anyone seeking dollars. Transfers information between one financial institution and another via computer tape. Banks typically require that this cash balance be held to indirectly pay for certain bank services. 7-24 ____ ____ ____ ____ ____ ____ ____ ____ ____ ____ ____ ____ Chapter 07 - Current Asset Management 130. Match the following with the items below: 1. credit terms 2. electronic funds transfer 3. conomic ordering quantity 4. average collection period 5. aging of accounts receivable 6. money market deposit account 7. safety stock 8. carrying cost 9. passbook savings account 10. Just In Time (JIT) 11. commercial paper 12. 5 C's of credit 13. money market fund 14. cash flow cycle Allows the firm to minimize the total ordering and carrying costs associated with inventory. A system in which funds are moved between banks and other participating corporations by use of the computer. An unsecured promissory note issued by large corporations to investors. Analyzing accounts based on the amount of time they have been on the books. These assets reduce the risk of losing business to competitors because of low inventory levels. The repayment provisions associated with a credit arrangement. The cost of holding an asset. The amount of time that a normal account receivable remains on our books. Because it pays the lowest interest rate at a bank, this is an unattractive investment for most investors. Due to federal deregulation, commercial banks, savings and loans, and credit unions now are allowed to offer these investment opportunities modeled from money market funds. The various factors that influence a company's ability to borrow money. A lean total production concept that produces quality products that minimize the level of inventory by maintaining close ties with suppliers and distributors. A process of generating cash which, although it remains continuous, is subjected to fluctuation in levels. Investing opportunity which allows small investors to place funds into short-term securities which they may not be able to buy directly because of the high funds required. 7-25 ____ ____ ____ ____ ____ ____ ____ ____ ____ ____ ____ ____ ____ ____ Chapter 07 - Current Asset Management Essay Questions 131. Mountain Home Systems, Inc. is a well-known and reputable supplier of integrated circuits to manufacturers of telecommunications devices. The firm is currently debating whether to expand its sales to car-telephone manufacturers. While the firm expects an extra $3 million in sales if it enters this market, it also knows that 15% of its sales will ultimately be uncollectible. In addition, collection costs will be 3% on all new sales and the firm's production and selling costs are 80% of sales. Mountain Home's tax rate is 30%. a) Calculate Mountain Home's additional net income from the new sales. b) If Mountain Home can turn its receivables over 4 times per year, what will its additional investment in accounts receivable be and what will the firm earn as an after-tax return on that investment? c) Mountain Home management requires that any new project earn a minimum of 10% return on investment. Should the firm enter the car-telephone manufacturer market? 132. Tanner Co. is a highly successful supplier of leather to manufacturers of leather goods. Tanner is considering expanding into the U.S. luxury auto seat market. It is estimated that although selling leather to U.S. auto manufacturers will bring additional annual sales of $1,000,000, a high 15% of those accounts will be uncollectible. The cost of conditioning and selling the leather is 70% of sales. Tanner's tax rate is 30%. a). Calculate Tanner's incremental net income on the new sales. b). Assume Tanner has a receivables turnover of 4. Calculate Tanner's incremental accounts receivable investment and after-tax return on that investment. c). Tanner's minimum required ROI is 15%. Should Tanner expand into the auto market?. 7-26 Chapter 07 - Current Asset Management 133. Novelty Gifts, Inc. is experiencing some inventory control problems. The manager, Wanda LaRue, currently orders 10,000 units four times each year to handle annual demand of 40,000 units. Each order costs $15 and each unit costs $1.50 to carry. Ms. LaRue maintains a safety stock of 200 units. a) What is Novelty Gifts' current total annual inventory cost? b) Calculate the economic ordering quantity (EOQ). c) What is average inventory under EOQ if Ms. LaRue maintains a safety stock of 200 units. d) Calculate total annual inventory cost under EOQ. How does this compare to her current inventory costs? 134. The Milling Corp. has developed a new type of widget. The local distributor expects to increase his sales by 25% over the past year due to this new development. Last year's sales were $150,000 at a selling price of $100 per unit. A safety stock of 35 units has eliminated stockouts. The manager would like to cut costs as much as possible and comes to you for advice. a) What is the economic order quantity? b) What is the amount of average inventory? c) How many orders will be made per year? d) What is the total cost of this inventory decision? 7-27 Chapter 07 - Current Asset Management 135. Linkup Systems, which provides investors with computerized information about stock prices, is considering the establishment of a lockbox system with its bank. The firm receives daily collections of $2.0 million, and could earn 6% on any funds freed up through faster collections. If the lockbox system can save 2 days in the collection process, and the firm's bankers will charge $200,000 per year to operate the lockbox system, is it worth it to establish the system? Chapter 07 Current Asset Management Answer Key True / False Questions 1. In the management of cash and marketable securities, the primary concern is profitability. FALSE Bloom's: Understand Difficulty: Basic Learning Objective: 07-01 Current asset management is an extension of concepts discussed in the previous chapter and involves the management of cash Learning Objective: 07-02 Cash management involves control over the receipt and payment of cash so as to minimize nonearning cash balances. Learning Objective: 07-03 The management of marketable securities involves selecting between various short-term investments Learning Objective: marketable securities; accounts receivable; and inventory. 2. For modern corporations, the more cash they have, the better off they are. FALSE Bloom's: Understand Difficulty: Basic Learning Objective: 07-02 Cash management involves control over the receipt and payment of cash so as to minimize nonearning cash balances. 7-28 Chapter 07 - Current Asset Management 3. Minimizing cash balances can improve overall corporate profitability. TRUE Bloom's: Understand Difficulty: Intermediate Learning Objective: 07-02 Cash management involves control over the receipt and payment of cash so as to minimize nonearning cash balances. 4. For most firms, the primary motive for holding cash is the transaction motive. TRUE Bloom's: Understand Difficulty: Basic Learning Objective: 07-02 Cash management involves control over the receipt and payment of cash so as to minimize nonearning cash balances. 5. Cash balances are usually determined by the amount of cash flowing through the firm on a yearly basis. FALSE Bloom's: Understand Difficulty: Basic Learning Objective: 07-02 Cash management involves control over the receipt and payment of cash so as to minimize nonearning cash balances. 6. A goal of cash management is to insure that the inflows and outflows of cash are synchronized. TRUE Bloom's: Understand Difficulty: Basic Learning Objective: 07-02 Cash management involves control over the receipt and payment of cash so as to minimize nonearning cash balances. 7-29 Chapter 07 - Current Asset Management 7. Sales, receivables, and inventory form the basis of cash flow. TRUE Bloom's: Understand Difficulty: Basic Learning Objective: 07-02 Cash management involves control over the receipt and payment of cash so as to minimize nonearning cash balances. 8. The cash generating process for a firm is continuous, even though cash flow can be sporadic. TRUE Bloom's: Understand Difficulty: Intermediate Learning Objective: 07-02 Cash management involves control over the receipt and payment of cash so as to minimize nonearning cash balances. 9. Computerized cash management and electronic funds transfer allow firms to carry smaller cash balances. TRUE Bloom's: Understand Difficulty: Intermediate Learning Objective: 07-02 Cash management involves control over the receipt and payment of cash so as to minimize nonearning cash balances. 10. Float is the difference between the cash balance on the corporate books and the amount credited to the corporation by the bank. TRUE Bloom's: Remember Difficulty: Basic Learning Objective: 07-02 Cash management involves control over the receipt and payment of cash so as to minimize nonearning cash balances. 7-30 Chapter 07 - Current Asset Management 11. "Float" is the name given for a short-term loan between suppliers and buyers. FALSE Bloom's: Remember Difficulty: Basic Learning Objective: 07-02 Cash management involves control over the receipt and payment of cash so as to minimize nonearning cash balances. 12. Checks can be cleared only through the Federal Reserve System. FALSE Bloom's: Understand Difficulty: Intermediate Learning Objective: 07-02 Cash management involves control over the receipt and payment of cash so as to minimize nonearning cash balances. 13. Unfortunately, float is too complicated to be effectively managed through any combination of disbursement and collection strategies. FALSE Bloom's: Understand Difficulty: Intermediate Learning Objective: 07-02 Cash management involves control over the receipt and payment of cash so as to minimize nonearning cash balances. 14. It is possible for companies to operate with negative cash balances on their books. TRUE Bloom's: Understand Difficulty: Intermediate Learning Objective: 07-02 Cash management involves control over the receipt and payment of cash so as to minimize nonearning cash balances. 7-31 Chapter 07 - Current Asset Management 15. A lock-box system is a method of extending disbursements. FALSE Bloom's: Remember Difficulty: Basic Learning Objective: 07-02 Cash management involves control over the receipt and payment of cash so as to minimize nonearning cash balances. 16. A lock-box is used to safeguard the corporation's marketable securities. FALSE Bloom's: Understand Difficulty: Basic Learning Objective: 07-02 Cash management involves control over the receipt and payment of cash so as to minimize nonearning cash balances. 17. A lock-box is used by the selling corporation to speed up the check collection and checkclearing process. TRUE Bloom's: Remember Difficulty: Basic Learning Objective: 07-02 Cash management involves control over the receipt and payment of cash so as to minimize nonearning cash balances. 18. "Extended disbursement float" has to do with the length of time a corporation takes to collect bills. FALSE Bloom's: Understand Difficulty: Intermediate Learning Objective: 07-02 Cash management involves control over the receipt and payment of cash so as to minimize nonearning cash balances. 7-32 Chapter 07 - Current Asset Management 19. Cost-benefit is not a consideration in development of a cash management system; only safety and liquidity. FALSE Bloom's: Understand Difficulty: Intermediate Learning Objective: 07-02 Cash management involves control over the receipt and payment of cash so as to minimize nonearning cash balances. 20. Electronic funds transfer will likely increase the use of float. FALSE Bloom's: Understand Difficulty: Basic Learning Objective: 07-02 Cash management involves control over the receipt and payment of cash so as to minimize nonearning cash balances. 21. The use of automated clearinghouses (ACHs) saves money for consumers, corporations and financial institutions by reducing transactions costs. TRUE Bloom's: Understand Difficulty: Basic Learning Objective: 07-02 Cash management involves control over the receipt and payment of cash so as to minimize nonearning cash balances. 22. It is less expensive to clear a check through the Federal Reserve System than to process an automatic fund transfer through an automated clearinghouse. FALSE Bloom's: Remember Difficulty: Basic Learning Objective: 07-02 Cash management involves control over the receipt and payment of cash so as to minimize nonearning cash balances. 7-33 Chapter 07 - Current Asset Management 23. The "SWIFT" transfer system was developed to aid regional bank fund transfers within the United States. FALSE Bloom's: Understand Difficulty: Intermediate Learning Objective: 07-02 Cash management involves control over the receipt and payment of cash so as to minimize nonearning cash balances. 24. SWIFT has combated the growing issue of electronic fraud with smart card technology that no longer requires users to manually log in to the network and thus eliminates any paper trail. TRUE Bloom's: Remember Difficulty: Basic Learning Objective: 07-02 Cash management involves control over the receipt and payment of cash so as to minimize nonearning cash balances. 25. Every message routed through SWIFT is encrypted and every money transaction is authorized by another code for security purposes. TRUE Bloom's: Remember Difficulty: Intermediate Learning Objective: 07-02 Cash management involves control over the receipt and payment of cash so as to minimize nonearning cash balances. 26. Multinational firms find it difficult to shift funds from one country to another. FALSE Bloom's: Understand Difficulty: Intermediate Learning Objective: 07-02 Cash management involves control over the receipt and payment of cash so as to minimize nonearning cash balances. 7-34 Chapter 07 - Current Asset Management 27. In general, cash management at the international level employs the same techniques as domestic cash management. TRUE Bloom's: Understand Difficulty: Intermediate Learning Objective: 07-02 Cash management involves control over the receipt and payment of cash so as to minimize nonearning cash balances. 28. Eurodollars are U.S. dollars held on deposit by foreign banks. TRUE Bloom's: Remember Difficulty: Basic Learning Objective: 07-02 Cash management involves control over the receipt and payment of cash so as to minimize nonearning cash balances. 29. Stretching out the maturity of marketable securities can rarely result in a loss. FALSE Bloom's: Understand Difficulty: Intermediate Learning Objective: 07-03 The management of marketable securities involves selecting between various short-term investments. 30. The investment of excess short-term funds is usually diversified between short- and longterm marketable securities. FALSE Bloom's: Understand Difficulty: Intermediate Learning Objective: 07-03 The management of marketable securities involves selecting between various short-term investments 7-35 Chapter 07 - Current Asset Management 31. Cash management becomes more important as the level of short-term interest rates rise. TRUE Bloom's: Understand Difficulty: Intermediate Learning Objective: 07-02 Cash management involves control over the receipt and payment of cash so as to minimize nonearning cash balances. 32. Treasury bills are unique in that they trade on a premium basis. FALSE Bloom's: Remember Difficulty: Basic Learning Objective: 07-03 The management of marketable securities involves selecting between various short-term investments 33. Because they generally run a surplus budget, government agencies are able to issue securities with slightly lower yields than direct Treasury issues. FALSE Bloom's: Understand Difficulty: Intermediate Learning Objective: 07-03 The management of marketable securities involves selecting between various short-term investments 34. Certificates of deposits purchased in small denominations of $1,000 at the savings and loan are readily marketable. FALSE Bloom's: Understand Difficulty: Intermediate Learning Objective: 07-03 The management of marketable securities involves selecting between various short-term investments 7-36 Chapter 07 - Current Asset Management 35. Banker's acceptances rank behind treasury bills and commercial paper as a vehicle for short-term investments. TRUE Bloom's: Understand Difficulty: Intermediate Learning Objective: 07-03 The management of marketable securities involves selecting between various short-term investments 36. Small-denomination certificates of deposit are usually more liquid than largedenomination CDs. FALSE Bloom's: Understand Difficulty: Intermediate Learning Objective: 07-03 The management of marketable securities involves selecting between various short-term investments 37. The rate on Eurodollar certificates of deposit is usually lower than domestic certificates of deposit. FALSE Bloom's: Understand Difficulty: Intermediate Learning Objective: 07-03 The management of marketable securities involves selecting between various short-term investments 38. Bankers' acceptances are short-term securities that arise from foreign trade. TRUE Bloom's: Understand Difficulty: Intermediate Learning Objective: 07-03 The management of marketable securities involves selecting between various short-term investments 7-37 Chapter 07 - Current Asset Management 39. The 5 C's of credit include character, capital, capacity, conditions, and collateral. TRUE AACSB: Ethics (ethical understanding and reasoning) Bloom's: Remember Difficulty: Basic Learning Objective: 07-04 Accounts receivable management requires credit policy decisions aimed at maximizing profitability. 40. One way businesses try to overcome the risk associated with new customers is to access a credit scoring report that will predict the probability of a customer causing credit problems in the future. TRUE Bloom's: Understand Difficulty: Basic Learning Objective: 07-04 Accounts receivable management requires credit policy decisions aimed at maximizing profitability. 41. Because of changing economic conditions, it is difficult for companies such as Dun & Bradstreet to devise models predicting payment problems and probability of bankruptcy 12 months in the future. FALSE Bloom's: Understand Difficulty: Intermediate Learning Objective: 07-04 Accounts receivable management requires credit policy decisions aimed at maximizing profitability. 42. Finding out who is ultimately responsible for a bad debt can be helped by Dun & Bradstreet's D-U-N-S (Data Universal Numbers System) that tracks relationships and ownership of businesses within Dun & Bradstreet's information base. TRUE Bloom's: Remember Difficulty: Basic Learning Objective: 07-04 Accounts receivable management requires credit policy decisions aimed at maximizing profitability. 7-38 Chapter 07 - Current Asset Management 43. If a firm averages $2,000 in daily credit sales and offers 60-day terms, the average accounts receivable balance be will $120,000. TRUE Avg. A/R = Daily credit sales x credit terms $120,000 = $2,000 x 60 days AACSB: Analytic Bloom's: Apply Difficulty: Intermediate Learning Objective: 07-04 Accounts receivable management requires credit policy decisions aimed at maximizing profitability. 44. Return on investment is the major decision criteria in credit decisions. TRUE Bloom's: Understand Difficulty: Intermediate Learning Objective: 07-04 Accounts receivable management requires credit policy decisions aimed at maximizing profitability. 45. Inventories are usually the most liquid, but lowest-yielding, current asset of a firm. FALSE Bloom's: Understand Difficulty: Intermediate Learning Objective: 07-05 Inventory management requires determining the level of inventory necessary to enhance sales and profitability. 46. Seasonal production allows for maximum efficiency in machinery and manpower use. FALSE Bloom's: Understand Difficulty: Basic Learning Objective: 07-05 Inventory management requires determining the level of inventory necessary to enhance sales and profitability. 7-39 Chapter 07 - Current Asset Management 47. The economic order quantity helps a firm determine the most efficient order size to place. TRUE Bloom's: Understand Difficulty: Intermediate Learning Objective: 07-05 Inventory management requires determining the level of inventory necessary to enhance sales and profitability. 48. The two basic costs associated with inventory are production cost and ordering cost. FALSE Bloom's: Understand Difficulty: Intermediate Learning Objective: 07-05 Inventory management requires determining the level of inventory necessary to enhance sales and profitability. 49. A reduction in carrying costs would increase the economic order quantity. TRUE Bloom's: Understand Difficulty: Intermediate Learning Objective: 07-05 Inventory management requires determining the level of inventory necessary to enhance sales and profitability. 50. Lower ordering costs would tend to increase a firm's economic order quantity. FALSE Bloom's: Understand Difficulty: Intermediate Learning Objective: 07-05 Inventory management requires determining the level of inventory necessary to enhance sales and profitability. 51. If we assume that inventory is used up at a constant rate and safety stock is zero, the average inventory will be 1/2 the order size. TRUE AACSB: Analytic Bloom's: Apply Difficulty: Challenge Learning Objective: 07-05 Inventory management requires determining the level of inventory necessary to enhance sales and profitability. 7-40 Chapter 07 - Current Asset Management 52. A stock out occurs when a firm runs out of inventory and is unable to sell or deliver the product requested. TRUE Bloom's: Understand Difficulty: Intermediate Learning Objective: 07-05 Inventory management requires determining the level of inventory necessary to enhance sales and profitability. 53. Maintaining a safety stock will guard against an EOQ from occurring. FALSE Bloom's: Understand Difficulty: Intermediate Learning Objective: 07-05 Inventory management requires determining the level of inventory necessary to enhance sales and profitability. 54. Just-in-time inventory systems can leave manufacturers empty handed if suppliers can't keep up with product growth rates. TRUE Bloom's: Understand Difficulty: Basic Learning Objective: 07-05 Inventory management requires determining the level of inventory necessary to enhance sales and profitability. 55. Just-in-time inventory management pushes the cost of holding inventory from the manufacturer to the manufacturer's suppliers. TRUE Bloom's: Understand Ethics Difficulty: Intermediate Learning Objective: 07-05 Inventory management requires determining the level of inventory necessary to enhance sales and profitability. 7-41 Chapter 07 - Current Asset Management 56. The use of "float" has dramatically increased since the Check Clearing for the 21st Century Act was passed. FALSE Bloom's: Remember Difficulty: Basic Learning Objective: 07-02 Cash management involves control over the receipt and payment of cash so as to minimize nonearning cash balances. 57. When considering offering a cash discount, a firm must weigh the benefits of freed up cash with the cost of the cash discount. TRUE Bloom's: Understand Difficulty: Intermediate Learning Objective: 07-04 Accounts receivable management requires credit policy decisions aimed at maximizing profitability. 58. When a potential customer has a mediocre credit history, a firm should not consider allowing them to become a customer. FALSE Bloom's: Understand Difficulty: Intermediate Learning Objective: 07-04 Accounts receivable management requires credit policy decisions aimed at maximizing profitability. 59. When selecting marketable securities, the company should always select securities with longer maturities if they offer higher yields. FALSE AACSB: Analytic Bloom's: Evaluate Difficulty: Intermediate Learning Objective: 07-03 The management of marketable securities involves selecting between various short-term investments 7-42 Chapter 07 - Current Asset Management 60. If a company would like to reduce their average collection period, they can either reduce offer a cash discount or increase their net terms. FALSE AACSB: Analytic Bloom's: Evaluate Difficulty: Intermediate Learning Objective: 07-04 Accounts receivable management requires credit policy decisions aimed at maximizing profitability. 61. Level production allows a company to reduce inventory and maximize efficiency as compared to seasonal production. FALSE AACSB: Analytic Bloom's: Evaluate Difficulty: Intermediate Learning Objective: 07-05 Inventory management requires determining the level of inventory necessary to enhance sales and profitability. Multiple Choice Questions 62. In managing cash and marketable securities, what should be the manager's primary concern? A. Maximization of profit B. Maximization of liquid assets C. Acceptable return on investment D. Liquidity and safety Bloom's: Understand Difficulty: Basic Learning Objective: 07-02 Cash management involves control over the receipt and payment of cash so as to minimize nonearning cash balances. Learning Objective: 07-03 The management of marketable securities involves selecting between various short-term investments 7-43 Chapter 07 - Current Asset Management 63. One of the first considerations in cash management is A. to have as much cash as possible on hand. B. synchronization of cash inflows and cash outflows. C. profitability. D. to put any excess cash into accounts receivable. Bloom's: Understand Difficulty: Basic Learning Objective: 07-02 Cash management involves control over the receipt and payment of cash so as to minimize nonearning cash balances. 64. Which of the following is not a valid reason for holding cash? A. To meet transaction requirements B. To earn the highest return possible C. To satisfy emergency needs for funds D. To provide a compensating balance for a bank Bloom's: Understand Difficulty: Intermediate Learning Objective: 07-02 Cash management involves control over the receipt and payment of cash so as to minimize nonearning cash balances. 65. Cash flow does not rely on which of the following? A. The payment patterns of customers B. The monetary policy of the Federal Reserve C. The speed at which suppliers and creditors process checks D. The efficiency of the banking system Bloom's: Understand Difficulty: Intermediate Learning Objective: 07-02 Cash management involves control over the receipt and payment of cash so as to minimize nonearning cash balances. 7-44 Chapter 07 - Current Asset Management 66. The difference between the amount of cash on the firm's books and the amount credited to it by the bank is A. an overdraft. B. interest revenue. C. extended disbursement. D. float. Bloom's: Remember Difficulty: Basic Learning Objective: 07-02 Cash management involves control over the receipt and payment of cash so as to minimize nonearning cash balances. 67. "Float" takes place because A. a firm is early in paying its bills. B. the level of cash on the firm's books is equal to the level of cash in the bank. C. a lag exists between writing a check and clearing it through the banking system. D. a customer writes "hot" checks. Bloom's: Remember Difficulty: Basic Learning Objective: 07-02 Cash management involves control over the receipt and payment of cash so as to minimize nonearning cash balances. 68. Which of the following is not a method of speeding up collections? A. Lock-box system. B. Regional collection centers. C. Extended disbursement float. D. All of these are methods for speeding up collections. Bloom's: Understand Difficulty: Intermediate Learning Objective: 07-02 Cash management involves control over the receipt and payment of cash so as to minimize nonearning cash balances. 7-45 Chapter 07 - Current Asset Management 69. The system whereby funds are moved between computer terminals without use of checks is A. electronic funds transfer. B. float. C. a lock-box system. D. magnetic character recognition. Bloom's: Remember Difficulty: Basic Learning Objective: 07-02 Cash management involves control over the receipt and payment of cash so as to minimize nonearning cash balances. 70. How would electronic funds transfer affect the use of "float"? A. Increase its use somewhat B. Decrease its use somewhat C. Virtually eliminate its use D. Have no effect on its use Bloom's: Understand Difficulty: Basic Learning Objective: 07-02 Cash management involves control over the receipt and payment of cash so as to minimize nonearning cash balances. 71. One of the most popular uses of automated clearing houses is the A. direct deposit of checks. B. transfer of funds between U.S. banks and foreign banks. C. transfer of funds between government agencies. D. collection of accounts receivable from customers. Bloom's: Remember Difficulty: Intermediate Learning Objective: 07-02 Cash management involves control over the receipt and payment of cash so as to minimize nonearning cash balances. 7-46 Chapter 07 - Current Asset Management 72. Automated clearinghouses are commonly used by consumers to make direct payments for A. insurance premiums. B. mortgage payments. C. utility bills. D. all of these. Bloom's: Remember Difficulty: Basic Learning Objective: 07-02 Cash management involves control over the receipt and payment of cash so as to minimize nonearning cash balances. 73. One of the major cost savings for consumers using automated clearing houses is A. saving more than $1 billion in postage. B. saving time paying bills through check writing. C. security of having the payments and deposits directly deposited or deducted from your account. D. All of these are true. Bloom's: Remember Difficulty: Basic Learning Objective: 07-02 Cash management involves control over the receipt and payment of cash so as to minimize nonearning cash balances. 74. Which of the following is not a true statement about automated clearinghouses (ACHs)? A. Automated clearinghouses are responsible for the check clearing process between commercial banks and the Federal Reserve Banks. B. Commercial transactions using automated clearinghouses have been growing at close to 17% per year since 1989. C. Debits drawn on automated clearinghouses cost less than half that of checks processed through financial institutions. D. The ability to reduce transactions costs and create convenience is driving the growth of automated clearinghouses. Bloom's: Remember Difficulty: Intermediate Learning Objective: 07-02 Cash management involves control over the receipt and payment of cash so as to minimize nonearning cash balances. 7-47 Chapter 07 - Current Asset Management 75. Some of the services provided around the clock by SWIFT are A. international payments between banks. B. foreign exchange. C. trade finance transactions. D. all of these. Bloom's: Understand Difficulty: Intermediate Learning Objective: 07-02 Cash management involves control over the receipt and payment of cash so as to minimize nonearning cash balances. 76. International cash management is more complex than domestic based cash management because of A. difficult liquidity management. B. different banking systems. C. currency risk fluctuations. D. all of these. Bloom's: Understand Difficulty: Intermediate Learning Objective: 07-02 Cash management involves control over the receipt and payment of cash so as to minimize nonearning cash balances. 77. SWIFT's implementation of the "smart card" is expected to A. decrease the likelihood of electronic fraud. B. remove the need for secret information to be sent through mail. C. guarantee the identity of the sender. D. all of these. Bloom's: Remember Difficulty: Intermediate Learning Objective: 07-02 Cash management involves control over the receipt and payment of cash so as to minimize nonearning cash balances. 7-48 Chapter 07 - Current Asset Management 78. International cash management systems are more complex than domestic cash management systems because A. many developing countries still use a cash payments system. B. some countries rely on electronic funds transfer more than the U.S. C. liquidity management, involving short-term cash balances and deficits, has to be managed across international boundaries and time zones and is subject to the risks of currency fluctuations. D. none of these. Bloom's: Understand Difficulty: Intermediate Learning Objective: 07-02 Cash management involves control over the receipt and payment of cash so as to minimize nonearning cash balances. 79. International cash management systems are more complex than domestic cash management systems because of A. the risk involved in currency fluctuations. B. the changing interest rates across countries. C. varying time zones across countries. D. all of these. Bloom's: Understand Difficulty: Intermediate Learning Objective: 07-02 Cash management involves control over the receipt and payment of cash so as to minimize nonearning cash balances. 80. The corporate sweep account is an account A. that allows companies to maintain zero balances in their checking accounts, with their excess cash moved into an interest earning account. B. that allows companies to write checks on zero balance accounts with the understanding that when the check is presented for payment, money will be moved from the interest bearing account to the appropriate payment account. C. that allows companies to move their lock box collections into an interest bearing checking account. D. a and b are correct. Bloom's: Remember Difficulty: Intermediate Learning Objective: 07-02 Cash management involves control over the receipt and payment of cash so as to minimize nonearning cash balances. 7-49 Chapter 07 - Current Asset Management 81. A multinational company may prefer to hold sizeable cash balances in one currency rather than another because A. of high interest rates existing in one country. B. one country's currency may be strong relative to the dollar. C. both a and b D. None of these Bloom's: Understand Difficulty: Intermediate Learning Objective: 07-02 Cash management involves control over the receipt and payment of cash so as to minimize nonearning cash balances. 82. The problem in stretching out the maturity of marketable securities is that A. you are legally locked in until the maturity date. B. longer term securities are often not available. C. there is greater possibility of loss. D. interest rates are generally lower. Bloom's: Understand Difficulty: Intermediate Learning Objective: 07-03 The management of marketable securities involves selecting between various short-term investments 83. Which of the following is not a factor influencing the selection of a marketable security? A. Yield B. Maturity C. Float D. Safety Bloom's: Understand Difficulty: Intermediate Learning Objective: 07-03 The management of marketable securities involves selecting between various short-term investments 7-50 Chapter 07 - Current Asset Management 84. Probably the safest and most marketable instrument for short-term investment is A. commercial paper. B. large denomination certificates. C. Treasury notes. D. Treasury bills. Bloom's: Remember Difficulty: Basic Learning Objective: 07-03 The management of marketable securities involves selecting between various short-term investments 85. Which of the following securities trades on a discount basis? A. Treasury notes B. Treasury bills C. Commercial paper D. Certificates of deposit Bloom's: Remember Difficulty: Intermediate Learning Objective: 07-03 The management of marketable securities involves selecting between various short-term investments 86. A firm that wishes to minimize risk when investing idle cash would be least likely to buy A. commercial paper. B. long-term corporate bonds. C. negotiable certificates of deposit. D. Treasury bills of the U.S. government. Bloom's: Remember Difficulty: Basic Learning Objective: 07-03 The management of marketable securities involves selecting between various short-term investments 87. A banker's acceptance A. is a draft drawn on a bank and paid by that bank when presented to it. B. may be accepted by the bank for future payment. C. is traded in a relatively liquid market until maturity. D. all of these. Bloom's: Remember Difficulty: Basic Learning Objective: 07-03 The management of marketable securities involves selecting between various short-term investments 7-51 Chapter 07 - Current Asset Management 88. Eurodollar certificate of deposits A. are not marketable investments. B. are used by banks to loan out funds to anyone seeking dollars. C. pay interest rates usually lower than the rates on U.S. treasury bills. D. are European currencies deposited into international U.S. branch banks. Bloom's: Remember Difficulty: Basic Learning Objective: 07-03 The management of marketable securities involves selecting between various short-term investments 89. In comparison to securities issued by the U.S. Treasury, securities issued by U.S. government agencies like the Federal Land Bank A. are significantly riskier than Treasury securities. B. are much less liquid than Treasury securities. C. yield slightly more than Treasury securities. D. usually require the payment of higher commissions when purchased than Treasury securities. Bloom's: Remember Difficulty: Intermediate Learning Objective: 07-03 The management of marketable securities involves selecting between various short-term investments 90. Treasury Inflation Protected Securities (TIPS) A. pay interest semiannually that equals a real rate of return specified by the U.S. Treasury, plus principal at maturity that is adjusted annually to reflect inflation's impact on purchasing power. B. are a useful short-term investment if interest rates should rise quickly because of rapid increases in inflation. C. increase the coupon rate of the security to adjust for changes in inflation. D. a and b are true Bloom's: Remember Difficulty: Intermediate Learning Objective: 07-03 The management of marketable securities involves selecting between various short-term investments 7-52 Chapter 07 - Current Asset Management 91. Which of the following securities represents an unsecured promissory note issued by a corporation? A. Certificates of deposit B. Savings accounts C. Commercial paper D. Money market fund Bloom's: Remember Difficulty: Basic Learning Objective: 07-03 The management of marketable securities involves selecting between various short-term investments 92. Eurodollars A. can only be redeemed at U.S. banks or their branches in European countries. B. are U.S. dollars which have been converted into several European currencies. C. may be borrowed by anyone who wishes to hold dollars. D. can only be redeemed at U.S. banks or their branches in any foreign country. Bloom's: Remember Difficulty: Intermediate Learning Objective: 07-03 The management of marketable securities involves selecting between various short-term investments 93. Money market funds are A. accounts that allow small investors to participate in buying large-denomination securities. B. extremely risky but high-yielding accounts used by large corporations to finance operations. C. accounts that allow small investors to buy shares in companies that then buy shares of common stock. D. pools of bonds held by large utility companies. Bloom's: Remember Difficulty: Intermediate Learning Objective: 07-03 The management of marketable securities involves selecting between various short-term investments 7-53 Chapter 07 - Current Asset Management 94. Characteristics of a money market mutual fund include A. the purchase of shares by investors, the proceeds of which are reinvested into liquid shortterm securities. B. a required minimum balance of $2,500. C. the ability to be readily marketable. D. none of these. Bloom's: Understand Difficulty: Intermediate Learning Objective: 07-03 The management of marketable securities involves selecting between various short-term investments 95. Characteristics of a money market deposit account include A. a lower risk than money market funds. B. insured by federal agencies. C. generally a limit of three deposits or withdrawals per month. D. all of these Bloom's: Remember Difficulty: Intermediate Learning Objective: 07-03 The management of marketable securities involves selecting between various short-term investments 96. Which of the following are characteristics of money market investments? A. Money market funds are offered by banks. B. Money market funds are insured up to $100,000 by federal agencies. C. The minimum balance for money market deposit accounts is $5,000. D. None of these Bloom's: Remember Difficulty: Intermediate Learning Objective: 07-03 The management of marketable securities involves selecting between various short-term investments 7-54 Chapter 07 - Current Asset Management 97. Money market funds A. are modeled after money market deposit accounts. B. are insured up to $100,000. C. have a minimum balance of $2,500. D. earn competitive market rates of return. Bloom's: Remember Difficulty: Basic Learning Objective: 07-03 The management of marketable securities involves selecting between various short-term investments 98. The three primary policy variables to consider when extending credit include all of the following except A. credit standards. B. the level of inflation. C. the terms of trade. D. collection policy. Bloom's: Understand Difficulty: Intermediate Learning Objective: 07-04 Accounts receivable management requires credit policy decisions aimed at maximizing profitability. 99. The most subjective and also significant segment of the 5 C's of credit for giving final approval is A. capacity. B. collateral. C. character. D. conditions. AACSB: Analytic Bloom's: Apply Difficulty: Intermediate Learning Objective: 07-04 Accounts receivable management requires credit policy decisions aimed at maximizing profitability. 7-55 Chapter 07 - Current Asset Management 100. Dun & Bradstreet is known for providing A. interest rate information to cash managers. B. credit scoring reports that rank a company's payment habits relative to its peer group. C. cash management systems to corporate treasurers. D. consumer credit reports to credit card companies. Bloom's: Remember Difficulty: Basic Learning Objective: 07-04 Accounts receivable management requires credit policy decisions aimed at maximizing profitability. 101. When developing a credit scoring report, many variables would be considered. Which of the following best represents the major factors Dun & Bradstreet would examine? A. The age of the management team, the dollar amount of sales, net profits, and long-term debt. B. The age of the company, the number of employees, the level of current assets. C. The financial statements, satisfactory or slow payment experiences, negative public records (suits, liens, judgments, bankruptcies). D. The company's cash balances, return on equity, and its average tax rates. Bloom's: Understand Difficulty: Challenge Learning Objective: 07-04 Accounts receivable management requires credit policy decisions aimed at maximizing profitability. 102. Which of the following is not a valid quantitative measure for accounts receivable collection policies? A. Average collection period B. Aging of accounts receivables C. Ratio of debt to equity D. Ratio of bad debts to credit sales Bloom's: Understand Difficulty: Intermediate Learning Objective: 07-04 Accounts receivable management requires credit policy decisions aimed at maximizing profitability. 7-56 Chapter 07 - Current Asset Management 103. Variables important to credit scoring models include A. age of company in years. B. negative public records. C. facility ownership. D. all of these. Bloom's: Understand Difficulty: Intermediate Learning Objective: 07-04 Accounts receivable management requires credit policy decisions aimed at maximizing profitability. 104. Inventory is usually divided into three basic categories except A. projected sales. B. work in progress. C. finished goods. D. raw materials. Bloom's: Understand Difficulty: Intermediate Learning Objective: 07-05 Inventory management requires determining the level of inventory necessary to enhance sales and profitability. 105. Companies that are mostly influenced by seasonal sales have to make a choice between A. level production and inventory buildup. B. seasonal production and an uneven workforce. C. a stable workforce and a fluctuating workforce. D. All of these. Bloom's: Understand Difficulty: Intermediate Learning Objective: 07-05 Inventory management requires determining the level of inventory necessary to enhance sales and profitability. 106. The costs of carrying inventory do not include A. the interest on funds tied up in inventory. B. the cost of warehouse space. C. ordering costs. D. insurance and handling costs. Bloom's: Remember Difficulty: Intermediate Learning Objective: 07-05 Inventory management requires determining the level of inventory necessary to enhance sales and profitability. 7-57 Chapter 07 - Current Asset Management 107. For a given firm, holding other factors constant, ordering costs per unit generally A. decline as average inventory increases. B. increase in proportion to increases in inventory. C. are considered fixed costs. D. are negotiated. Bloom's: Understand Difficulty: Intermediate Learning Objective: 07-05 Inventory management requires determining the level of inventory necessary to enhance sales and profitability. 108. The economic order quantity A. determines the reorder point. B. provides the lowest inventory costs. C. determines the safety stock. D. all of these. Bloom's: Understand Difficulty: Basic Learning Objective: 07-05 Inventory management requires determining the level of inventory necessary to enhance sales and profitability. 109. The economic order quantity A. assumes that inventory usage is seasonal. B. assumes that delivery times of each order are consistent. C. considers stock-outs D. all of these. Bloom's: Understand Difficulty: Intermediate Learning Objective: 07-05 Inventory management requires determining the level of inventory necessary to enhance sales and profitability. 7-58 Chapter 07 - Current Asset Management 110. When using the economic order quantity model A. ordering costs increase as the level of inventory increases. B. carrying costs decrease as the level of inventory increases. C. costs are minimized when total carrying costs and total ordering costs are equal. D. none of these AACSB: Analytic Bloom's: Analyze Difficulty: Challenge Learning Objective: 07-05 Inventory management requires determining the level of inventory necessary to enhance sales and profitability. 111. Hedging A. is a way to protect your accounts receivable position. B. increases risk. C. is a legal agreement to buy or sell a financial futures contract. D. can be carried out with a futures contract. Bloom's: Understand Difficulty: Intermediate Learning Objective: 07-05 Inventory management requires determining the level of inventory necessary to enhance sales and profitability. 112. The amount of safety stock that a firm carries depends upon A. the predictability of inventory usage. B. the time period necessary to fill inventory orders. C. the riskiness of the storage facility. D. a and b are correct Bloom's: Understand Difficulty: Intermediate Learning Objective: 07-05 Inventory management requires determining the level of inventory necessary to enhance sales and profitability. 7-59 Chapter 07 - Current Asset Management 113. A Just-In-Time (JIT) inventory management program has all but which of the following requirements? A. Quality production B. Large safety stocks C. Close ties between suppliers, manufacturers, and customers D. Minimizing inventory levels Bloom's: Understand Difficulty: Basic Learning Objective: 07-05 Inventory management requires determining the level of inventory necessary to enhance sales and profitability. 114. Cost savings from JIT inventory management include(s) A. reduced overhead expenses. B. lower inventory financing costs. C. greater productivity. D. all of these. Bloom's: Understand Difficulty: Basic Learning Objective: 07-05 Inventory management requires determining the level of inventory necessary to enhance sales and profitability. 115. All of the following are benefits of just-in-time inventory ordering systems except A. reduces warehouse space. B. saves utility and manpower costs. C. reduces inventory costs. D. prevents stock outs. Bloom's: Remember Difficulty: Intermediate Learning Objective: 07-05 Inventory management requires determining the level of inventory necessary to enhance sales and profitability. 7-60 Chapter 07 - Current Asset Management 116. If average daily remittances are $6 million, and "extended disbursement float" adds 2 days to the disbursement schedule, how much should the firm be willing to pay for a cash management system if the firm earns 7% on excess funds. A. $500,000 B. $1,500,000 C. $0 D. $840,000 Annual return from cash management system = $6,000,000 x 2 days x 7% = $840,000 AACSB: Analytic Bloom's: Apply Difficulty: Intermediate Learning Objective: 07-02 Cash management involves control over the receipt and payment of cash so as to minimize nonearning cash balances. 117. Price Corp. is considering selling to a group of new customers and creating new annual sales of $90,000. 5% will be uncollectible. The collection cost on these accounts is 3% of new sales, the cost of producing and selling is 80% of sales and the firm is in the 30% tax bracket. What is the profit on new sales? A. $7,560 B. $9,660 C. $7,245 D. none of these. AACSB: Analytic Bloom's: Apply Difficulty: Challenge Learning Objective: 07-04 Accounts receivable management requires credit policy decisions aimed at maximizing profitability. 7-61 Chapter 07 - Current Asset Management 118. Waldron Inc. is considering selling to a group of new customers that will bring in credit sales of $24,000 with a return on sales of 5%. The only new investment will be in accounts receivable. Waldron has a turnover ratio of 6 to 1 between sales and accounts receivable. What is the return on investment? A. 3% B. 25% C. 5% D. none of these AACSB: Analytic Bloom's: Apply Difficulty: Challenge Learning Objective: 07-04 Accounts receivable management requires credit policy decisions aimed at maximizing profitability. 7-62 Chapter 07 - Current Asset Management 119. Modos Company has deposited $3,500 in checks received from customers. It has written $1,400 in checks to its suppliers. The initial bank and book balance was $600. If $1,600 of its customer's checks have cleared but only $600 of its own, calculate its float. A. $1,200 B. $1,100 C. $300 D. $700 Bank balance = $600 + $1.600 - $600 = $1,600 Book balance = $600 + $3,500 - $1,400 = $2,700 Float = $1,100 AACSB: Analytic Bloom's: Apply Difficulty: Intermediate Learning Objective: 07-02 Cash management involves control over the receipt and payment of cash so as to minimize nonearning cash balances. 120. Massa Machine Tool expects total sales of $60,000. The price per unit is $10. The firm estimates an ordering cost of $25 per order, with an inventory cost of $0.70 per unit. What is the optimum order size? A. 327 units B. 655 units C. 447 units D. 207 units AACSB: Analytic Bloom's: Apply Difficulty: Challenge Learning Objective: 07-05 Inventory management requires determining the level of inventory necessary to enhance sales and profitability. 7-63 Chapter 07 - Current Asset Management 121. Assuming that we can earn a 10% return on accounts receivable, which of the following actions to finance an increase in our accounts receivable balance would be optimal? A. An increase in bank loans that would cost us 8%. B. A decrease in inventories which are earning a 16% return. C. A reduction in marketable securities which are earning a return of 14%. D. An increase in accounts payable that would cost our firm 15%. AACSB: Analytic Bloom's: Analyze Difficulty: Challenge Learning Objective: 07-04 Accounts receivable management requires credit policy decisions aimed at maximizing profitability. 122. If a company can implement cash management systems and save 3 days by reducing remittance time and 1 day by increasing disbursement time based on $2,000,000 in average daily remittances and $2,500,000 in average daily disbursements and their return on freed up funds is 10%, what is the max they should spend on the system? A. $2,000,000 B. $650,000 C. $850,000 D. $1,000,000 Additional collections ( $2,000,000 x 3 days) = $6,000,000 Delayed disbursements ($2,500,000 x 1 day) = 2,500,000 Freed-up funds 8,500,000 Interest rate x .10 Interest on freed-up funds $850,000 AACSB: Analytic Bloom's: Apply Difficulty: Intermediate Learning Objective: 07-02 Cash management involves control over the receipt and payment of cash so as to minimize nonearning cash balances. 7-64 Chapter 07 - Current Asset Management 123. All of the following are methods of controlling receivables except: A. offer a cash discount B. reduce net terms C. use DBIS D. reduce cash sales AACSB: Analytic Bloom's: Analyze Difficulty: Intermediate Learning Objective: 07-04 Accounts receivable management requires credit policy decisions aimed at maximizing profitability. 124. Level production offers all of the following benefits except: A. lower overtime usage B. maximum efficiency C. greater storage space D. higher use of capacity AACSB: Analytic Bloom's: Analyze Difficulty: Intermediate Learning Objective: 07-05 Inventory management requires determining the level of inventory necessary to enhance sales and profitability. 7-65 Chapter 07 - Current Asset Management 125. We expect that we can receive annual incremental income after taxes of $25,000 which includes an adjustment for uncollectible accounts. What is the maximum commitment to A/R we should be willing to assume if our firm's minimum required after-tax return is 8%? A. $36,000 B. $312,500 C. $168,000 D. $180,000 AACSB: Analytic Bloom's: Apply and Evaluate Difficulty: Challenge Learning Objective: 07-04 Accounts receivable management requires credit policy decisions aimed at maximizing profitability. 126. All of the following are examples of carrying costs except: A. interest expense B. warehouse space C. shipping costs D. insurance premiums Bloom's: Understand Difficulty: Intermediate Learning Objective: 07-05 Inventory management requires determining the level of inventory necessary to enhance sales and profitability. 7-66 Chapter 07 - Current Asset Management 127. The inventory decision model provides which type of information A. optimal total inventory B. optimal safety stock C. optimal order size D. optimal carrying cost per unit Bloom's: Understand Difficulty: Intermediate Learning Objective: 07-05 Inventory management requires determining the level of inventory necessary to enhance sales and profitability. 128. Warren Enterprises expects 20,000 unit sales, has ordering costs of $20 per order, carrying costs of $1.00 per unit and desires to keep 100 units in safety stock. Assuming level production, what is their average inventory? A. 200-300 B. 301-400 C. 401-500 D. 501-600 Bloom's: Understand Difficulty: Challenge Learning Objective: 07-05 Inventory management requires determining the level of inventory necessary to enhance sales and profitability. 7-67 Chapter 07 - Current Asset Management Matching Questions 129. Match the following with the items below: The difference between the corporation's recorded 1. Automated cash balance on its books and the amount credited to the clearing house corporation by the bank. Is offered by banks and savings and loans for the 2. bankers' deposit of funds at a given interest rate over a specified acceptance time period. Intermediate term obligations of the federal 3. Dun & Bradstreet government with maturities from one to seven years. 4. certificates of A credit-rating agency that publishes information on deposit over three million business establishments. Short-term obligations of the federal government with 5. lock-box maturities up to one year. A procedure used to expedite cash flows to a business 6. Eurodollars having accounts receivable. 7. compensating An unsecured promissory note issued by large balance corporations to investors. A study of the positive and negative results that can 8. Treasury notes be derived from a given course of action. 9. Treasury bills A short-term security that arises from foreign trade. 10. commercial U.S. dollars held on deposit by foreign banks and paper loaned out to anyone seeking dollars. Transfers information between one financial 11. float institution and another via computer tape. 12. cost-benefit Banks typically require that this cash balance be held analysis to indirectly pay for certain bank services. 11 4 8 3 9 5 10 12 2 6 1 7 Bloom's: Understand Difficulty: Intermediate Learning Objective: 07-01 Current asset management is an extension of concepts discussed in the previous chapter and involves the management of cash Learning Objective: 07-02 Cash management involves control over the receipt and payment of cash so as to minimize nonearning cash balances. Learning Objective: 07-03 The management of marketable securities involves selecting between various short-term investments Learning Objective: 07-04 Accounts receivable management requires credit policy decisions aimed at maximizing profitability. Learning Objective: marketable securities; accounts receivable; and inventory. 7-68 Chapter 07 - Current Asset Management 130. Match the following with the items below: Allows the firm to minimize the total ordering and carrying costs associated with inventory. A system in which funds are moved between banks 2. electronic funds and other participating corporations by use of the transfer computer. 3. conomic ordering An unsecured promissory note issued by large quantity corporations to investors. 4. average collection Analyzing accounts based on the amount of time they period have been on the books. 5. aging of accounts These assets reduce the risk of losing business to receivable competitors because of low inventory levels. 6. money market The repayment provisions associated with a credit deposit account arrangement. 7. safety stock The cost of holding an asset. The amount of time that a normal account receivable 8. carrying cost remains on our books. 9. passbook savings Because it pays the lowest interest rate at a bank, this account is an unattractive investment for most investors. Due to federal deregulation, commercial banks, savings and loans, and credit unions now are allowed to 10. Just In Time offer these investment opportunities modeled from (JIT) money market funds. 11. commercial The various factors that influence a company's ability paper to borrow money. A lean total production concept that produces quality products that minimize the level of inventory by 12. 5 C's of credit maintaining close ties with suppliers and distributors. 13. money market A process of generating cash which, although it fund remains continuous, is subjected to fluctuation in levels. Investing opportunity which allows small investors to place funds into short-term securities which they may not be able to buy directly because of the high funds 14. cash flow cycle required. 1. credit terms 3 2 11 5 7 1 8 4 9 6 12 10 14 13 Bloom's: Understand Difficulty: Intermediate Learning Objective: 07-01 Current asset management is an extension of concepts discussed in the previous chapter and involves the management of cash Learning Objective: 07-02 Cash management involves control over the receipt and payment of cash so as to minimize nonearning cash balances. Learning Objective: 07-03 The management of marketable securities involves selecting between various short-term investments Learning Objective: 07-04 Accounts receivable management requires credit policy decisions aimed at maximizing profitability. Learning Objective: 07-05 Inventory management requires determining the level of inventory necessary to enhance sales and profitability. Learning Objective: marketable securities; accounts receivable; and inventory. 7-69 Chapter 07 - Current Asset Management Essay Questions 131. Mountain Home Systems, Inc. is a well-known and reputable supplier of integrated circuits to manufacturers of telecommunications devices. The firm is currently debating whether to expand its sales to car-telephone manufacturers. While the firm expects an extra $3 million in sales if it enters this market, it also knows that 15% of its sales will ultimately be uncollectible. In addition, collection costs will be 3% on all new sales and the firm's production and selling costs are 80% of sales. Mountain Home's tax rate is 30%. a) Calculate Mountain Home's additional net income from the new sales. b) If Mountain Home can turn its receivables over 4 times per year, what will its additional investment in accounts receivable be and what will the firm earn as an after-tax return on that investment? c) Mountain Home management requires that any new project earn a minimum of 10% return on investment. Should the firm enter the car-telephone manufacturer market? c) No, Mountain Home should not enter this market. 7-70 Chapter 07 - Current Asset Management AACSB: Analytic Bloom's: Apply and Evaluate Difficulty: Intermediate Learning Objective: 07-04 Accounts receivable management requires credit policy decisions aimed at maximizing profitability. 132. Tanner Co. is a highly successful supplier of leather to manufacturers of leather goods. Tanner is considering expanding into the U.S. luxury auto seat market. It is estimated that although selling leather to U.S. auto manufacturers will bring additional annual sales of $1,000,000, a high 15% of those accounts will be uncollectible. The cost of conditioning and selling the leather is 70% of sales. Tanner's tax rate is 30%. a). Calculate Tanner's incremental net income on the new sales. b). Assume Tanner has a receivables turnover of 4. Calculate Tanner's incremental accounts receivable investment and after-tax return on that investment. c). Tanner's minimum required ROI is 15%. Should Tanner expand into the auto market?. c). Yes, the auto seat market could provide high ROI. AACSB: Analytic Bloom's: Apply and Evaluate Difficulty: Challenge Learning Objective: 07-04 Accounts receivable management requires credit policy decisions aimed at maximizing profitability. 7-71 Chapter 07 - Current Asset Management 133. Novelty Gifts, Inc. is experiencing some inventory control problems. The manager, Wanda LaRue, currently orders 10,000 units four times each year to handle annual demand of 40,000 units. Each order costs $15 and each unit costs $1.50 to carry. Ms. LaRue maintains a safety stock of 200 units. a) What is Novelty Gifts' current total annual inventory cost? b) Calculate the economic ordering quantity (EOQ). c) What is average inventory under EOQ if Ms. LaRue maintains a safety stock of 200 units. d) Calculate total annual inventory cost under EOQ. How does this compare to her current inventory costs? This will save the company $6,236 per year. AACSB: Analytic Bloom's: Apply Difficulty: Challenge Learning Objective: 07-05 Inventory management requires determining the level of inventory necessary to enhance sales and profitability. 7-72 Chapter 07 - Current Asset Management 134. The Milling Corp. has developed a new type of widget. The local distributor expects to increase his sales by 25% over the past year due to this new development. Last year's sales were $150,000 at a selling price of $100 per unit. A safety stock of 35 units has eliminated stockouts. The manager would like to cut costs as much as possible and comes to you for advice. a) What is the economic order quantity? b) What is the amount of average inventory? c) How many orders will be made per year? d) What is the total cost of this inventory decision? AACSB: Analytical Skills Bloom's: Application Difficulty: Challenge Learning Objective: 07-05 Inventory management requires determining the level of inventory necessary to enhance sales and profitability. 7-73 Chapter 07 - Current Asset Management 135. Linkup Systems, which provides investors with computerized information about stock prices, is considering the establishment of a lockbox system with its bank. The firm receives daily collections of $2.0 million, and could earn 6% on any funds freed up through faster collections. If the lockbox system can save 2 days in the collection process, and the firm's bankers will charge $200,000 per year to operate the lockbox system, is it worth it to establish the system? It will be worthwhile to establish the lockbox system. AACSB: Analytic Bloom's: Apply and Evaluate Difficulty: Intermediate Learning Objective: 07-02 Cash management involves control over the receipt and payment of cash so as to minimize nonearning cash balances. 7-74

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Herzing - FINANCE - 101
Chapter 08 - Sources of Short-Term FinancingChapter 08Sources of Short-Term FinancingTrue / False Questions1. The largest source of short-term funds for most companies is suppliers (trade credit).True False2. Larger firms tend to be net users of tra
Herzing - FINANCE - 101
Chapter 09 - The Time Value of MoneyChapter 09The Time Value of MoneyTrue / False Questions1. An amount of money to be received in the future is worth less today than the statedamount.True False2. Discounting refers to the growth process that turns
Herzing - FINANCE - 101
Chapter 10 - Valuation and Rates of ReturnChapter 10Valuation and Rates of ReturnTrue / False Questions1. The valuation of a financial asset is based on the concept of determining the present valueof future cash flows.True False2. The prices of fin
Herzing - FINANCE - 101
Chapter 11 - Cost of CapitalChapter 11Cost of CapitalTrue / False Questions1. It is standard practice to evaluate investment decisions using the cost of the specificfinancing method involved.True False2. The calculation of the cost of capital depen
Herzing - FINANCE - 101
Chapter 12 - The Capital Budgeting DecisionChapter 12The Capital Budgeting DecisionTrue / False Questions1. Capital budgeting decisions involve a minimum time horizon of five years.True False2. A good capital budgeting program requires that a number
Herzing - FINANCE - 101
Chapter 13 - Risk and Capital BudgetingChapter 13Risk and Capital BudgetingTrue / False Questions1. A basic assumption in financial theory is that most investors and managers are riskseekers.True False2. If we are risk-averse, a risky investment wi
Herzing - FINANCE - 101
Chapter 14 - Capital MarketsChapter 14Capital MarketsTrue / False Questions1. The European Central Bank issues bonds, notes, and bills denominated in the new Eurocurrency.True False2. The European Monetary Union (EMU) includes Britain, Germany, Fra
Herzing - FINANCE - 101
Chapter 15 - Investment Banking: Public and Private PlacementChapter 15Investment Banking: Public and Private PlacementTrue / False Questions1. The investment banker is someone who buys large new issues of stocks and then sells themto the public afte
Herzing - FINANCE - 101
Chapter 16 - Long-Term Debt and Lease FinancingChapter 16Long-Term Debt and Lease FinancingTrue / False Questions1. Over the decades, the times interest earned ratio of the Standard and Poor's' 500corporations has held fairly steady.True False2. Ho
Herzing - FINANCE - 101
Chapter 17 - Common and Preferred Stock FinancingChapter 17Common and Preferred Stock FinancingTrue / False Questions1. Common stockholders have a residual claim to income, in other words they are last in line.True False2. Common stockholders have a
Herzing - FINANCE - 101
Frantic Fast FoodsEarnings after taxesShares OutstandingEarnings b4 increase in taxesIncrease in taxesShares OutstandingShares Issued - New$390,000300,000$390,00020%300,00025,000Solution:a) Earnings per share 2009$1.30b) Earnings after tax
Herzing - FINANCE - 101
Low Carb Diet Supplement, Inc.Division ADivision BNet Income$100,000$25,000Sales$2,000,000$300,000Solution:Profit Margin(Net Income/ Sales)5.00%8.33%SuperiorDatabase SystemsTotal InvestmentSalesProfit MarginSolution:Net Income(Sales x
Herzing - FINANCE - 101
Philip MorrisBeginning CashNet Assets as a % of salesSales year 1Sales year 2Return on total assetsSolution:Beginning cashAsset BuildupProfitEnding Cash$100,00050%$500,000$1,000,0009%$100,000($250,000)$90,000($60,000)deficitPhilip Mor
Herzing - FINANCE - 101
Shock ElectronicsSell Price per Unit$25Variable Cost per Unit$17Fixed Costs$96,000Solution:Breakeven= Fixed Costs / (Price - Variable Cost)Breakeven =12,000unitsSalesFixed CostsTotal Variable CostsNet Profit (loss)$300,000($96,000)($204,
Herzing - FINANCE - 101
Solution:State of EconomyStrongSteadyWeekAustin ElectronicsSalesProbability$900,0000.15$650,0000.60$375,0000.25Expected Level of Sales:Expected Outcome$135,000$390,000$93,750$618,750Solution:State of EconomyStrongSteadyWeekSharpe
Herzing - FINANCE - 101
Beth Society Clothiers,Inc.Daily collections$4,000,000Days speed up2.50Daily disbursements$3,000,000Days slow down1.50Interest rate6%Solution:a)Additional collections = Daily collections * Days speed upAdditional collections =$10,000,000De
Herzing - FINANCE - 101
a)b)c)d)2% /2% /3% /3% /10 net15 net10 net10 net504045180Solution: Cost of notDiscount %360taking a cash =100% Disc.% Final due date discountDiscount perioda)Days in Year360100%Cost of lost discount =18.37%b)Cost of lost disc
Herzing - FINANCE - 101
Solution:a) Par ValueInterest (Coupon)Time to Maturity = nYield to Maturity = iAnnuity = APVIFAPVIFLone Star Company$1,0006%Present Value of Interest Payments = A * PVIFA20Present Value of Interest Payments = $1,032.296%Present Value of Pri
Herzing - FINANCE - 101
Solution:a.DebtCommon EquityWeighted average cost of capitalSpeedy Delivery SystemsCost5%17%Weights Weighted Cost50%2.5%50%8.5%11%Solution:Time to Maturity = nYield to Maturity = iAnnuity = APVIFAPVIF404%$200,00019.7930.208Law Su
Herzing - FINANCE - 101
Solution:Diploma MillsEarningsInterestPreferred stock dividendsCommon stockholders residual claim to earnings$30,000,000$4,250,000$2,950,000$22,800,000Steele Pipe Co.Shares outstandingStock Selling PriceTrigger Point% Reduction in Price13,8
Herzing - FINANCE - 101
InformationSpot30-day forward# of Swiss Francs$0.8466$0.8504100,00090-day forward180-day forwardValue of Dollars$0.8540$0.8587$100,000Solution:Forward rate Spot rate 12b)30-day forward premium =100Spot rate130-day forward premium =5.3
Herzing - FINANCE - 101
Chapter 18 - Dividend Policy and Retained EarningsChapter 18Dividend Policy and Retained EarningsTrue / False Questions1. The "marginal principle of retained earnings" holds that corporate investment shouldprovide a return equal to or higher than tha
Ashford University - PHYS - 207
Lab QuestionsWhat, specifically, about the companys products or practices is environmentally sustainable (inany of the following areas that are applicable):A fund-raiser for Growing Gardens. This non-profit organization helps elderly, low incomepeople
Caltech - ECON - 1133
WATR 4415 WATER RESOURCES MANAGEMENT ANDLEGISLATIONEconomics of Water Resources Planning and ManagementLect 8:Budget Preparation and AdministrationA budget is a financial report containing estimates of income and expenses.It can also be viewed as pl
Caltech - ECON - 1012
WATR 4415 WATER RESOURCES MANAGEMENT ANDLEGISLATIONWater Resources PlanningLect 7:Plan ImplementationWhen a planning report is accepted and the alternative selected, theimplementation step starts.Obstacles in Implementation1. The raising of the ne
Abraham Baldwin Agricultural College - ACCOUNTING - 101
Chapter TwoDetermination ofInterest Rates2-12009,TheMcGrawHillCompanies,AllRightsReservedInterest Rate Fundamentals Nominal interest rates: the interest ratesNominal interest rates: the interest ratesactually observed in financial marketsactually
Abraham Baldwin Agricultural College - ACCOUNTING - 301
Chapter 01 - IntroductionSOLUTIONS MANUALChapter OneAnswers to Chapter 1Questions:1.a. primaryb. primaryc. secondaryd. secondarye. secondary2.a. money marketb. money marketc. capital marketd. capital markete. capital marketf. money market
Abraham Baldwin Agricultural College - ACCOUNTING - 301
Answers to Chapter 2 Questions 1. Time value of money specifically assumes that any interest or other return earned on an investment is reinvested and interest is, in turn, earned on the earlier interest payments. That is, interest is compounded. This is
Abraham Baldwin Agricultural College - ACCOUNTING - 301
Answers to Chapter 3 Questions1. 935 = 75(PVIFA rr, 5) + 980(PVIF rr, 5) rr = 8.83%2. 980 = 75(PVIFA Err, 3) + 990(PVIF Err, 3) Err = 7.97%3. Vb = 1,000(.08) (PVIFA 9%, 10) + 1,000(PVIF 9%, 10) = $935.824. $1,100 = 1,000(.12) (PVIFA ytm/2, 10(2) ) + 1
Abraham Baldwin Agricultural College - ACCOUNTING - 301
Answers to Chapter 4 Questions1. As part of the Federal Reserve System, Federal Reserve Banks perform multiple functions.These include assistance in the conduct of monetary policy, supervision and regulation of memberbanks, and the provision of service
Abraham Baldwin Agricultural College - ACCOUNTING - 301
Answers to Chapter 5 Questions1. First, money market instruments are generally sold in large denominations (often in units of $1million to $10 million). Most money market participants want or need to borrow large amounts ofcash. So that transactions co
Abraham Baldwin Agricultural College - ACCOUNTING - 301
Answers to Chapter 8 Questions1. This is because stock market movements are sometimes seen as predictors of economic activityin a country. This is also because corporate stocks may be the most widely held of all financialsecurities. Most individuals ow
Abraham Baldwin Agricultural College - ACCOUNTING - 301
Answers to Chapter 9 Questions1. From 1944 to 1971, the Bretton Woods Agreement called for the exchange rate of onecurrency for another to be fixed within narrow bands around a specified rate with the help ofgovernment intervention. The Bretton Woods A
Abraham Baldwin Agricultural College - ACCOUNTING - 301
Answers to Chapter 10 Questions1. A derivative security is a financial security whose payoff is linked to another, previously issuedsecurity. Derivative securities generally involve an agreement between two parties to exchange astandard quantity of an
Abraham Baldwin Agricultural College - ACCOUNTING - 301
Answers to Chapter 11 Questions1. A depository institution is a financial intermediary that obtains a significant proportion of itsfunds from customer deposits. Industrial corporations tend to obtain a greater proportion of theirfunds from stockholders
Abraham Baldwin Agricultural College - ACCOUNTING - 301
Answers to Chapter 12 Questions1. A comparison of Table 12-3 with Table 11-2 reveals that unlike banks, savings institutions holdthe vast majority of their assets in the form of mortgages and mortgage backed securities. Likebanks, the liabilities of sa
Abraham Baldwin Agricultural College - ACCOUNTING - 301
Answers to Chapter 13 Questions1. The Report of Condition refers to the bank's balance sheet which presents information aboutthe accumulation of assets, liabilities, and equity as of a specific point in time. The Report ofIncome refers to the bank's in
Abraham Baldwin Agricultural College - ACCOUNTING - 301
Answers to Chapter 14 Questions1. Regulators have issued several guidelines to insure the safety and soundness of FIs:i. FIs are required to diversify their assets and not concentrate their holdings of assets. Forexample, banks cannot lend more than 15
Abraham Baldwin Agricultural College - ACCOUNTING - 301
Answers to Chapter 15 Questions1. The primary function of a life insurance company is to protect policyholders from adverseevents. Banks accept deposits from people and companies looking for a fairly safe, liquid place toput their money and make loans
Abraham Baldwin Agricultural College - ACCOUNTING - 301
Answers to Chapter 17 Questions1. The three types of finance companies are (1) sales finance institutions, (2) personal creditinstitutions, and (3) business credit institutions.Finance companies differ from commercial banks in that they rely on short-a
Abraham Baldwin Agricultural College - ACCOUNTING - 301
Answers to Chapter 18 Questions1. A mutual fund represents a pool of financial resources obtained from individuals and investedin the money and capital markets. It represents another way for those with extra funds to channelthose funds to those in need
Abraham Baldwin Agricultural College - ACCOUNTING - 301
Answers to Chapter 19 Questions1. Firm-specific credit risk refers to the likelihood that individual assets may deteriorate inquality. Thus, if S&P lowers its rating on IBM stock and if an investor is holding only thisparticular stock, she will face si
Abraham Baldwin Agricultural College - ACCOUNTING - 301
Answers to Chapter 20 Questions1. Credit risk management is important for bank managers because it determines several featuresof a loan: interest rate, maturity, collateral and other covenants. Riskier projects require moreanalysis before loans are app
Abraham Baldwin Agricultural College - ACCOUNTING - 301
Answers to Chapter 21 Questions1. Credit risk management is important for bank managers because it determines several featuresof a loan: interest rate, maturity, collateral and other covenants. Riskier projects require moreanalysis before loans are app
Abraham Baldwin Agricultural College - ACCOUNTING - 301
Answers to Chapter 22 Questions1. Asset-side risk arises from transactions that result in a transfer of cash to some other asset.This could arise from the exercise of a loan commitment or a line of credit. Liability side riskarises from transaction whe
Abraham Baldwin Agricultural College - ACCOUNTING - 301
Answers to Chapter 23 Questions1. The length of the repricing period determines which of the securities in a portfolio are ratesensitive. The longer the repricing period, the more securities either mature or need to be repriced,and, therefore, the more
Abraham Baldwin Agricultural College - ACCOUNTING - 301
Answers to Chapter 24 Questions1. The major differences between futures and forward contracts are:i. Futures contracts are traded in open exchanges in standardized units, with fixed maturities.Forward contracts are bilateral agreements between two coun
Abraham Baldwin Agricultural College - BUSINESS - 201
Answers to Chapter 6 Questions 1. Capital markets are markets that trade equity (stocks) and debt (notes, bonds, and mortgages) instruments with maturities of more than one year. Bonds are long term debt obligations issued by corporations and government u
Abraham Baldwin Agricultural College - MGMT - 425
Answers to Chapter 7 Questions1. Mortgage markets are examined separately from bond and stock markets for several reasons.First, mortgages are backed by a specific piece of real property. If the borrower defaults on amortgage, the financial institution
Abraham Baldwin Agricultural College - BMGT - 510
Answers to Chapter 16 Questions1. As with all intermediaries, these firms bring together those who may need extra money withthose who wish to invest their money. This may take the form of an investment bankerunderwriting an IPO for a growing company or
Abraham Baldwin Agricultural College - ACCOUNTING - 425
Chapter EightStock MarketsMcGrawHill/IrwinCopyright8-1 2004byTheMcGrawHillCompanies,Inc.Allrightsreserved.Stock Markets Overview Stockholders are the legal owners of aStockholders are the legal owners of acorporationcorporation they have a resid
Abraham Baldwin Agricultural College - ACCOUNTING - 425
Chapter NineForeign ExchangeMarketsMcGrawHill/IrwinCopyright9-1 2004byTheMcGrawHillCompanies,Inc.Allrightsreserved.Foreign Exchange Markets Overview Foreign exchange (FX) markets - markets in whichForeign exchange (FX) markets markets in whichcas
Abraham Baldwin Agricultural College - ACCOUNTING - 425
Chapter TenDerivative SecuritiesMarketsMcGrawHill/Irwin10-1Copyright2004byTheMcGrawHillCompanies,Inc.Allrightsreserved.Derivative Securities: ChapterOverview Derivative securityDerivative security a financial security whose payoff is linked to
Abraham Baldwin Agricultural College - ACCOUNTING - 425
Chapter ThreeInterest Rates andSecurity ValuationMcGrawHill/Irwin3-1Copyright2004byTheMcGrawHillCompanies,Inc.Allrightsreserved.Various Interest Rate Measures Coupon rate: iinterestrate on aabond used to calculate theCoupon rate: nterest rate on b
Abraham Baldwin Agricultural College - ACCOUNTING - 425
Chapter FourThe Federal ReserveSystem, Monetary Policy,and Interest Rates4-12009,TheMcGrawHillCompanies,AllRightsReservedThe Federal Reserve Founded by Congress under the FederalFounded by Congress under the FederalReserve Act in 1913Reserve Act
Abraham Baldwin Agricultural College - ACCOUNTING - 425
Chapter FiveMoney MarketsMcGrawHill/Irwin5-12009,TheMcGrawHillCompanies,AllRightsReservedMoney Markets Liquid funds flow between short-term borrowers andLiquid funds flow between short-term borrowers andllendersthrough money marketsenders through
Abraham Baldwin Agricultural College - ACCOUNTING - 425
Chapter SixBond Markets6-12009,TheMcGrawHillCompanies,AllRightsReservedBond and Bond Markets Capital markets iinvolve equity and debtCapital markets nvolve equity and debtiinstruments with maturities of more than one yearnstruments with maturities
Abraham Baldwin Agricultural College - ACCOUNTING - 425
Chapter SevenMortgage Markets7-12009,TheMcGrawHillCompanies,AllRightsReservedMortgages and Mortgage-BackedSecurities Mortgages aareloans to individuals or businesses toMortgages re loans to individuals or businesses topurchase homes, land, or othe
Abraham Baldwin Agricultural College - ACCOUNTING - 425
Chapter ElevenCommercial Banks:Industry OverviewMcGrawHill/Irwin8-12009,TheMcGrawHillCompanies,AllRightsReservedCommercial Banks Commercial banks aarethe largest group of financialCommercial banks re the largest group of financialiinstitutionsin
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Chapter TwelveCommercial BanksFinancial Statements andAnalysisMcGrawHill/Irwin8-12009TheMcGrawHillCompanies,AllRightsReservedRegulators The Federal Deposit Insurance Corporation (FDIC)The Federal Deposit Insurance Corporation (FDIC)iinsuresthe d
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Chapter ThirteenRegulation ofCommercial BanksMcGrawHill/Irwin8-12009,TheMcGrawHillCompanies,AllRightsReservedSpecialness of Commercial Banks Commercial banks provide many unique servicesCommercial banks provide many unique services information, l