Chapter 15--Managing Short-Term Assets Chapter 15--Managing Short-Term Assets Student: ___________________________________________________________________________ 1. Firms hold cash balances in order to complete transactions that are necessary in business operations and as compensation to banks for providing loans and services. True False 2. Two of the primary motives for a firm to hold cash are the transaction motive and the precautionary motive. True False 3. A firm's target cash balance should be set as the smaller of (1) its transaction balance plus a precautionary (safety stock) balance or (2) its required compensating balance. True False 4. For a firm that makes heavy use of float, being able to forecast its collections and disbursement check clearings is essential. True False 5. Lockbox arrangements are one way for a firm to speed up the receipt of payments from customers. True False 6. Target cash balances are generally not affected by compensating balance requirements except during periods of high interest rates and tight money. True False 7. The primary purpose of compensating balances required of borrowers is to compensate the bank in the event the borrower defaults on the loan. True False
8. Fixed dividend preferred stock is a good candidate for marketable security holdings designed to provide liquidity because 70 percent of the dividends are excludable from taxable income, hence the preferred would provide a relatively high after-tax rate of return. True False 9. The term "interest rate price risk" refers to the probability that a firm will be unable to continue making interest payments on its debt. True False 10. The benefits of a sound cash management program are not sensitive to interest rates. True False 11. If there are large fluctuations in a firm's cash flows, or if there are large costs associated with selling securities, then the firm should hold relatively small average cash balances. True False 12. The average accounts receivables balance is determined jointly by the volume of credit sales and the days sales outstanding. True False 13. The four major elements in a firm's credit policy are (1) credit standards, (2) credit terms, (3) monitoring function, and (4) collection policy. True False 14. Credit associations and credit reporting agencies are two major sources of external credit information on credit customers. True False 15. If you receive some goods on April 1 with the terms 3/20, net 30, June 1 dating, it means that you will receive a 3 percent discount if the bill is paid on or before June 20 and that the full amount must be paid 30 days after receipt of the goods. True False
16. Offering trade credit discounts is costly to a firm and as a result, firms that offer trade discounts are usually those that are performing poorly and need cash quickly. True False
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