Chapter 15--Managing Short-Term Assets
Chapter 15--Managing Short-Term
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.
2. Two of the primary motives for a firm to hold cash are the transaction motive and the precautionary motive.
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.
4. For a firm that makes heavy use of float, being able to forecast its collections and disbursement check
clearings is essential.
5. Lockbox arrangements are one way for a firm to speed up the receipt of payments from customers.
6. Target cash balances are generally not affected by compensating balance requirements except during periods
of high interest rates and tight money.
7. The primary purpose of compensating balances required of borrowers is to compensate the bank in the event
the borrower defaults on the loan.
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.
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.
10. The benefits of a sound cash management program are not sensitive to interest rates.
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.
12. The average accounts receivables balance is determined jointly by the volume of credit sales and the days
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.
14. Credit associations and credit reporting agencies are two major sources of external credit information on
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.
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.
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