Course Hero Logo

Answer a is incorrect because credit and collection

Course Hero uses AI to attempt to automatically extract content from documents to surface to you and others so you can study better, e.g., in search results, to enrich docs, and more. This preview shows page 27 - 30 out of 41 pages.

Answer (A) is incorrect because credit and collection policies concern receivables and arenot influenced by an EOQ model for inventory management.Answer (B) is incorrect becausethe level of marketable securities is in part determined by cash needs, so (D) is a betteranswer.Answer (C) is incorrect because the relationship between current assets andcurrent liabilities concerns many factors other than cash management.32.Answer (A) is correct. The optimal amount of cash to be raised by selling securities iscalculated by a formula similar to that used to determine the economic order quantity forinventory.2(F)(T)C+ =kIf:C+= Cash to be raisedT = Total cash needed for the periodF = Cost of making a securities tradek = Opportunity cost of holding cash
The optimal amount of cash to be raised by selling securities is inversely related to the rateof return forgone (opportunity cost) and directly related to the cost of the transaction.Answer (B) is incorrect because a high (low) opportunity cost results in a lower (higher)optimal cash balance, whereas high (low) transaction costs result in a higher (lower) optimalcash balance.Answer (C) is incorrect because a high (low) opportunity cost results in alower (higher) optimal cash balance, whereas high (low) transaction costs result in a higher(lower) optimal cash balance. Answer (D) is incorrect because a high (low) opportunity costresults in a lower (higher) optimal cash balance, whereas high (low) transaction costs resultin a higher (lower) optimal cash balance.33.REQUIRED:The assumption not made in the EOQ model.DISCUSSION:(D)The EOQ formula is a deterministic model that requires a known demandfor inventory, or in this case, the amount of cash needed.Thus, the cash flow requirementscannot be random.The model also assumes a given carrying (interest) cost and a flattransaction cost for converting marketable securities to cash, regardless of the amountwithdrawn.Answer (A) is incorrect because the EOQ model assumes that the cost of a transaction isindependent of the dollar amount of the transaction and interest rates are constant over theshort-run.Answer (B) is incorrect because the EOQ model assumes an opportunity cost isassociated with holding cash, beginning with the first dollar.Answer (C) is incorrect becausethe EOQ model assumes that the total demand for cash is known with certainty.34.Answer (A) is correct. Risk and yield are fundamental concerns, and taxation is apervasive issue that affects yield. Default risk is the risk that a borrower will be unable tomake interest payments or principal repayments on debt (e.g., bonds purchased from afinancially troubled company have high default risk). Taxability refers to the tax treatment ofany income or loss from a security. Relative yields are the rates of return of each security incomparison with other potential investments.Answer (B) is incorrect because these matters are a financial manager's overallresponsibility, not securities selection criteria.Answer (C) is incorrect because these cyclesare important in working capital management. The operating and payment cycles arecomponents of the cash conversion cycle. This cycle lasts from the time cash is paid forresources to the time cash is received in payment for goods sold.Answer (D) is incorrectbecause these are factors in the determination of cash flow. The inventory conversion cycleis the time between acquisition of resources and sale of finished goods. The receivablesconversion cycle lasts from the date of sale of finished goods to the date of cash collection.A payable deferral period is the lapse of time between purchase of resources and the datethey are paid for. Thus, the cash conversion cycle does not begin until the end of thepayable deferral period.
35.Answer (A) is correct. A Treasury bill is a short-term U.S. government obligation that issold at a discount from its face value. A Treasury bill is highly liquid and nearly risk-free, andit is often held as a substitute for cash.
36.Answer (B) is correct. The marketable securities with the lowest default risk are thoseissued by the federal government because they are backed by the full faith and credit of theU.S. Agency securities are issued by agencies and corporations created by the federalgovernment, such as the Federal Housing Administration. They are backed by a secondarypromise from the government.
agreements could become worthless if the organization agreeing to make the repurchase

Upload your study docs or become a

Course Hero member to access this document

Upload your study docs or become a

Course Hero member to access this document

End of preview. Want to read all 41 pages?

Upload your study docs or become a

Course Hero member to access this document

Term
Fall
Professor
N/A
Tags
Balance Sheet, Generally Accepted Accounting Principles

Newly uploaded documents

Show More

Newly uploaded documents

Show More

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture