Question 1

A firm is involved in "cheque kiting" if it:

Accepted Answer

Cheque kiting involves writing cheques from one account to another, taking advantage of the float (the time between when the cheque is deposited and when it clears). Writing cheques on its own account for creating float is an example of cheque kiting. Option A is an example of fraud, but not cheque kiting. Option B is an example of late payments, but not cheque kiting. Option C is vague and does not provide enough information to determine if it is cheque kiting.

Question 2

Short-term securities are safe to keep idle cash balance.Choose from the following, one appropriate reason for this.

Accepted Answer

Short-term securities typically have lower interest rate risk compared to longer-term securities, making them a safer option for idle cash balances. While they may not offer high returns or high net present value, they are a convenient choice for receiving interest payments.

Question 3

A firm with unpredictable cash flows is trying to set upper and lower limits for cash balances.Which of the following factors will result in upper and lower limits being closer to each other?

Accepted Answer

When the variance of cash flows is low, it means that the cash flows are more predictable and stable. This stability allows for upper and lower limits to be set closer together, as there is less risk of unexpected cash flow fluctuations.

Question 4

Which of the following statements is correct for a firm that currently has total costs of carrying and ordering inventory that are 50 percent higher than total carrying costs?

Accepted Answer

Current order size is greater than optimal

Question 5

A firm issued three cheques for $25,000, $15,000, and $13,000 on January 31, and deposited a $30,000 cheque into the bank account.None of the cheques were cleared by February 1.What is the net float from these transactions?

Accepted Answer

The payment float is $53,000 (the total amount of the three cheques issued).
The availability float is $30,000 (the amount of the cheque deposited in the bank).
Therefore, the net float is $23,000 (payment float - availability float).
Since the net float is positive, it means that the firm has access to more funds than what is currently available in the bank account. Hence, the correct answer is B (+$23,000).

Question 6

A primary purpose of restricting the investment of idle cash balances to money market instruments is to:

Accepted Answer

The primary purpose of restricting the investment of idle cash balances to money market instruments is to carry a minimal amount of interest-rate risk. Money market instruments have a low maturity and low credit risk which minimizes the chances of fluctuations in their market value due to interest rate changes. This ensures the preservation of the principal amount invested and provides stability to the cash reserves of the entity. While obtaining government guarantees, minimizing transaction costs, and having a continual market for selling the investment could be additional benefits, they are not the primary purpose of investing in money market instruments.

Question 7

The economic order quantity for a product is 500 units.However, new orders require five working-days lead time during which time 60 units will be used.Given this information, the correct economic order quantity is:

Accepted Answer

The economic order quantity (EOQ) formula calculates the ideal order quantity a company should purchase to minimize inventory costs such as holding costs, shortage costs, and order costs. The lead time and usage rate do not affect the EOQ calculation itself; they are more relevant for determining reorder points. Therefore, the EOQ remains 500 units despite the lead time and usage rate information provided.

Question 8

What is the opportunity cost of keeping a cash balance of $2.5 million, if the daily interest rate is 0.025 percent and the average transaction cost of investing money overnight is $50?

Accepted Answer

The cost of keeping a cash balance of $2.5 million is the opportunity cost of not investing that money and earning interest on it.

The daily interest earned on $2.5 million is $625 (2.5 million x 0.025%).

If the average transaction cost of investing money overnight is $50, then the opportunity cost of keeping the cash balance for one day is $625 - $50 = $575.

Therefore, the best choice is C.

Question 9

Baumol's model is not suitable for a firm that experiences:

Accepted Answer

Baumol's model assumes a constant cash flow rate and does not consider variability in cash flow. Therefore, it is not suitable for a firm that experiences increased variability of cash flow. The other options are not relevant to the assumptions of Baumol's model.

Question 10

Recent interest rate increases have increased the cost of carrying the inventory.What will be the effect of this on EOQ, if the sales and order costs remain the same?

Accepted Answer

EOQ (Economic Order Quantity) is calculated using the formula:

EOQ = √(2DS/H)

where D = Annual demand, S = Ordering cost per order, and H = Holding cost per unit per year.

Interest rate increases will lead to an increase in the holding cost per unit per year. As a result, H will increase, and EOQ will decrease. Therefore, the correct choice is C.

Question 11

Money market securities usually have a maturity of:

Accepted Answer

Money market securities are short-term debt securities with a maturity of less than one year. This includes Treasury bills, certificates of deposit (CDs), commercial paper, and municipal notes.

Question 12

What is the economic order quantity for firm that sells 30,000 units annually, each unit has a $6 carrying cost, and the fixed cost of placing an order is $100?

Accepted Answer

EOQ =
=
= (1,000,000)S1U1P1.5S1S1P0S1U1P1
= 1,000 units

Question 13

Average daily collection of cheques for a firm is $50,000.The firm also writes on the average $35,000 of cheques daily.If the collection period for cheques is 5 days, calculate the net float.

Accepted Answer

The answer of Average daily collection of cheques for a...

Question 14

Which of the following is correct for a firm that places orders for an item in amounts greater than the economic order quantity?

Accepted Answer

The economic order quantity is the optimal size of an order, taking into account the tradeoff between ordering costs and holding (carrying) costs. If a firm places orders for an item in amounts greater than the economic order quantity, the marginal reduction in order cost becomes smaller while the marginal carrying cost per item increases. This means that the cost of holding excess inventory increases more than the cost savings from ordering larger quantities, resulting in a situation where the marginal carrying cost per item exceeds the marginal reduction in order cost. Therefore, it is not optimal to place orders for amounts greater than the economic order quantity.

Question 15

ABC Corp.disburses $4 million annually and keeps idle funds in Treasury bills which earn an average of 5 percent and incur a fixed cost of $35 each time a cash conversion is made.What is the average amount of cash that ABC Corp.should have on hand?

Accepted Answer

The answer of ABC Corp.disburses $4 million annually and keeps...

Question 16

Which of the following represents a serious concern for those firms employing the Baumol model of cash management?

Accepted Answer

The Baumol model of cash management assumes a constant rate of cash disbursements. Therefore, a volatile rate of cash disbursements would be a serious concern as it would make it difficult to accurately predict cash needs and maintain proper cash balances. Market illiquidity, high interest-rate risk, and low rates of return on Treasury bills may be concerns for cash management in general, but they are not specific to the Baumol model.

Question 17

A firm's safety stock represents the:

Accepted Answer

Safety stock is the extra inventory that is maintained to meet the unexpected demand or uncertainty in the supply chain. It is the reorder point that considers the time lag between placing an order and receiving it, as well as any uncertainty in demand or lead time. Option A refers to finished goods inventory, Option B refers to economic order quantity, and Option C refers to high-demand items.

Question 18

Find the break-even size of wire transfer if the cost of wire transfer is $20, the daily interest rate is 0.02 percent and the reduction in float is three days.

Accepted Answer

We can use the formula:

Interest savings = Daily interest rate x Reduction in float x Amount transferred

We want to find the amount transferred that will result in interest savings equal to the cost of the wire transfer:

0.02% x 3 days x Amount = $20

0.0006 x Amount = $20

Amount = $20 / 0.0006

Amount = $33,333.33

Therefore, the break-even size of wire transfer is $33,333. Option C is the correct answer.

Question 19

In the Baumol model, the optimal sale amount is _____ with higher interest rates and ______ with a higher cost of selling securities.

Accepted Answer

The answer of In the Baumol model, the optimal sale...

Question 20

Preauthorized payments allow customers to do one of the following.

Accepted Answer

Preauthorized payments allow customers to arrange with their bank to have the account debited directly, which is a convenient and secure way of paying bills automatically without any hassle. While the other options mentioned may be available in certain situations, they are not the most common or advisable choices for preauthorized payments.

Quiz 21: Mergers, Acquisitions, and Corporate Control