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Finance
Q:
If a firm extends 4/10, net 60-day terms of sale, what is the cost in terms of nominal APR? Assume a 360-day year.
A) 29.40%
B) 30.0%
C) 23.99%
D) 27.86%
Q:
Which of the following factors determines the amount that a firm would have invested in accounts receivable?
A) collection efforts
B) the percentage of credit sales to total sales
C) the volume of sales
D) the terms of sale
E) All of the above
Q:
Which of the following might occur when a firm increases its collection efforts?
A) an increase in inventory costs
B) an increase in bad debts
C) an increase in sales
D) a decline in accounts payable
Q:
Credit and collection policies affect all of the following EXCEPT
A) level of sales.
B) length of time before credit sales are collected.
C) terms of sales.
D) pricing policies.
Q:
Which of the following is generally under the control of the financial manager?
A) the percentage of credit sales to total sales
B) the actual level of sales
C) the credit policies
D) A and B
Q:
Determine the effective annualized cost of forgoing the trade discount on terms 1/20 net 45.
A) 14.55%
B) 15.24%
C) 16.780%
D) 20.69%
Q:
Determine the effective annualized cost of forgoing the trade discount on terms 2/15 net 65.
A) 11.30%
B) 14.69%
C) 32.6%
D) 48.98%
Q:
If a firm with credit terms of 2/10 net 30 were to change its terms to 2/10 net 60, the result would probably be
A) more customers would take advantage of the cash discount.
B) fewer customers would take advantage of the cash discount.
C) increased accounts receivable turnover.
D) a reduction in safety stock.
Q:
If a firm with credit terms of 1/10 net 30 were to change its terms to 3/10 net 30, the result would probably be
A) increased bank loans.
B) increased accounts receivable turnover.
C) an increase in the average level of accounts receivable.
D) a decrease in accounts payable.
Q:
A trade credit discount such as 2/10 net 40 means
A) a 2 percent penalty is due after 40 days.
B) a 2 percent discount if payment is made within 10 days, otherwise, the total amount is due in 40 days.
C) a 2 percent discount for payment within 10 days, and a 3 percent penalty if payment is made after 40 days.
D) 10 percent discount for cash on delivery and a 2 percent discount for payment within 40 days.
Q:
An aging schedule of accounts receivable aids the financial manager in determining
A) the amount of receivables that are past due.
B) the average age of the customers.
C) the receivables turnover.
D) the average length of the discount period.
Q:
A firm's credit and collection policies usually include
A) terms of sale, quality of customers, and collection of credit sales.
B) average collection period, dollar value of aged receivables, and terms of sale.
C) terms of sale and collection of credit sales.
D) terms of sale, level of credit sales, and collection of credit sales.
Q:
Because poor creditworthy customers may cause bad debt losses, credit sales to them should not be allowed.
Q:
A corporation that is short on cash will take a trade discount of 2/10 net 30 only if the corporation's cost of funds is less than 2%.
Q:
The terms of sale identify the possible discount for early payment, the discount period, and the total credit period.
Q:
Current assets in order of liquidity are cash, marketable securities, inventory, and accounts receivable.
Q:
A company's investment in accounts receivable is determined by the company's level of sales, percent of credit sales to total sales, and credit and collection policies.
Q:
According to the Altman model, multiple discriminant analysis indicates that those applicants with a Z score below 2.7 have a significant probability of filing for bankruptcy within a year.
Q:
The decision to forgo the discount available to those customers who pay early has an advantage as well as a disadvantage.
Q:
In terms of trade credit, default costs vary indirectly with the quality of the customer.
Q:
Efficient collection of accounts receivable helps to determine both the profitability and the liquidity of the firm.
Q:
One method used to monitor the collections of accounts receivable is aging.
Q:
Terms of sale are frequently changed by the financial manager in order to increase sales.
Q:
The financial manager typically cannot control the level of credit sales, and hence the company's investment in accounts receivable, as the level of credit sales is determined in large part by the nature of the business enterprise.
Q:
Accounts receivable variables under control of the financial manager include the terms of credit sales and the quality of credit customers.
Q:
For many industries, accounts receivable comprise as much as 25 percent of total assets.
Q:
Accounts receivable is an asset representing sales made on credit.
Q:
What is a lockbox arrangement, and how does its use reduce a firm's float?
Q:
Define float and its origins in the cash management process (that is, mail processing and transit).
Q:
Describe the relationship between the firm's cash management program and the firm's risk of insolvency.
Q:
What are the three motives for holding cash?
Q:
The selection of a proper marketable-securities mix involves evaluation of certain criteria. What are these criteria and why are they important?
Q:
The corporate treasurer of Wooden Furniture Inc. is considering the purchase of either a municipal obligation with a 6.1% coupon or a corporate bond with a 9.5% return. Both bonds have a $1,000 par value. The company is currently in the 35% marginal tax bracket. Which security should the treasurer recommend?
Q:
You have a choice between investing in a corporate bond or a municipal bond. The corporate bond has an annual yield of 10 percent, while the municipal bond has an annual yield of 7 percent. At what tax rate would you be indifferent between buying the corporate bond or the municipal bond?
Q:
Premium Seed Sales, Inc. expects to generate sales of $22,000,000 in the coming year. All sales are done on a credit basis, net 45 days. Premium Seed has estimated that it takes an average of three days for payments to reach their central office and an additional two days to process the payments. What is the opportunity cost of the funds tied up in the mail and processing? Premium Seed uses a 360-day year in all calculations and can invest free funds at 6.5%.
Q:
Crimson Plumbing Supplies expects total sales of $9,000,000 this year. Ten percent of the company's sales are paid in cash; credit sales are usually paid by check. The average check size is $3,000. Second National Bank is offering the company a lock-box system. The fees are $800 per month plus $.60 per check. Short-term marketable securities are currently earning 8 percent per year. What reduction in check collection time is necessary for Carrollton Plumbing Supplies to be neither better nor worse off from adopting the proposed system? Use a 365-day year.
Q:
Howton Mining expects to have credit sales of $8,000,000 this year. First National Bank is offering Howton Mining a lock-box system for $1,200 per month. Howton Mining estimates that the new lock-box system will reduce float by 4.5 days. What rate of return must Howton Mining earn on its marketable securities to make it worthwhile for the company to institute this lock-box system? Use a 365-day year.
Q:
Jay's Lumber Supplies earns 2.5 percent on its investment in marketable securities. A draft disbursing system has been proposed that will increase disbursement float by 4 days. Purchases next year are expected to total $18 million. Individual payments average $1,000. Use a 365-day year.
a. If the draft system is adopted, what amount of funds can the firm expect to release during the year?
b. If each issue draft costs the firm $0.30, should the draft system be adopted?
c. Should the firm consider any other factors?
Q:
Brett's, Inc. expects to have $35 million in credit sales during the coming year. In spite of a national distributing system, all remittances are sent to the home office. A proposed system can eliminate 3 days of float, releasing funds which, when invested, will earn 6.5 percent. What annual savings can Brett's, Inc. expect if the system is implemented? Use a 365-day year.
Q:
Brett's, Inc. is a national distributor of women's apparel. The company expects to receive 95,000 checks during the coming year totaling $78 million. A large bank has offered to install a lock-box system at a charge of $0.45 per processed check. If Brett's, Inc. is able to earn 5 percent before tax on additional funds, what is the minimum amount of total float days that must be saved to make the system worthwhile? Use a 365-day year.
Q:
Brett's, Inc. has received a proposal from its bank to establish a lock-box system to accelerate the receipt of $600 million annually on 900,000 checks. By its own analysis, Brett's, Inc. believes such a system would decrease total float by 3.5 days. If Brett's, Inc. can earn 7 percent before taxes on the released funds, what is the maximum that Brett's, Inc. should be willing to pay the bank per check for the service? Use a 365-day year.
Q:
Money-market funds
A) are tax exempt.
B) typically invest in a diversified portfolio of short-term, high-grade debt instruments.
C) are generally very profitable but fail to provide liquidity to the small investor.
D) typically sell shares to the public in $25,000 denominations.
Q:
Given that short-term interest rates typically fluctuate less than long-term rates, interest rate risk is least for
A) treasury bills.
B) common stock.
C) long-term government bonds.
D) medium-term corporate bonds.
Q:
A large corporation has annual sales revenues of $6 billion. The corporation currently earns 2.25% on its money-market account. If the corporation can reduce its float by three days by making its billing and collection functions more efficient, the company's operating profits will increase by approximately
A) $3,069,863.
B) $2,196,500.
C) $1,350,000.
D) $1,109,589.
Q:
A retailer sells most of its merchandise on credit and bills clients monthly. Which of the following elements of float does the retailer have the most control over?
A) mail float
B) processing float
C) transit float
D) disbursing float
Q:
Total float consists of each of the following elements EXCEPT
A) mail float.
B) processing float.
C) transit float.
D) audit float.
Q:
Considerations in the selection of a proper marketable-securities mix include all of the following EXCEPT
A) financial risk.
B) interest rate risk.
C) maturity.
D) liquidity.
Q:
________ is a short-term promissory note sold by large corporations to raise cash.
A) Repurchase agreement
B) Money-market mutual fund
C) Commercial paper
D) U.S. Treasury bill
Q:
If you were a treasurer for a Fortune 1,000 corporation who has responsibility for investing "excess cash balances," which of the following alternatives would you be least likely to select?
A) commercial paper
B) common stock
C) bankers' acceptances
D) U.S. Treasury bills
Q:
Banker's acceptances have the following characteristics EXCEPT
A) typical maturities of 1 to 5 years.
B) fully taxable at the federal, state, and local levels.
C) are sold on a discount basis and payable to the bearer.
D) are not "issued" in predetermined denominations.
Q:
The financial manager is concerned with
A) striking a balance between holding too much and too little cash.
B) maintaining high levels of profitability.
C) minimizing the chance of insolvency.
D) all of the above
Q:
Which of the following is the least liquid?
A) U.S. Treasury bills
B) commercial paper
C) money-market mutual funds
D) federal agency securities
Q:
Which of the following are short-term, unsecured promissory notes sold by large businesses?
A) negotiable certificates of deposit
B) repurchase agreements
C) money-market mutual funds
D) commercial paper
Q:
If you compare the yield of a municipal bond with that of a negotiable certificate of deposit, what is the equivalent before-tax yield of the certificate of deposit if the municipal bond has a yield of 8% per year and the investor has a marginal tax rate of 28%?
A) 8.28%
B) 9.30%
C) 10.24%
D) 11.11%
Q:
Which of the following has the least interest rate risk?
A) a six-month unsecured promissory note from International Harvester
B) an eight-year investment certificate from a federally insured bank
C) a 15-year U.S. Treasury bond
D) an AT&T bond maturing in 15 years
Q:
Which of the following has the highest interest rate risk?
A) a 20-year U.S. Treasury bond
B) Bendix Corporation six-month commercial paper
C) a six-month money-market certificate at a federally issued bank
D) a Southwest Airlines bond maturing in four years
Q:
Compare the risk of a 90-day unsecured promissory note issued by Southwest Airlines to a 20-year U.S. Government Treasury bond.
A) The Treasury bond has a lower financial risk, but a higher interest rate risk.
B) The Treasury bond has a lower financial risk and a lower interest rate risk.
C) The Treasury bond has a lower interest rate risk, but higher financial risk.
D) The Treasury bond has a higher interest rate risk, and a higher financial risk.
Q:
The objectives of a zero balance account system for the firm include
A) reduce disbursing float.
B) achieve better control over its cash payments.
C) increase cash balances in regional rather than national banks.
D) All of the above are correct.
Q:
Lockbox arrangement benefits include
A) increased working capital from shorter receivables/cash transformation time.
B) elimination of bank charges for handling and audit functions.
C) increased cash flows from delays in uncollectible check processing.
D) all of the above are benefits from this arrangement.
Q:
All of the following are false EXCEPT
A) the mail float is caused by the time lapse from the moment a firm receives the check and begins to process it.
B) the processing float is caused by the time necessary for a bank to process the check.
C) the transit float is caused by the time lapse from the moment a customer mails a check until the firm begins to process it.
D) the disbursing float derives from the fact that funds remain in a firm's bank account until its payment check is cleared through the banking system.
Q:
Managing a firm's cash outflows through use of a "zero balance account" system offers all but which of the following benefits?
A) centralized control over disbursements
B) reduction of management time spent on superficial cash management activities
C) higher rate of return on invested funds
D) reduction of excess balances in outlying accounts
Q:
Assume that Federated Stores, whose credit card billings total $120 billion per year, were to implement a lockbox arrangement that would speed up the collection of its credit card billings by 2 full days. If Federated could earn 3.5% on its marketable securities, how much would the firm earn per year from such a lockbox arrangement? Assume a 365-day year.
A) $316.99 million
B) $244.58 million
C) $230.14 million
D) $183.50 million
Q:
Float is best described by which of the below?
A) investing excess cash balances
B) the time required for a deposited check to clear through the commercial banking system and be available for payment
C) the term used to describe payment for the purchase of raw materials that are needed to complete production of a luxury liner
D) the time that is required to receive payment on a zero balance account
Q:
A way of managing a firm's cash disbursements would be through
A) zero balance accounts.
B) accounts receivable factoring.
C) lockbox system.
D) floating lien.
Q:
Salamander Insurance Company tries to settle claims as quickly as possible. In certain cases, agents can present payments to claimants which are cleared through the banking system like a check, but must be passed through the Insurance Company for approved prior to payment. This is an example of a(n)
A) zero balance account.
B) payable-through draft.
C) insurance float voucher.
D) post-dated check.
Q:
Funds that are available in a company's bank account until its payment check has cleared refers to
A) mail float.
B) processing float.
C) transit float.
D) disbursing float.
Q:
The Siskiyou Manufacturing Company will collect an estimated $12,000,000 next year; and it will receive an estimated 20,000 checks. Siskiyou's bank has offered to set up a lock-box system that will reduce float time by 4.5 days. The cost of the system will be $.15 per check. What is the minimum annual interest rate on its cash balance that Siskiyou should receive before it would be willing to adopt the lock-box system?
A) 3.25%
B) 2.03%
C) 1.82%
D) 1.07%
Q:
The PMI, Inc. processes an estimated 200,000 checks per year from its customers. Total revenue collected by check is $40,000,000. The average float time until the funds are credited to PMI's checking account is 6 days. For an extra cost of $ .06/check, PMI's bank will install a lock-box system that will reduce float time from 6 days to 2.5 days. If PMI earns 3.5% on its checking account, how much per check will PMI make if it uses the lock-box system?
A) $.005
B) $.006
C) $.007
D) $.008
Q:
SteelCo Production, Inc. is considering the use of a lock-box collection system. SteelCo's average check receipt is $1,350. The company invests excess cash in money-market certificates and receives an average of 3.5% annual interest. The lock-box system will speed up SteelCo's collections by 2.5 days. What is the maximum per check processing cost that SteelCo should be willing to pay for the lock-box system?
A) $0.1871
B) $0.2987
C) $0.3236
D) $0.4519
Q:
The time necessary for a deposited check to clear through the commercial banking system causes which of the following types of floats?
A) mail
B) processing
C) transit
D) disbursing
Q:
A company trying to optimize the use of float will try to
A) increase its disbursing float.
B) decrease its disbursing float.
C) decrease processing float.
D) Both A and C
Q:
A lock-box system reduces
A) mail float.
B) transit float.
C) disbursing float.
D) A and B
Q:
Payable-through drafts
A) provide for effective control over field payments.
B) are not legal instruments.
C) cannot be cleared through the banking system.
D) are a form of commercial paper.
Q:
Assume that liquid funds can be invested to yield 4.5 percent. If annual remittance checks total $2 billion, what is it worth for the firm to reduce float by 1 day?
A) $388,349
B) $246,575
C) $257,534
D) $24,658
Q:
Transit float is caused by
A) the time necessary for a deposited check to clear the banking system and become usable funds to the company.
B) the time funds are not available, through the company's bank account, until its payment check has cleared the banking system.
C) the elapsed time from the moment a customer mails his remittance check until the firm begins to process it.
D) the time required for the firm to process remittance checks.
Q:
Flashbinder Guitars, Inc. is considering a lockbox system that will increase its check processing cost by $.20 per check. The company estimates an average check size of $900 and expects any funds freed up by the new lockbox system can be invested in an account that earns 4% per year before taxes. What reduction in collection time is necessary for the lockbox to be beneficial to Flashbinder Guitars, Inc.?
A) 1.96 days
B) 2.03 days
C) 1.73 days
D) 2.15 days
Q:
Flashbinder Guitars, Inc. is negotiating with the bank for a lockbox system that is expected to reduce check collection time by 4 days. Flashbinder Guitars' average check size is $1,200 and any funds freed up by the new system will be invested in a money-market account that is currently paying 2.5% annually. What is the most Flashbinder Guitars should be willing to pay the bank for the lockbox service, assuming the bank charges a per-check processing fee?
A) 20.500 cents
B) 29.767 cents
C) 30.726 cents
D) 32.877 cents
Q:
Flashbinder Guitars, Inc. is considering a lockbox system that will increase its check processing cost by $.15 per check. The company estimates an average check size of $1,700 and expects the lockbox to reduce check collection time by 3 days. What annual before-tax yield must Flashbinder Guitars, Inc. earn on its marketable securities for the lockbox system to be beneficial?
A) 1.825%
B) 1.118%
C) 1.074%
D) 0.735%
Q:
Centralized control over disbursements is assisted by which of the following cash management techniques?
A) lockbox system
B) zero balance accounts
C) payable-through drafts
D) both B and C
Q:
A company with national sales but only one large manufacturing operation and one administrative headquarters located in the same large northeastern city would most likely use which of the following techniques for cash management?
A) lockbox system
B) zero balance accounts
C) payable-through drafts
D) bankers' acceptances