The Baumol model is:

Multiple Choice

• Has one difference where the interest rate is substituted for the carrying cost per unit.
• Is based off linear regression models.
• Considers cash flows, cost per sale of security and the interest rate.
• Has one difference where the cost per security sale is substituted for the cost per order.
• The exact same as the EOQ model.

Allstar Inc. is considering a lockbox system that would reduce its float by three days. An expected 500 collections per day will be made to the lockbox with an average payment size of $1,000. The bank's charge for operating the lockboxes is $.30 per cheque. The interest rate is .015 percent per day. How much will Allstar save per day by having the lockbox?

Multiple Choice

• -$75
• $150
• $75
• $0
• $225

SML Co. has established a lower limit with regard to its cash balance holdings of $10,000. Its daily cash flows have a standard deviation of $5,000. The annual interest rate on marketable securities is 8 percent. The fixed cost per transaction of buying and selling securities is $12. Calculate the target cash balance.

Multiple Choice

• $10,000
• $11,883
• $11,412
• $14,236
• $17,746

The Trektronics store begins each week with 162 phasers in stock. This stock is depleted each week and reordered. The carrying cost per phaser is $26 per year and the fixed order cost is $50. What is the optimal order quantity?

Multiple Choice

• 127 phasers
• 66 phasers
• 94 phasers
• 180 phasers
• 25 phasers

Zoo Corp. has a chequing account ledger balance of $41,000, and after calling the bank, found that the bank balance was $47,000. A deposit of $5,000 was made this morning and has not yet been credited by the bank. What is the value of the cheques outstanding or payment float?

Multiple Choice

• $6,000
• -$1,000
• $11,000
• $1,000
• $5,000

Which of the following is false?

Multiple Choice

• Checks written by the firm generate payment float
• All of the answers are false.
• An objective of float management is to speed up the availability float
• Float management will succeed if the firm can collect late and pay early
• The difference between a bank's ledger balance and the firm's ledger balance is called float

A firm has a lower limit cash balance of $200 with a standard deviation of $50. The fixed cost per transaction is $8 and the interest rate per period is 0.5%. What is the target cash balance?

Multiple Choice

• $134
• $292
• $444
• $344
• $97

A firm has a lower limit cash balance of $200 with a standard deviation of $50. The fixed cost per transaction is $8 and the interest rate per period is 0.5%. What is the average cash balance?

Multiple Choice

• $152
• $192
• $227
• $87
• $134

As order size increases the total annual order costs:

Multiple Choice

• Is in determinant
• Stays the same
• Increases
• Is always equal to the total carrying costs
• Decreases

safety stocks of an inventory item should be carried when:

Multiple Choice

• demand or lead time is uncertain.
• fluctuation in demand is known with certainty.
• the lead time for delivery is known, certain, and non-zero.
• demand or lead time is certain.
• inventory can be ordered and received without delay

When interest rates are high:

Multiple Choice

• In determinant
• Hold smaller average cash balances
• Has no effect on the average cash balance
• Holding larger cash balances is always a bad idea
• Hold larger average cash balances

AU Corp. is considering a lockbox system that would reduce its float by two days. Collections average $125,000 per day. The interest rate is 6 percent per year and the bank charges $10 per day for the lockbox system. How much will AU Corp. save per day by having the lockbox?

Multiple Choice

• $31.10
• $51.10
• $10.55
• $41.10
• $20.55

MJK Co. has established a lower limit with regard to its cash balance holdings of $500. Its daily cash flows have a standard deviation of $200. The annual interest rate on marketable securities is 5 percent. The fixed cost per transaction of buying and selling securities is $10. Calculate the target cash balance.

Multiple Choice

• $800
• $743
• $1,045
• $500
• $682

One reason why firms hold cash is in anticipation of taking advantage of unforeseen opportunities. This is called:

Multiple Choice

• meeting transaction needs.
• hedging against uncertainty.
• the liquidity requirement.
• arbitrage.
• Speculation

The target cash balance should be located:

Multiple Choice

• one-third of the distance from the lower to the upper limit.
• halfway between the upper and lower limits.
• at the upper limit.
• one-third of the distance from the upper to the lower limit.
• at the lower limit.

A firm has a lower limit cash balance of $200 with a standard deviation of $50. The fixed cost per transaction is $8 and the interest rate per period is 0.5%. What is the upper cash limit?

Multiple Choice

• $511
• $901
• $385
• $484
• $632

A firm uses the Miller-Orr model with a minimum balance of $170, a maximum of $375 and a target balance of $290. If the cash balance hits $450, what will the firm do?

Multiple Choice

• Buy $75 in marketable securities
• Buy $205 in marketable securities
• Sell $160 in marketable securities
• Sell $75 in marketable securities
• Buy $160 in marketable securities

Which of the following is true?

Multiple Choice

• None of the answers are true.
• An objective of float management is to speed up the availability float
• The difference between a bank's ledger balance and the firm's ledger balance is called float
• Checks written by the firm generate payment float
• All of the answers are true

Bell Manufacturing uses 16,000 switch assemblies per month and then reorders another 16,000. The relevant carrying cost per switch assembly is $3 per year and the fixed order cost is $80. What is the optimal order quantity?

Multiple Choice

• 120
• 3,200
• 16,000
• 14,400
• 924

The opportunity cost of holding cash is the:

Multiple Choice

• interest rate
• inflation rate
• tax rate
• WACC
• cost of equity

When the cost per security sale is high you should:

Multiple Choice

• Has no effect on the average cash balance
• In determinant
• Hold larger average cash balances
• Holding larger cash balances is always a bad idea
• Hold smaller average cash balances

At the optimal order quantity the total order costs and the total carrying costs will be:

Multiple Choice

• The order costs are always lower than the carrying costs
• Unequal
• Equal
• Unable to determine as it caries from problem to problem
• The order costs are always higher than the carrying costs

Botany Corp. uses up cash at a rate of $3,000,000 per year. The interest rate is 5 percent and each sale of securities costs $25. What is the optimal amount of securities that should be sold each time to minimize the cost of investing cash?

Multiple Choice

• $10,954
• $5,477
• $54,772
• $189,737
• $38,730

Finding the optimal amount of cash balances is important to all firms because:

Multiple Choice

• the WACC depends on the optimal cash balance.
• there are both benefits and costs to liquidity.
• interest rates on marketable securities change.
• they need to purchase marketable securities.
• of maintaining the float.

A place to invest idle cash is the:

Multiple Choice

• Any market can be used.
• money market
• long bond market
• stock market
• derivatives market

Carrying costs are:

Multiple Choice

• Cost to place the order
• Cost of space, spoilage, theft, insurance
• Cost of interest only
• Lost sales costs
• Cost of capital only

One advantage of maintaining high inventory level is:

Multiple Choice

• the possibility of lost sales is reduced.
• little capital will be tied up in inventory.
• the danger of obsolescence is minimized.
• storage costs are reduced.
• loss from theft is minimized.

Assume that a firm makes payments of $400 a day, which take an average of four days to clear, and that it receives $750 a day in cheques, which take an average of three days to clear. Calculate the firm's net float.

Multiple Choice

• -$2,250
• -$650
• $2,250
• $650
• $1,600

A firm should set the upper and lower limits on its cash balances close together if:

Multiple Choice

• the uncertainty of cash flows is high.
• the cost of buying and selling securities is high.
• All of the answers are correct.
• the day-to-day variability of cash flows is large.
• the rate of interest is high.

Zoo Corp. uses up cash at a rate of $100,000 per month. The interest rate is 7 percent and each sale of securities costs $30. What is the optimal amount of securities that should be sold each time to minimize the cost of investing cash?

Multiple Choice

• $6,547
• $7,483
• $32,071
• $42,857
• $3,207

As order size increases the total annual order costs:

Multiple Choice

• Decreases
• Is in determinant
• Increases
• Is always equal to the total carrying costs
• Stays the same

Which of the following would not be an effective way to reduce the net float?

Multiple Choice

• Introduce a lockbox system
• Mail payment cheques from remote locations
• All of the choices would reduce the net float
• Maintain a zero-balance account
• Arrange preauthorized payments with customers

When cash flows increase:

Multiple Choice

• The optimal level of cash increases more than proportionally
• The optimal level of cash increases proportionally
• Will cause a decrease to the optimal level of cash
• In determinat
• The optimal level of cash increases less than proportionally

Which money market security is a very short term, collateralized loan?

Multiple Choice

• Commercial Paper
• Repurchase agreements
• Certificates of deposit
• Treasury Bills
• Banker's acceptances

_________ is a time deposit at a bank, usually in denominations greater than $100,000, which pays interest and principal only at maturity.

Multiple Choice

• Commercial Paper
• Repurchase agreements
• Treasury Bills
• Banker's acceptances
• Certificates of deposit