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