chapter 24

Question 1

1) Which is not one of the reasons why firms hold cash?

a) In case good deals arise
b) To finance major outlays
c) To enjoy returns on investment
d) To handle emergencies

Answer 1

c

Question 2

2) Which of the following pairs does not include a motive for holding cash?

a) Transactions motive and speculative motive
b) Precautionary motive and transactions motive
c) Speculative motive and finance motive
d) Transactions motive and operating motive

Answer 2

d

Question 3

3) The transactions motive refers to

a) The motive to hold cash that is required for a firm’s normal operations
b) The motive to hold cash that is required for purchases
c) The motive to hold cash that is required for a firm’s long-term purchases
d) The motive to hold cash that is required for emergencies

Answer 3

a

Question 4

4) The precautionary motive refers to

a) A firm’s motive to hold securities in case of emergencies
b) A firm’s motive to hold cash in case of emergencies
c) A firm’s motive to hold cash for insurance purposes
d) A firm’s motive to hold cash to pay for damages

Answer 4

b

Question 5

5) Which of the four motives for holding cash do firms cite when planning for major outlays?

a) Speculative motive
b) Precautionary motive
c) Transactions motive
d) Finance motive

Answer 5

d

Question 6

6) The term “cash on hand” refers to:

a) cash in the current account
b) cash in marketable securities
c) None of the above
d) a and b

Answer 6

6

Question 7

7) To be included in “cash on hand” cash must be:

a) Available instantaneously
b) Available almost instantaneously
c) Next day available
d) Available for borrowing immediately

Answer 7

b

Question 8

8) Investments in short-term marketable securities are categorized as:

a) Operational investments
b) Speculative investments
c) Strategic investments
d) Near-cash investments

Answer 8

d

Question 9

9) Which of the following is not an example of a near-cash item?

a) Treasury Bonds
b) Commercial Paper
c) Treasury Bills
d) Bankers’ Acceptances

Answer 9

a

Question 10

10) What is the optimal amount of cash a firm should hold?

a) As much as possible
b) Just enough to pay for purchases
c) Enough to be liquid
d) None

Answer 10

c

Question 11

11) What determines the optimum amount of cash a firm should hold?

a) The motives for the use of the cash
b) The firm’s borrowing capacity
c) a and b
d) None of the above determines the optimum amount of cash a firm should hold

Answer 11

c

Question 12

12) Why might firms prefer to hold more liquidity in borrowing facilities rather than raising capital from shareholders?

a) Firms can obtain more capital from borrowing
b) Obtaining the money is faster via borrowing
c) Borrowing is often cheaper
d) Firms would like to avoid paying dividends to investors

Answer 12

c

Question 13

13) Which of the following scenarios is an example of the transactions motive to hold cash?

a) An oil company saves abnormally high earnings as cash on its balance sheet which it will use to buy another oil company.
b) A manufacturing company holds cash to pay its suppliers for raw materials.
c) An airline keeps a reserve of cash during the winter months in case it has to pay customers a refund because bad weather results in a cancellation of flights.
d) A firm holds cash to pay its annual dividend.

Answer 13

b

Question 14

14) Which of the following scenarios is an example of the speculative motive to hold cash?

a) An oil refining company holds cash to make special purchases of petroleum if the price temporarily drops below a predetermined level.
b) A government holds cash to make interest payments on its bonds.
c) A small business holds cash that it will use to purchase equipment at the end of the year.
d) A firm holds cash to pay its employee wages.

Answer 14

a

Question 15

15) Which of the following scenarios is an example of the precautionary motive to hold cash?

a) A retailer holds a reserve of cash in case customers return products for a cash refund.
b) A bank holds cash on deposit for its customers.
c) A car dealership holds cash to pay its utility bill.
d) A small business pays a cash dividend to its owner because she’s not sure she will have enough funds to pay for Christmas gifts for her family

Answer 15

a

Question 16

16) Cash on hand provides:

a) low return, high liquidity, and low default risk
b) high return, high liquidity, and low default risk
c) high return, high liquidity, and high default risk
d) low return, high liquidity, and high default risk

Answer 16

a

Question 17

17) A firm taking a conservative approach with respect to its cash balance is most likely to be:

a) holding as much credit as possible
b) holding as much cash as possible
c) holding as much borrowing ability as possible
d) holding as much long-term debt as possible

Answer 17

b

Question 18

18) A firm taking an aggressive approach with respect to their cash balance is most likely to be:

a) holding as little cash as possible
b) holding as much cash as possible
c) holding as much credit as possible
d) holding as little borrowing power as possible

Answer 18

a

Question 19

19) The optimal cash balance is one that

a) Balances liquidity against sacrificing expected return
b) Balances illiquidity against sacrificing borrowing power
c) Balances illiquidity against sacrificing expected return
d) Balances illiquidity against sacrificing expected profits

Answer 19

c

Question 20

20) Which of the following scenarios is an example of the finance motive to hold cash?

a) A government holds cash to pay for its operating expenses.
b) A taxi company holds cash in reserve in case some of its vehicles require repairs.
c) A company that makes motion pictures holds cash to pay for special effects for a new film.
d) A bank holds cash to pay its shareholders their annual dividend.

Answer 20

d

Question 21

21) Which of the following firms will have the highest cash balance?

a) A firm with low cash requirements but unpredictable cash needs
b) A firm with high cash requirements but unpredictable cash needs
c) A firm with high cash requirements but predictable cash needs
d) A firm with low cash requirements but predictable cash needs

Answer 21

b

Question 22

22) One way to alleviate the problem of the low returns associated with cash, but still maintain high liquidity is to

a) Keep no cash on hand
b) Invest in more bonds
c) Borrow funds at a lower interest rate
d) Invest in marketable securities

Answer 22

d

Question 23

23) The level of a firm’s investment in marketable securities is dictated by its:

a) Liquidity requirements
b) Accuracy of cash requirement needs forecasts
c) Accuracy of cash requirement needs and level of returns
d) Liquidity requirements and accuracy of cash requirement needs

Answer 23

d

Question 24

24) Which firms can maintain a higher portion of their liquidity in marketable securities and less in cash?

a) firms that have well-developed cash management systems and more predictable cash flows.
b) firms that have more cash than they need.
c) firms that have expertise in securities trading.
d) firms that have volatile cash flows.

Answer 24

a

Question 25

25) The main premise to good cash management is to:

a) Sell at the highest profit possible
b) Collect sales as quickly as possible and sell at the highest price
c) Sell at the highest profit and pay expenses as late as possible
d) Delay payables as much as possible and collect receivables as soon as possible

Answer 25

d

Question 26

26) The drawbacks to delaying making payments may include all of the following, except

a) Alienating suppliers
b) Losing out on valuable trade credit
c) Loss of business
d) Reduced liquidity

Answer 26

d

Question 27

27) The float is defined as:

a) The time between when payables are accrued and when they are paid
b) The time between when the sale is made and when the money is available for use by the receiving firm
c) The time between when payment is initiated and the time the money is available for use by the receiving firm
d) The time between when sale is made and the time the payment cheque is issued to the receiving firm

Answer 27

c

Question 28

28) All of the following are components of float except:

a) The time it takes the receiving firm to make a sale on credit and receive payment from the purchasing firm
b) The time it takes the cheque to clear through the banking system so that the funds are available to the firm
c) The time it takes the receiving firm to process the cheque and deposit it in an account
d) The time it takes the cheque to reach the firm after it is mailed by the customer

Answer 28

a

Question 29

29) A post-dated cheque is:

a) A cheque dated before the purchase has been made
b) A cheque written after the purchase has been made
c) A cheque dated at the date the purchase was made
d) A cheque dated later than the date the purchase was made

Answer 29

d

Question 30

30) Which of the following is/are alternatives to paying with a cheque?

a) Electronic funds transfer
b) Debit cards
c) Electronic data interchange
d) All of the above

Answer 30

d

Question 31

31) Firms implement centralized systems with respect to receivables and payables in order to:

a) Monitor collections
b) Ensure payments are made on time
c) Monitor payments
d) All the above

Answer 31

d

Question 32

32) Which of the following is/ are part of the credit granting decision?

a) The credit terms
b) Whether to grant credit
c) Details of the collection process
d) All of the above

Answer 32

d

Question 33

33) A company’s trade credit decision is largely set by all of the following criteria except

a) The nature of the product sold
b) The industry the firm operates in
c) The company’s profitability
d) Competitors’ credit policies

Answer 33

c

Question 34

34) An open account credit occurs when a firm:

a) Grants trade credit to customers who have an account with the firm
b) Grants trade credit to customers who have depository accounts
c) Grants trade credit to customers by collateralizing the assets sold to the customer
d) Grants credit to customers who have an open bank account

Answer 34

c

Question 35

35) The credit terms offered to a customer include all the following except:

a) Due date
b) Discount date
c) Discount amount
d) Product on discount

Answer 35

d

Question 36

36) If the current credit policy is 3/30 net 60, which of the following tightens the credit policy?

a) 3/30 net 90
b) 3/35 net 75
c) 2/30 net 60
d) 3/20 net 45

Answer 36

d

Question 37

37) If the current credit policy is 3/30 net 60, which of the following loosens the credit policy?

a) 3/20 net 60
b) 3/35 net 75
c) 2/30 net 60
d) 3/30 net 45

Answer 37

b

Question 38

38) Use the following statements to answer this question:
I. A high receivable turnover is a good credit strategy that allows firms to lower working capital requirements
II. Trade credit terms are financing tools to the supplier

a) I and II are correct
b) I and II are incorrect
c) I is correct and II is incorrect
d) I is incorrect and II is correct

Answer 38

c

Question 39

39) You are offered the following terms: 5/25 net 50. What is the effective annual interest rate for not paying on time, approximately?

a) 111.5%
b) 103.9%
c) 76.8%
d) 45.4%

Answer 39

a

Question 40

40) Your supplier offers you 6/20 net 60 terms. What is the effective annual interest rate for not paying on time, approximately?

a) 45.7%
b) 58.2%
c) 75.9%
d) 209.3%

Answer 40

c

Question 41

41) A factoring company is:

a) A financial firm that buys receivables at a discount
b) A financial firm to which a company out-sources its collection process.
c) a and b
d) None of the above

Answer 41

c

Question 42

42) Creditors are interested in assessing a borrower’s capacity and character, as well as overall economic conditions when reviewing a loan application. Which of the following would make a bank more willing to lend funds?

a) A small business faces deteriorating business conditions because of a recession in the overall economy.
b) The owner of a small business has been personally bankrupt twice.
c) A retail store has been diligent in making all of its payments on time and in full over the past five years.
d) A large corporation missed an interest payment on one of its bond issues last month.

Answer 42

c

Question 43

43) The following pairs are all costs of holding inventory except:

a) Storage and insurance
b) Obsolescence and inventory financing
c) Handling and spoilage
d) Purchase price and overhead

Answer 43

d

Question 44

44) The following pairs are all benefits of holding inventory except:

a) receive discounts on large-volume purchases
b) keep sufficient levels of raw materials to minimize disruptions in the production process
c) minimize lost sales because of shortage
d) reduce interest payments

Answer 44

d

Question 45

45) The ABC approach to inventory management divides inventory into

a) Several categories based on first-in, first-out basis
b) Several categories based on first-in, first-out basis
c) Several categories based on overall level of importance and profitability
d) Several categories based on overall type of product

Answer 45

c

Question 46

46) The Economic Order Quantity (EOQ) model of inventory management determines the optimal inventory level that:

a) Minimizes shortage costs
b) Minimizes carrying costs
c) a and b
d) None of the above describes the EOQ model.

Answer 46

c

Question 47

47) Under which scenario does the Economic Order Quantity inventory management model work poorly?

a) A clothing retailer wants to reduce its inventory shortage costs without unnecessary increases in carrying costs.
b) A grocery store wants to optimize its fruit and vegetable produce inventory, which has an 8% spoilage rate per week.
c) A store that sells only Christmas decorations and Halloween costumes wants to optimize its inventory management.
d) An online retailer wants to determine optimal inventory levels

Answer 47

c

Question 48

48) By adopting a “Just In Time inventory” management concept, a company will be vulnerable to:

a) Suppliers’ bargaining power
b) Acute changes in economic environment
c) Suppliers’ risk of bankruptcy
d) All of the above

Answer 48

d

Question 49

49) An example of a spontaneous source of funds is:

a) Short-term borrowing
b) Bank credit line
c) Trade credit
d) Commercial paper loans

Answer 49

c

Question 50

50) The prime lending rate is defined as:

a) The rate banks borrow from other commercial banks
b) The rate banks give to their best customers
c) The rate banks give to their smallest customers
d) The rate banks borrow from the central bank

Answer 50

b

Question 51

51) Which of the following scenarios are examples of credit enhancements?

a) A manufacturing company makes monthly payments into a sinking fund which it will use to repay principal to bondholders when the bonds mature.
b) A trucking company obtains a lower interest rate on a bank loan for trucks by pledging the vehicles as collateral.
c) Mortgages on residential properties must be insured by the Canada Mortgage and Housing Corporation if the down payment is less than 20%.
d) All of the above.

Answer 51

d

Question 52

52) Which of the following scenarios is an example of securitization?

a) A bank issues more common shares to the public.
b) A multinational manufacturing company sells fixed income securities to a European pension fund in a private deal.
c) A bank creates fixed income securities using the receivables from mortgages on residential property, and sells them to a fixed income mutual fund.
d) The Government of Canada sells 25-year Treasury bonds to raise funds for infrastructure.

Answer 52

c

Question 53

53) Toronto Skaters Company is being offered a one-year variable rate loan at a rate of prime + 0.75%. The loan is to be paid in quarterly installments and there are no other fees associated with it. The prime lending rate is currently 6% compounded quarterly. What is the effective annual cost of this loan?

a) 6%
b) 6.14%
c) 6.75%
d) 6.92%

Answer 53

d

Question 54

54) All of the following are tasks performed by a factor except:

a) Purchasing payables and extending loans
b) Purchasing receivables
c) Checking customers’ credit and authorizing credit
d) Receivables bookkeeping and collection

Answer 54

a

Question 55

55) The two major types of money market instruments available are

a) Credit lines and T-Bills
b) T-bonds and junk bonds
c) Bankers’ acceptances and commercial paper
d) Stocks and options

Answer 55

c

Question 56

56) Laurentide Resort Company would like to issue $25 million face value of 60-day commercial paper at a cost of 0.65%. In addition, the firm must maintain the $25 million credit line at a cost of 0.1% as a standby fee. What is the effective annual cost of this transaction?

a) 4.02%
b) 4.56%
c) 4.65%
d) 56.57%

Answer 56

c

Question 57

57) Securitization refers to the process of:

a) Bonds are sold to the public at a discount
b) Stocks are issued to raise funds instead of bonds
c) Loans and / or receivables are packaged to create new securities
d) A portfolio of securities is sold to raise funds to pay debts

Answer 57

c

Question 58

58) A firm would like to issue $15 million face value of 30-day bankers’ acceptances quoted at 5.5% at a stamping fee of 0.25%. What is the effective annual cost to the firm?

a) 4.65%
b) 5.64%
c) 8.90%
d) 23.39%

Answer 58

c