SU 6: Managing Current Assets

Question 0

Optimal Cash Balance

Answer 0

Square root of 2(Fixed cost per transaction)(Total demand for cash for the period)/Interest rate on marketable securities

Question 1

Cash Management Motives

Answer 1

1. Transactional
2. Precautionary
3. Speculative

Question 2

Benefit of receiving cash early

Answer 2

Daily cash receipts x Days of reduced float x Opportunity cost of funds

Question 3

Zero-Balance Account

Answer 3

At the end of each processing day, the bank transfers just enough from the firm’s master account to cover all checks presented against the ZBA that day

Question 4

Repurchase Agreement

Answer 4

A means for dealers in government securities to finance their portfolios.

Question 5

Bankers’ Acceptances

Answer 5

Drafts drawn by a non financial firm on deposits at a bank

Question 6

Average Collection Period

Answer 6

Derived by weighting the collection period for each group of receivables by it’s collection percentage

Question 7

Average Collection Period Calculation

Answer 7

Days in year/Accounts receivable turnover

Question 8

Average Balance in Receivables

Answer 8

Daily credit sales x Avg. Collection period

Question 9

Accounts receivable turnover (using dollars)

Answer 9

Annual net credit sales/Average balance in receivables

Question 10

Average Balance in Receivables for the year

Answer 10

Annual credit sales x (Avg. collection period/Days in year)

Question 11

Accounts Receivable Turnover (using days)

Answer 11

Days in year/Average collection period

Question 12

Increased Investment in Receivables

Answer 12

Incremental variable costs x Incremental avg. collection period/Days in year

Question 13

Cost of Change in Credit Terms

Answer 13

Increased investment in receivables x Opportunity cost of funds

Question 14

Benefit/Loss from a change in credit terms

Answer 14

Incremental CM - Cost of change

Question 15

Cost related to Inventory

Answer 15

Purchase costs + Carrying costs + Ordering costs + Stockout costs

Question 16

Carrying Cost of Inventory

Answer 16

Storage, insurance, opportunity costs

Question 17

Economic Order Quantity (EOQ)

Answer 17

Square root of 2(Variable cost per PO)(Periodic demand in units)/Periodic carrying costs per unit

Question 18

Reorder Point

Answer 18

(Average daily demand x Lead time in days) + Safety stock

Question 19

Cost of Inventory

Answer 19

(Invoice amount + Shipping) x Cost of capital + Insurance

Question 20

Cost of Not Taking a Discount

Answer 20

Discount %/100% - Discount % x Days in year/Total payment period - Discount period

Question 21

Cost of Carrying Safety Stock

Answer 21

Expected Stockout costs + Carrying cost

Question 22

Effective Interest Rate

Answer 22

Net interest expense/Usable funds

Question 23

Amount Needed

Answer 23

Invoice amount x (1.0 - Discount %)

Question 24

Effective Rate on Discounted Loans

Answer 24

Stated rate/(1.0-Stated rate)

Question 25

Effective Rate with Comp. Balance

Answer 25

Stated rate/(1.0-Compensating balance %)

Question 26

Total Borrowings (Comp. Balance)

Answer 26

(Invoice amount x 1.0 - Discount %)/(1.0 - Compensating balance %)

Question 27

Lines of Credit with Commitment Fees

Answer 27

(Avg. Balance x Stater rate) + [(Credit limit - Avg. Balance) x Commitment fee %]