Chapter 19: Cash and Marketable Securities Management
Multiple Choice


1.  

What are the three motives a firm may have to hold cash?

mail float, processing float and transit float.
lock-box agreements, preauthorized checks, and depository transfer checks.
transactions, precautions, and speculation.
zero balance accounts, payable-through drafts, and remote disbursing.


2.  

Assume that Harley-Davidson has $2 million in excess cash that it is considering investing in marketable securities. To buy and sell the securities, however, the firm must pay a transaction fee of $45,000. Would you recommend that Harley-Davidson purchase the securities if they yield 12 percent annually and are held for one month, three months, six months, or one year?

Yes, if held for one month.
No, if held for one year.
No, Harley-Davidson should not purchase the securities for any holding period.
Yes, if held for three months or longer.


3.  

Assume that Harley-Davidson is investigating the possibility of adopting a lock-box system. In a typical year the firm receives remittances totaling $12 million by check. The firm will record and process 6,000 checks over this same period. Its bank has informed Harley-Davidson management that it will expedite checks through a lock-box system for a unit cost of $.20 per check. The financial manager has projected that cash freed if the lock-box system is adopted can be invested in a portfolio of near-cash assets that will yield an annual before-tax return of 7 percent. Harley-Davidson uses a 365-day year in its calculations. How many days must Harley-Davidson save in its collection for the lock-box to pay for itself?

.2514 days
.5214 days
1.5214 days
.7841 days


4.  

Assume that Harley-Davidson will generate $12 million in credit sales next year. Collection of these credit sales will occur evenly over this period. The firm's employees work 270 days a year. Currently, the firm's processing system ties up four days' worth of remittance checks. A recent report from a financial consultant suggested procedures that will enable Harley-Davidson to reduce processing float by two full days. If the firm invests the released funds to earn 6 percent, what are the annual savings?

$44,444.
$5,333.
$45,333.
$12,000,000.


5.  

The treasurer of Harley-Davidson is considering the purchase of a BBB-rated bond that carries a 9 percent coupon. The BBB-rated security is taxable, and the firm is in the 46 percent marginal tax bracket and the face value of this bond is $1,000. A financial analyst who reports to the corporate treasurer has alerted him to the fact that a municipal obligation is coming to the market with a 5 1/2 percent coupon. The par value of this security is also $1,000. Which one of the two securities do you recommend the firm purchase? Why?

Both the municipal bond and the BBB-rated bond because they have similar yields.
Neither, because their yields are not high enough to warrant investing in them.
The BBB-rated bond because it has a higher yield than the municipal bond.
The municipal because it has a higher yield than the BBB-rated bond.


6.  

Which of the following descriptions of "float" is correct?

mail float, which is caused by the time lapse from when a customer mails a remittance check until the firm's bank deposits funds in the firm's account.
processing float, which is caused by the time necessary for a deposited check to clear through the commercial banking system and become usable funds to the firm.
transit float, which is caused by the time required for the firm to process remittance checks before they can be deposited in the bank.
disbursing float, which derives from the fact that funds are available in the firm's bank account until its payment check clears through the banking system.


7.  

Which of the following characteristics is NOT an advantage of a lock-box system?

increased working cash.
elimination of clerical functions.
slowing down disbursing float.
early knowledge of dishonored checks.


8.  

Assume that Harley-Davidson has total revenues of $50,000,000 and typically earns an annual return of 5 percent on short-term investments. What is the amount of usable funds Harley-Davidson would release if it could achieve a one-day reduction in float?

$136,986.
$172,602.
$250,897.
$275,987.


9.  

If Harley-Davidson, which has total revenues of $50,000,000 and $136,986 in daily sales, and typically earns an annual return of 5 percent on short-term investments, started using a lock-box system that is expected to speed up its cash collections by 4 days, what would its gross annual savings be?

$34,520.
$27,397.
$50,179.
$55,197.


10.  

Which of the following should the financial manager include in a portfolio of marketable securities?

high-grade shares of common stock.
long-term shares of common stock.
high-quality preferred stock.
high-grade commercial paper.


11.  

What is the equivalent before-tax yield for an investor in the 30 percent tax bracket who owns a tax-exempt bond yielding 8 percent?

1.43 percent.
11.43 percent.
10.00 percent.
15.00 percent.


12.  

From which of the following transactions does a firm receive cash inflows?

purchase of marketable securities.
purchase of fixed assets.
cash dividends.
cash sales.


13.  

Which of the following mechanisms can be used by a company to reduce excess cash balances, increase its disbursing float, and better control cash payments?

zero balance accounts.
wire transfer.
depository transfer checks.
payable through draft.


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