88  Chapter 17/The Management of Cash and Marketable Securities

Chapter 17
The Management of Cash and Marketable Securities

MULTIPLE CHOICE

1. Which of the following methods is (are) used to transfer surplus funds from local (collection)
bank accounts to concentration (disbursement) bank accounts?
a. wire transfers
b. electronic depository transfer checks
c. (mail) depository transfer checks
d. all of these answers are correct
ANS: D OBJ: TYPE: Fact TOP: Expediting collections

2. ______ are processed through the Automated Clearing House (ACH) System.
a. Drafts
b. Wire transfers
c. Check-like electronic images
d. Floats
ANS: C OBJ: TYPE: Fact TOP: Electronic funds transfer

3. ______ consists of short-term unsecured promissory notes issued by large, well-known

corporations and finance companies.
a. Negotiable certificates of deposit
b. Commercial paper
c. Repurchase agreements
d. Bankers' acceptances
ANS: B OBJ: TYPE: Fact TOP: Commercial paper

4. ______ are short-term debt instruments issued as part of a commercial transaction, with payment
guaranteed by a commercial bank.
a. Negotiable certificates of deposit
b. Commercial paper
c. Repurchase agreements
d. Bankers' acceptances
ANS: D OBJ: TYPE: Fact TOP: Bankers' acceptances

5. Which of the following statements concerning auction rate money market preferred stocks is (are)
true?
a. The price of the stock stays near par.
b. Fifty percent of the dividends are exempt from corporate income taxes.
c. The dividend yield on these securities is adjusted every 20 days through an auction process,
where investors can exchange their stock for cash.
d. The price of the stock stays well above par.
ANS: A OBJ: TYPE: Fact TOP: Auction rate preferred stocks
89  Chapter 17/The Management of Cash and Marketable Securities

6. The primary reason(s) why firms hold liquid asset balances is (are):
a. for transactions purposes
b. for precautionary purposes
c. to compensate its broker for various services rendered to the firm
d. for transaction and precautionary purposes
ANS: D OBJ: TYPE: Fact TOP: Liquid asset balance

7. The "shortage" costs associated with inadequate liquid asset balances include
a. higher cash discounts
b. possible financial insolvency
c. lower interest expense
d. possible financial insolvency and lower interest expense
ANS: B OBJ: TYPE: Fact TOP: Optimal liquid asset balance

8. Liquid asset balances include all of the following except

a. accounts receivable
b. checking account balances
c. marketable securities
d. currency on hand
ANS: A OBJ: TYPE: Fact TOP: Optimal liquid asset balance

9. The firm's optimal liquid asset balance occurs where the sum of the opportunity holding and
___________ costs is minimized.
a. borrowing
b. compensating balance
c. shortage
d. capital
ANS: C OBJ: TYPE: Fact TOP: Optimal liquid asset balance

10. The difference between the firm's checking account balance shown on the books of the bank and
the account balance shown on its own books is known as
a. overdraft
b. compensating balances
c. surplus balances
d. float
ANS: D OBJ: TYPE: Fact TOP: Float

11. All of the following are methods used in expediting the collection of cash except
a. wire transfers
b. lockboxes
c. drafts
d. decentralized collection centers and concentration banks
ANS: C OBJ: TYPE: Fact TOP: Expediting collections
 Chapter 17/The Management of Cash and Marketable Securities  90

12. The costs of a lockbox collection system include

a. foregone returns on the required compensating balances
b. service fees charged by the bank
c. increased bad-debt expenses
d. foregone returns on the required compensating balances and service fees charged by the bank
ANS: D OBJ: TYPE: Fact TOP: Lockboxes

13. The fastest method for moving funds between banks is

a. special courier services
b. wire transfers
c. drafts
d. float
ANS: B OBJ: TYPE: Fact TOP: Wire transfers and depository transfer checks

14. Which of the following statements concerning "zero balance" systems is (are) correct?
a. Zero balance systems help utilize disbursement float more effectively.
b. Exactly enough funds are transferred into the zero balance accounts each day to cover the
checks that have cleared.
c. The function of the concentration account is to receive all deposits coming into the zero
balance system.
d. all of these answers are correct
ANS: D OBJ: TYPE: Fact TOP: Scheduling and centralizing payments

15. Which of the following statements concerning drafts is (are) correct?

a. Drafts require the firm to keep larger balances in its disbursement account.
b. When a draft is transmitted to the firm's bank for collection, the bank must present the draft to
the firm for acceptance before payment is made.
c. Drafts are cheaper to use than checks.
d. Drafts are payable on demand.
ANS: B OBJ: TYPE: Fact TOP: Drafts

16. The optimal amount of the firm's liquid asset balance to be invested in marketable securities is a
function of
a. the interest earned over the expected holding period
b. the transaction cost involved in buying and selling the securities
c. the spread between long-term and short-term interest rates
d. the interest earned over the expected holding period and the transaction cost involved in
buying and selling the securities
ANS: D OBJ: TYPE: Fact TOP: Investing in marketable securities

17. Which of the following criteria is generally least important in selecting marketable securities for
inclusion in the firm's portfolio?
a. length of maturity
b. yield
c. marketability
d. default risk
ANS: B OBJ: TYPE: Fact TOP: Choosing marketable securities
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18. Which of the following types of marketable securities is considered to have the lowest default
risk?
a. bankers' acceptances
b. U.S. Treasury issues
c. repurchase agreements
d. commercial paper
ANS: B OBJ: TYPE: Fact TOP: Types of marketable securities

19. Which of the following types of marketable securities normally has the lowest yields?
a. Federal agency issues
b. Treasury bills
c. repurchase agreements
d. commercial paper
ANS: B OBJ: TYPE: Fact TOP: Types of marketable securities

20. Which of the following types of marketable securities is most suitable for a smaller firm with
only a few thousand dollars to invest at any given time?
a. money market mutual funds
b. Treasury bills
c. Federal agency issues
d. commercial paper
ANS: A OBJ: TYPE: Fact TOP: Types of marketable securities

21. Which of the following types of marketable securities has a relatively weak secondary market?
a. Bankers' acceptances
b. Federal agency issues
c. negotiable certificates of deposit
d. commercial paper
ANS: D OBJ: TYPE: Fact TOP: Types of marketable securities

22. The primary reason(s) that firms do not hold long-term U.S. Treasury securities in their
marketable securities portfolio is because
a. the interest-rate risk associated with these securities is too high
b. the transactions costs associated with these securities is too high
c. the default risk associated with these securities is too high
d. these securities are not readily marketable
ANS: A OBJ: TYPE: Fact TOP: Choosing marketable securities

23. All of the following would be viable securities to purchase with temporary excess cash except:
a. a recently issued 30 year Baa corporate bond
b. U.S. Treasury bill
c. the commercial paper of General Motors Acceptance Corporation
d. a repurchase agreement
ANS: A OBJ: TYPE: Fact TOP: Choosing marketable securities
 Chapter 17/The Management of Cash and Marketable Securities  92

24. The "shortage" costs associated with inadequate liquid asset balances include all of the following
except
a. deterioration of the firm's credit rating
b. foregone cash discounts
c. lost sales
d. possible financial insolvency
ANS: C OBJ: TYPE: Fact TOP: Optimal liquid asset balance

25. All of the following are cash management strategies to expedite collections except
a. a lockbox collection system
b. wire transfers
c. decentralized collection system
d. the use of drafts instead of checks
ANS: D OBJ: TYPE: Fact TOP: Expediting collections

26. The cash management function is concerned with determining

a. the optimal size of a firm's liquid asset balance
b. the appropriate types and amounts of short-term investments the firm should make
c. the most efficient methods of controlling the collection and disbursement of cash
d. all of these answers are correct.
ANS: D OBJ: TYPE: Fact TOP: Introduction

27. In addition to providing their commercial customers with lines of credit and/or term loans, banks
provide all of the following tangible services except
a. handling of dividend payments
b. registration and transfer of a firm's stock
c. establishment of credit terms
d. cash management
ANS: C OBJ: TYPE: Fact TOP: Corporate-bank relations

28. The objective of cash collection and disbursement policies is to

a. minimize storage costs
b. speed up collections and slow down disbursements
c. maximize the return on near cash equivalents
d. avoid using float
ANS: B OBJ: TYPE: Fact
TOP: Controlling the collection and disbursement of cash

29. The primary components or sources of float include all the following except
a. check clearing float
b. collection float
c. processing float
d. mail float
ANS: B OBJ: TYPE: Fact TOP: Float
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30. In general the ______ the number of checks being handled and the ______ the dollar amount of
each check, the greater the benefit of a lockbox arrangement is to a firm.
a. smaller, greater
b. greater, smaller
c. greater, greater
d. smaller, smaller
ANS: A OBJ: TYPE: Fact TOP: Lockboxes

31. ______, which are similar to other checks except they are not payable on demand, are used
primarily to provide for centralized control over payments authorized in field offices.
a. Preauthorized checks
b. Drafts
c. Mail depository transfer checks
d. Electronic depository transfer checks
ANS: B OBJ: TYPE: Fact TOP: Drafts

32. All of the following are criteria that a firm should consider when deciding where to invest excess
cash reserves among the different types of securities except
a. rate of return
b. maturity date
c. issue date
d. marketability
ANS: C OBJ: TYPE: Fact TOP: Choosing marketable securities

33. To minimize the cost associated with misdirected funds between subsidiaries, many multinational
companies have instituted a process called ______.
a. multinational cash consolidation
b. multilateral netting
c. unilateral netting
d. cash restriction
ANS: B OBJ: TYPE: Fact TOP: International issues: Cash management

34. The first step in efficient cash management is the development of a _____.
a. liquid asset balance
b. cash budget
c. proforma cash flow statement
d. compensating spreadsheet
ANS: B OBJ: TYPE: Fact TOP: Cash flows and the cash budget

35. There is a(n) _____ relationship between a firm's liquid asset balance and "shortage" costs.
a. direct
b. no
c. inverse
d. very small
ANS: C OBJ: TYPE: Fact TOP: Optimal liquid asset balance
 Chapter 17/The Management of Cash and Marketable Securities  94

36. A(n) _____ is an unsigned, nonnegotiable check drawn on the local collection bank and payable
to the concentration bank.
a. pre-authorized check
b. bankers acceptance check
c. special remittance
d. mail depository transfer check
ANS: D OBJ: TYPE: Fact TOP: Wire transfers and depository transfer checks

37. A _____ is a security issued by a commercial bank which entitles the holder to receive the
amount deposited plus accrued interest on a specified date.
a. negotiable certificate of deposit
b. commercial paper
c. banker's acceptance
d. repurchase agreement
ANS: A OBJ: TYPE: Fact TOP: Negotiable certificate of deposit

38. The Essex Company found that an average of 10 days elapses between when customer payments
are received and the deposited funds clear the customer's bank and become usable by the firm.
Essex's annual sales are $240 million. (Assume 365 days per year when converting from annual
data to daily data or vice versa.) What is the increase in Essex's average cash balance assuming
that it can reduce the time required to process customer payments by 3 days through more
efficient payment processing methods?
a. $666,667
b. $120,000,000
c. $1,972,603
d. $270,000
ANS: C
Solution:
Increase in cash balance = $240,000,000/365 x 3 = $1,972,603

OBJ: TYPE: E. Prob. TOP: Expediting collections

39. The Essex Company found that an average of 10 days elapses between when customer payments
are received and the deposited funds clear the customer's bank and become usable by the firm.
Essex's annual sales are $240 million (Assume 365 days per year when converting from annual
data to daily data or vice versa.) Suppose that Essex is able to reduce the time required to process
customer payments by 4 days through more efficient payment processing methods. Given that
these additional funds can be used to reduce the firm's outstanding bank loans (10% interest rate),
what is the annual pretax savings in interest expense?
a. $263,014
b. $96,000,000
c. $66,667
d. $2,630,149
ANS: A
Solution:
Savings = [($240,000,000/365) x 4] x 0.10 = $263,014

OBJ: TYPE: E. Prob. TOP: Expediting collections

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40. Osborne Shipbuilding Company, located in Baton Rouge, receives large remittances from its
customers in New York and California. If the firm deposits these checks in its local bank, two
business days are required for the checks to clear and the funds to become usable by the firm.
However, if Osborne sends an employee to New York or California and presents the check for
payment at the bank upon which it is drawn, the funds are available immediately to the firm. The
firm can earn 8% per annum on short-term investments and the cost of sending an employee to
New York or California to present the check for payment is $500. What is the net benefit to the
firm of employing this special handling technique for a $5 million check received on Tuesday
(assume 365 days per year)?
a. $2,192.00
b. $1,692.00
c. $2,000.00
d. $1,095.50
ANS: B
Solution:
Benefit = $5,000,000(2)(0.08/365) - $500 = $1,692

OBJ: TYPE: E. Prob. TOP: Special check handling analysis

41. Zycad has sales of $110 million a year. If Zycad reduces their processing float by 3 days, what is
the increase in the firm's average cash balance? Assume 365 days per year.
a. $916,667
b. $904,110
c. $872,180
d. $30,137
ANS: B
Solution:
Increase in cash balance = $110,000,000/365 x 3 = $904,110

OBJ: TYPE: E. Prob. TOP: Reduction of processing float

42. MLX has annual sales of $320 million per year and has calculated that the collection float is 12
days. If MLX is currently paying 9.35 percent on its line of credit, what amount of interest
expense could be saved if the collection float is reduced by 3 days? Assume 365 days per year.
a. $249,333
b. $573,808
c. $299,200
d. $245,918
ANS: D
Solution:
Interest savings = $320,000,000/365 x 3 x 0.0935 = $245,918

OBJ: TYPE: E. Prob. TOP: Reduction of collection float

 Chapter 17/The Management of Cash and Marketable Securities  96

43. Pronet has annual sales of $724 million from its 600 retail stores. Pronet can reduce its mail float
by 2 days through the use of wire transfers. The annual cost of the wire transfers is expected to be
$105,610. If Pronet's cost of short-term funds is 9.75 percent, should the change to wire transfers
be made? Assume 365 days per year.
a. No, loss of $247,340
b. Yes, savings of $281,185
c. Yes, savings of $474,582
d. No, loss of $105,610
ANS: B
Solution:
Interest savings = ($724,000,000/365)(2)(0.0975) - $105,610 = $281,185

OBJ: TYPE: E. Prob. TOP: Wire transfers

44. Tocor is considering the implementation of a lockbox collection system for its mid-western and
western sales regions. Sales in those two regions are 30 percent of Tocor's annual sales of $560
million. The lockbox system will cost $187,000 a year and reduce collection time by 3 days. If
Tocor could invest any released funds at 10.85 percent, should it use the lockbox system? Assume
365 days per year.
a. Yes, savings of $149,819
b. Yes, savings of $312,397
c. No, loss of $37,181
d. No, loss of $35,100
ANS: C
Solution:
Net benefits of lockbox = ($560,000,000/365)(0.3)(3)(0.1085) - $187,000
= -$37,181

OBJ: TYPE: E. Prob. TOP: Lockbox

45. Average daily sales for Sierra are $140,000. The financial manager can reduce the float by 4 days
using a lockbox system that will cost $33,000. If the opportunity cost of any funds released is 11
percent, what is the annual savings from this system?
a. $28,600
b. $14,520
c. $61,600
d. $35,000
ANS: A
Solution:
Lockbox savings = $140,000(4)(0.11) - $33,000 = $28,600

OBJ: TYPE: E. Prob. TOP: Lockbox

97  Chapter 17/The Management of Cash and Marketable Securities

46. Lexicon has a daily average check collections of $180,000 and it takes the firm 5 days before it
can completely process those checks. An automated lockbox system that costs $33,000 a year
would reduce the processing time by 2 days. Should Lexicon invest in this system if the
opportunity cost of short-term funds is 12.3 percent?
a. Yes, savings of $44,280
b. Yes, savings of $33,420
c. Yes, savings of $11,280
d. No, loss of $10,860
ANS: C
Solution:
Lockbox savings = $180,000(2)(0.123) - $33,000 = $11,280

OBJ: TYPE: E. Prob. TOP: Lockbox

47. Marcos Company annual sales are $730 million. Suppose Marcos is able to reduce the time
required to process customer payments by 3 days through more efficient payment processing
techniques. Given that any funds released by these methods can be invested elsewhere in the
company to yield a 15% pretax rate of return, determine the annual increase in pretax returns.
(Assume 365 days per year in all calculations.)
a. $900,000
b. $300,000
c. $6,000,000
d. cannot be determined from the information provided
ANS: A
Solution:
Annual pretax returns = [($730,000,000/365) x 3] x 0.15 = $900,000

OBJ: TYPE: E. Prob. TOP: Returns from expediting collections

48. Jester, Inc. has annual sales of $434 million. An average of 12 days elapses between the time a
customer mails its payment and the funds are available to Jester. What is the increase in the
average cash balance if the use of a lock box system is believed to reduce the collection time by 4
days?
a. $ 4.76 million
b. $49.6 million
c. $633,640
d. $ 9.5 million
ANS: A
Solution:
Increase = ($434,000,000/365)(4) = $4.756 million

OBJ: TYPE: E. Prob. TOP: Lock box

 Chapter 17/The Management of Cash and Marketable Securities  98

49. Galway's sales average $12 million per day. If Galway could reduce the time between customer's
mailing date and when these payments are available to Galway by 3 days, what would be the
resulting annual increase in earnings if the opportunity cost of funds in 9.25%?
a. $1.11 million
b. $98,630
c. $3.33 million
d. $9,123
ANS: C
Solution:
Increase = $12(.0925)(3) = $3.33 million

OBJ: TYPE: E. Prob. TOP: Expediting collections

50. Fagins, a nationwide department store chain, currently processes all of its credit sales payments at
its St. Louis headquarters. The firm is considering the establishment of a lockbox arrangement
with a Los Angeles bank to process payments from its customers in 10 western states. With the
lockbox system, average mailing time for customers from this region would be reduced from 3
days to 1.5 days. Check clearing time would also be reduced from 4 days to 2.5 days. Annual
collections from the western region are $150 million. Establishment of this lockbox system would
reduce the compensating balance requirement at the firm's St Louis bank by $600,000 and reduce
annual payment processing costs at the St. Louis office by $30,000. Funds released by the
lockbox arrangement can be invested elsewhere in the firm to earn 12 percent before taxes. The
Los Angeles bank has agreed to process Fagins' customer payments for an annual fee of
$100,000. What are the annual net pretax benefits to Fagins of establishing a lockbox system with
the Los Angeles bank (assume 365 days per year)?
a. $222,000
b. $130,000
c. $1,832,877
d. $149,945
ANS: D
Solution:
Reduction in collection time = (3 - 1.5) + (4 - 2.5) = 3 days
Amount. of funds released = $150,000,000/365 x 3 + $600,000 = $1,832,877
Net benefits = $1,832,877(0.12) + $30,000 - $100,000 = $149,945

OBJ: TYPE: C. Prob. TOP: Lockbox system analysis

99  Chapter 17/The Management of Cash and Marketable Securities

51. Fagins, a nationwide department store chain, currently processes all of its credit sales payments at
its St. Louis headquarters. The firm is considering the establishment of a lockbox arrangement
with a Los Angeles bank to process payments from its customers in 10 western states. Average
mailing time for customers from this region would be reduced from 3 days to 1.5 days. In
addition, check processing and clearing time would be reduced from 4 days to 2.5 days. Annual
collections from the western region are $150 million. Establishment of this lockbox system would
reduce the compensating balance requirement at the firm's St. Louis bank by $600,000 and reduce
annual payment processing costs at the St. Louis office by $30,000. Funds released by the
lockbox arrangement can be invested elsewhere in the firm to earn 12 percent. The Los Angeles
bank has agreed to process Fagins' customer payments "free of charge" provided that the firm
maintains a minimum compensating balance of $1,500,000 in its account at the bank. What are
the annual net benefits to Fagins of establishing a lockbox system with the Los Angeles bank
(assume 365 days per year)?
a. $630,000
b. $332,877
c. $ 69,945
d. $41,096
ANS: C
Solution:
Reduction in collection time = (3 - 1.5) + (4 - 2.5) = 3 days
Amt. of funds released = $150,000,000/365 x 3 + $600,000 - $1,500,000 = $332,877
Net benefits = $332,877(0.12) + $30,000 = $69,945
OBJ: TYPE: C. Prob. TOP: Lockbox system analysis

52. A Delaware bank has offered to set up a lock-box arrangement to process Union Oil Company of
California's (UNOCAL) credit card payments from customers in 8 mid-Atlantic states for an
annual fee of $150,000 plus $0.05 per payment. Total collections from this area are $547.5
million annually -- consisting of an average of 10 payments per year from 1,100,000 credit card
customers. Average mailing time for customers from this region would be reduced from 3.5 days
currently to 2 days with the lock-box system. Check processing and clearing time also would be
reduced from 5 days presently to 1.5 days with the lock-box arrangement. Establishment of the
lock-box system would reduce annual payment processing costs at its Los Angeles headquarters
by $250,000 and reduce the compensating balance at its Los Angeles bank by $500,000. The
Delaware bank will not require UNOCAL to maintain a compensating balance if it establishes a
lock-box system. Funds released by the lock-box arrangement can be invested elsewhere in the
firm to earn 15% per annum pretax. Determine the net pretax benefits to UNOCAL of
establishing the lock-box system with the Delaware bank. (Assume 365 days per year in the
calculations.)
a. $675,000
b. $750,000
c. $500,000
d. $450,000
ANS: B
Solution:
Reduction in collection time = (3.5 - 2) + (5 - 1.5) = 5.0 days
Amount of funds released = ($547,500,000/365) x 5.0 + $500,000 = $8,000,000
Cost of lock-box system = 1,100,000 x 10 x ($0.05) + $150,000 - $250,000 = $450,000
Net pretax benefits = $8,000,000 x 0.15 - $450,000 = $750,000
OBJ: TYPE: C. Prob. TOP: Lock-box analysis
 Chapter 17/The Management of Cash and Marketable Securities  100

53. Lone Star Technologies has annual sales of $336 million. Management has determined that an
average of 8 days elapses between the time customers mail their payments and when the funds are
available to the firm. The cost of reducing the float 3 days will be $60,000. Should Lone Star
work to reduce the float if the increase in cash can be invested to earn 7.5% per annum?
a. Yes--savings of $9,041
b. Yes--savings of $147,123
c. Yes--savings of $78,080
d. No--loss of $18,080
ANS: B
Solution:
Savings = ($336,000,000/365)(3)(0.075) - $60,000 = $147,123

OBJ: TYPE: C. Prob. TOP: Expediting collections analysis

54. Currently Nemonix is using a decentralized collection system whereby customers mail their
checks to one of the firm's eight regional locations. Its annual sales are $95 million. Checks are
deposited each business day in a local bank and the amount of the deposit is sent to the firm's
concentration bank in Dallas. The average time between deposit in the local bank and the
availability of those funds, in Dallas, to Nemonix is 6 days. Nemonix has determined that the use
of wire transfers would reduce the float by four days, but the transfer will cost $7.50. If transfers
will be made on the 250 days that banks are open each year, should Nemonix switch to the wire
transfer system? Assume that Nemonix can earn 8% on the funds released through this more
efficient transfer.
a. Yes-savings of $106,600
b. Yes-savings of $61,388
c. Yes-savings of $68,288
d. No-loss of $6,671
ANS: C
Solution:
Earnings on released funds = 4($95,000,000/365)(0.08) = $83,288
Additional costs = $7.50 (8)(250) = $15,000
Net (pretax) benefits = $83,288 - $15,000 = $68,288

OBJ: TYPE: C. Prob. TOP: Wire transfer analysis

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55. Tritonic is considering switching from depository transfer checks to using wire transfers for
sending funds from its local banks to its bank in Chicago. The cost of the wire transfer is $5.25
more than the cost of depository transfer checks. The change would reduce the total float by 3
days. Tritonic can earn 8.5% on the funds released through the more efficient transfer. If Tritonic
has 30 local banks, what annual sales level would the firm require before the change to wire
transfers would be profitable? Assume there are 250 business days each year.
a. $391,544,118
b. $ 56,360,294
c. $ 84,286,029
d. $ 1,149,750
ANS: B
Solution:
Costs = $5.25(30)(250) = $39,375

Sales level = $39,375 (365) = $56,360,294

(0.085)(3)

OBJ: TYPE: C. Prob. TOP: Wire transfer analysis

56. Slimware is considering establishing a zero-balance system for its payroll account. Currently, the
firm pays its hourly employees every week on late Friday afternoon and puts a check for
$750,000 in the bank to cover the payroll each Monday morning. Slimware has determined that
the checks clear its bank as follows:

Day Percent clearing

Monday 26%
Tuesday 51%
Wednesday 14%
Thursday 7%
Friday 2%

What is the annual pretax return to Slimware if the firm can earn 9% on any funds released from
employing the zero-balance system? Assume the company has 52 weekly pay periods each year.
a. $10,374
b. $199.72
c. $24,601
d. $17,488
ANS: A
Solution:
Mon. $750,000(0.74)(0.09/365) = $136.85
Tues. $750,000(0.23)(0.09/365) = 42.53
Wed. $750,000(0.09)(0.09/365) = 16.64
Thur. $750,000(0.02)(0.09/365) = 3.70
Total per pay period = $199.72
Annual return = $199.72(52) = $10,385

OBJ: TYPE: C. Prob. TOP: Zero-balance system analysis

 Chapter 17/The Management of Cash and Marketable Securities  102

57. Amazon's CFO is considering the fees charged by two banks at trying to determine which is best
for her firm. First American charges a flat $0.11 per payment and First Western requires a
minimum compensating balance of $500,000 plus $0.05 per payment. If Amazon's cost of funds
is 8.50%, and the expected number of payments per year is 900,000, which bank should be
chosen?
a. FW, savings = $54,000
b. FA, savings = $23,000
c. FW, savings = $11,500
d. FW, savings = $18,500
ANS: C
Solution:
FW = 500,000(.085) + 900,000(.05) = $87,500
FA = 900,000(.11) = $99,000

OBJ: TYPE: C. Prob. TOP: Bank service fee analysis

58. Dupree Funds is considering the fees charges by two banks. First America charges a flat rate of
$0.11 per payment and First Western requires a minimum compensating balance of $500,000,
plus $0.05 per payment. What is the number of payments per year where the costs of the two
banks will be equal? Assume Dupree's costs of funds is 9%.
a. 281,250
b. 750,000
c. 900,000
d. 409,091
ANS: B
Solution:
x(.11) = 500,000(.09) + x(.05)
x = 750,000

OBJ: TYPE: C. Prob. TOP: Bank service fee analysis

ESSAY

1. Explain how companies can slow disbursements in order to keep funds in the bank for longer
periods of time.

ANS:
Firms can:
1. Schedule and centralize payments: Firms should pay bills on time; there is no benefit to paying
bills early unless there is a cash discount for early payment. Centralizing payments from
disbursement accounts helps minimize the amount of idle funds a firm must keep in local field
offices and divisional bank accounts.
2. Drafts: By issuing drafts instead of checks, the bank must present the draft to the firm for
acceptance before making payment. Checks are payable on demand.
3. Minimze check-clearing float: By making payments from a checking account located a long
distance from the supplier, the firm increases the time required for the check to clear through the
banking system.

OBJ: TYPE: Fact TOP: Controlling the collection and disbursement of cash
103  Chapter 17/The Management of Cash and Marketable Securities

2. Name the three primary components (or sources) of float:

ANS:
1. Mail float is the delay between the time a payment is sent to the payee through the mail and the
time that payment arrives at the payee’s office.
2. Processing float is the delay between receipt of payment from a payer and the deposit of that
receipt in the payee’s account.
3. Check-clearing float is the delay between the time a check is deposited in the payee’s account and
the time the funds are available to be spent.

OBJ: TYPE: Fact TOP: Controlling the collection and disbursement of cash