finance data bank
75. Theo's Bar & Grill needs $147,000 a week to
pay bills. The standard deviation of the weekly disbursements is $9,600. The
firm has established a lower cash balance limit of $40,000. The applicable
interest rate is 3.5 percent and the fixed cost of transferring funds is $45.
Based on the BAT model, what is the optimal average cash balance?
A. $36,199
B. $49,568
C. $70,100
D. $99,136
E. $112,400
76. Parkway Express needs $318,000 a week to pay
bills. The standard deviation of the weekly disbursements is $31,000. The firm
has established a lower cash balance limit of $60,000. The applicable interest
rate is 4.5 percent and the fixed cost of transferring funds is $65. Based on
the BAT model, what is the opportunity cost of holding cash?
A. $3,873
B. $4,918
C. $5,207
D. $109,283
E. $110,440
77. Penco Supply spends $428,000 a week to pay bills
and maintains a lower cash balance limit of $75,000. The standard deviation of
its disbursements is $18,900. The applicable interest rate is 5 percent and the
fixed cost of transferring funds is $65. What is the firm's optimal initial
cash balance based on the BAT model?
A. $150,600
B. $158,929
C. $170,096
D. $221,506
E. $240,553
78. Your firm spends $54,000 a week to pay bills and
maintains a lower cash balance limit of $45,000. The standard deviation of your
disbursements is $12,100. The applicable interest rate is 4.5 percent and the
fixed cost of transferring funds is $55. What is your opportunity cost of
holding cash based on the BAT model?
A. $1,318
B. $1,864
C. $2,204
D. $2,311
E. $3,709
79. Rosie O'Grady's spends $98,000 a week to pay bills
and maintains a lower cash balance limit of $95,000. The standard deviation of
the disbursements is $14,600. The applicable interest rate is 4.8 percent and
the fixed cost of transferring funds is $50. What is this firm's total cost of
holding cash based on the BAT model?
A. $1,431
B. $2,862
C. $3,034
D. $4,912
E. $4,946
80. Your firm spends $346,000 a week to pay bills and
maintains a lower cash balance limit of $150,000. The standard deviation of
your disbursements is $28,700. The applicable interest rate is 5 percent and
the fixed cost of transferring funds is $60. What is your optimal average cash
balance based on the BAT model?
A. $103,900
B. $146,500
C. $182,200
D. $207,800
E. $249,900
81. The Cow Pie Spreader Co. spends $214,000 a week to
pay bills and maintains a lower cash balance limit of $175,000. The standard
deviation of the disbursements is $16,000. The applicable weekly interest rate
is 0.025 percent and the fixed cost of transferring funds is $49. What is the
firm's cash balance target based on the MillerOrr model?
A. $208,511
B. $247,560
C. $251,006
D. $254,545
E. $258,878
82. The Blue Moon Hotel and Spa spends $359,000 a week
to pay bills and maintains a lower cash balance limit of $250,000. The standard
deviation of the disbursements is $46,800. The applicable weekly interest rate
is 0.045 percent and the fixed cost of transferring funds is $60. What is the
hotel's optimal upper cash limit based on the MillerOrr model?
A. $430,836
B. $447,905
C. $528,700
D. $739,459
E. $861,672
83. Donaldson, Inc. spends $94,000 a week to pay bills
and maintains a lower cash balance limit of $50,000. The standard deviation of
the disbursements is $13,000. The applicable weekly interest rate is 0.045
percent and the fixed cost of transferring funds is $52. What is your optimal
average cash balance based on the MillerOrr model?
A. $78,778
B. $82,623
C. $231,969
D. $236,334
E. $247,868
84. The Burger Stop spends $52,000 a week to pay bills
and maintains a lower cash balance limit of $60,000. The standard deviation of
the disbursements is $7,500. The applicable weekly interest rate is 0.04
percent and the fixed cost of transferring funds is $50. What is your optimal
average cash balance based on the MillerOrr model?
A. $79,116
B. $83,208
C. $110,315
D. $237,348
E. $249,624
85. Your firm spends $48,000 a week to pay bills and
maintains a lower cash balance limit of $50,000. The standard deviation of the
disbursements is $8,600. The applicable weekly interest rate is 0.054 percent
and the fixed cost of transferring funds is $65. What is your cash balance target
based on the MillerOrr model?
A. $48,156
B. $49,990
C. $54,884
D. $68,830
E. $75,726
86. Travel Inn Express spends $109,000 a week to pay
bills and maintains a lower cash balance limit of $125,000. The standard
deviation of the disbursements is $14,400. The applicable weekly interest rate
is 0.039 percent and the fixed cost of transferring funds is $58. What is the
inn's cash balance target based on the MillerOrr model?
A. $28,492
B. $31,359
C. $153,492
D. $156,359
E. $225,417
Essay Questions
87. Explain how a lockbox system operates and why a firm might consider implementing such a system.
88. Explain how the Check Clearing Act for the 21^{st} Century affects both collection and disbursement float.
89. Explain how the unethical use of uncollected funds has been impacted by the growth of online retailing and banking.
90. Float management systems may provide only minimal benefits to a firm. Given that most firms have other projects with higher positive net present values, why should a firm's managers spend time implementing a float management system?
91. Explain what a zerobalance account is, how it is used, and how it affects cash management.
Multiple
Choice Questions
92. Each business day, on average, a company writes
checks totaling $26,000 to pay its suppliers. The usual clearing time for the
checks is 5 days. Meanwhile, the company is receiving payments from its
customers each day, in the form of checks, totaling $40,000. The cash from the
payments is available to the firm after 2 days. What is the amount of the
firm's average net float?
A. $30,00
B. $50,000
C. $80,000
D. $110,000
E. $130,000
93. Purple Feet Wine, Inc. receives an average of
$6,000 in checks per day. The delay in clearing is typically 3 days. The
current interest rate is 0.025 percent per day. Assume 30 days per month. What
is the highest daily fee the company should be willing to pay to eliminate its
float entirely?
A. $1.50
B. $3.00
C. $3.75
D. $4.50
E. $6.00
94. Your neighbor goes to the post office once a month
and picks up two checks, one for $18,000 and one for $4,000. The larger check
takes 4 days to clear after it is deposited; the smaller one takes 6 days.
Assume 30 days per month. What is the weighted average delay?
A. 4.21 days
B. 4.36 days
C. 4.78 days
D. 5.00 days
E. 6.00 days
95. Your firm has an average receipt size of $60. A
bank has approached you concerning a lockbox service that will decrease your
total collection time by 1 day. You typically receive 28,000 checks per day.
The daily interest rate is 0.016 percent. What is the NPV of the lockbox
project if the bank charges a fee of $210 per day?
A. $367,500
B. $427,500
C. $903,350
D. $1,412,500
E. $1,680,000
96. A mailorder firm processes 5,000 checks per month.
Of these, 55 percent are for $55 and 45 percent are for $65. The $55 checks are
delayed 2 days on average; the $65 checks are delayed 5 days on average. Assume
each month has 30 days. The interest rate is 6 percent per year. How much
should the firm be willing to pay to reduce the weighted average float by 1.4
days?
A. $4,165
B. $13,883
C. $41,650
D. $138,883
E. $416,500
97. Paper Submarine Manufacturing is investigating a
lockbox system to reduce its collection time. It has determined the following:
The total collection time will be reduced by 2 days if the lockbox system is
adopted. What is the NPV of adopting the lockbox system?
A. $600,000
B. $775,000
C. $975,000
D. $1,200,000
E. $1,425,000
98. Home Roasted Turkeys disburses checks every 4
weeks that average $70,000 and take 5 days to clear. How much interest can the
company earn if it delays transfer of funds from an interestbearing account
that pays 0.02 percent per day for these 5 days? Ignore the effects of compound
interest. Assume 52 weeks in a year.
A. $36
B. $91
C. $182
D. $364
E. $910
99. Never Again Enterprises has an agreement with The
Worth Bank whereby the bank handles $3.12 million in collections a day and
requires a $1,000,000 compensating balance. Never Again is contemplating
canceling the agreement and dividing its eastern region so that two other banks
will handle its business. Banks A and B will each handle $1.56 million of
collections a day, and each requires a compensating balance of $1,550,000.
Never Again's financial management expects that collections will be accelerated
by one day if the eastern region is divided. The Tbill rate is 5 percent
annually. What is the amount of the annual net savings if this plan is
adopted?
A. $10,200
B. $51,000
C. $76,500
D. $102,000
E. $125,000
100. Mountaintop Inns, a Kentucky company, has
determined that a majority of its customers are located in the Pennsylvania
area. It therefore is considering using a lockbox system offered by a bank
located in Pittsburgh, Pennsylvania. The bank has estimated that use of the
system will reduce collection time by one day. In addition to the variable
charge shown below, there is also a fixed charge of $4,320 per year for the
lockbox system. Assume a year has 365 days. What is the NPV of the lockbox
system given the following information?
A. $156,727
B. $131,301
C. $74,208
D. $11,507
E. $26,433
101. Cow Chips, Inc., a large fertilizer distributor
based in California, is planning to use a lockbox system to speed up collections
from its customers located on the East Coast. A Philadelphiaarea bank will
provide this service for an annual fee of $25,000 plus 10 cents per
transaction. The estimated reduction in collection and processing time is one
day. The average customer payment in this region is $8,200. Treasury bills are
currently yielding 5 percent per year. Assume a year has 365 days.
Approximately how many customers each day, on average, are needed to make the
system profitable for Cow Chips, Inc.?
A. 56
B. 67
C. 74
D. 83
E. 89

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