FIN 3400 Ch 14 SMARTBOOK - Complete Solutions (Verified)

FIN 3400 Ch 14 SMARTBOOK - Complete Solutions (Verified) Which entities issue commercial paper? Select all that apply. Medium-to-large corporations Large banks A banker's acceptance (B.A.) has which one of these characteristics? Low risk Rationale: A banker's acceptance carries a bank guarantee which makes it low-risk. Which term refers to a firm's need to keep cash on hand to pay normal expenses such as utilities and wages? Transaction facilitation Which of these correctly describe the Baumol model? Select all that apply. Cash is replenished only when it declines to zero. The cash balance always increases from 0 to C*. The cash balance declines at a steady rate. Why is a banker's acceptance called a banker's acceptance? The debt bears an unconditional guarantee of a major bank. In the Baumol model, what does the formula [C/2 × i] represent? Lost interest earnings from holding cash Ken is a successful entrepreneur and the owner of a conglomerate. His firm always keeps extra cash on hand so Ken can expand the business if a good opportunity arises. This is an example of which reason to maintain a cash balance? Investment opportunity What is the purpose of the Baumol model? To minimize the total of the opportunity and trading costs related to cash management Which of these correctly defines a variable used in the Baumol model formulas? Select all that apply. F = Trading cost per transaction T = Annual demand for cash Tucker, Inc. earns 3 percent on its marketable securities and incurs costs of $82 for each sale of marketable securities. The firm has an annual demand for cash of $1.68 million per year. Illustrate the Baumol method of computing the optimal cash replenishment level. C = [(2 × $1,680,000 × $82)/0.03]1/2 How is the minimum level of cash established in the Miller-Orr model? The minimum level is determined by the firm. What does the formula (2 TF/i)1/2 compute? The cash replenishment level that minimizes the annual cash management costs Which of these Miller-Orr model variables are described correctly? Select all that apply. F = The trading cost for marketable securities per transaction σ2 = Variance in net daily cash flows σ = Standard deviation in net daily cash flows Kurt's Keys requires $386,000 of cash per year. Excess cash is invested at 4.1 percent while transfers of excess cash cost $75. What is the optimal cash replenishment level based on the Baumol model? $37,579 Rationale: C* = [(2 × $386,000 × $75)/0.041]1/2 = $37,579 The Baumol model works best for firms with which one of these characteristics? Fairly predictable cash outflows Which assumption does the Miller-Orr model make? Daily cash inflows and outflows are normally distributed The Diary Barn desires a minimum cash balance of $15,000 and expects the standard deviation of its daily cash flows to be $6,400. The cost per sale or purchase of marketable securities is $22 and the effective annual rate on marketable securities is 3.5 percent. Which one of these correctly matches a variable in the Miller-Orr model with its value for the Diary Barn? L = $15,000 Rationale: L represents the lower limit which is $15,000. Which of these are correct definitions of the Miller-Orr model variables? Select all that apply. L = Lower control limit iday = Daily interest rate on marketable securities A firm's effective annual interest rate on its marketable securities is 3.4 percent. How is the daily interest rate computed? iday = (1 + 0.034)1/365 Rationale: The power of 1/365 indicates the 365th root. How is 11/3 interpreted? The cube root of 1 Rationale: In Learnsmart, the superscript 1/3 is used to represent a cube root. Which one of these is not considered by either the Baumol or the Miller-Orr models? A compensating balance requirement may be an average value, not a set minimum requirement. The Power Place wants to keep a minimum of $75,000 in the cash account. The standard deviation of its daily cash flows is $1,200 and the trading cost per sale of marketable securities is $95. The daily interest rate is 0.012 percent. How is the optimal cash return point computed? Z* = [(3 × $95 × $1,2002)/(4 × 0.00012)]1/3 + $75,000 What is the definition of float? The time period between a customer mailing a payment and the funds being available to the collecting firm Which of these describe a zero-balance account? Select all that apply. Money is transferred in to the account only on days when checks are presented and only in the amount of those checks. The account has a zero balance at the end of every day. The account is a checking account for disbursing payments. Neither the Baumol nor the Miller-Orr model considers which one of these factors? Firms have the option of borrowing short-term funds. A collecting firm has the most control over which portion of collection float? In-house processing float