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| 1 | |
Which of the following are transaction reasons for holding cash?
I. compensating banks by maintaining specified minimum cash balances at the bank
II. paying dividends to shareholders of the firm
III. issuing paychecks to employees of the firm
IV. submitting taxes to the government based on the firm's taxable income |
| | A) | I and III only |
| | B) | II and IV only |
| | C) | II, III, and IV only |
| | D) | I, III, and IV only |
| | E) | I, II, III, and IV |
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| 2 | |
Which one of the following statements is correct? |
| | A) | The term cash equivalent is defined as the amount of cash a firm holds in currency and undeposited checks plus the firm's checking and saving account balances. |
| | B) | A cost of holding cash is the additional income that could otherwise be earned on the money. |
| | C) | Firms can avoid transaction costs by investing in marketable securities. |
| | D) | Compensating balances are a means of reducing the banking costs incurred by a firm. |
| | E) | The term "cash" on a balance sheet adheres to the economic, not the financial, definition of cash. |
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| 3 | |
What effect do compensating balances required by a firm's lending arrangements have on the target cash balance of a firm? |
| | A) | They set a maximum amount of cash which a firm must hold at all times. |
| | B) | They prescribe a desired level of cash but do not impose any minimum or maximum levels. |
| | C) | They set a lower limit on the amount of cash a firm needs to maintain. |
| | D) | They have no effect if the compensating account does not pay interest. |
| | E) | They affect the level of a firm's debt but have no effect on the target cash balance. |
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| 4 | |
Which one of the following statements is accurate? |
| | A) | The opportunity cost of holding cash varies in direct relation to the amount of cash held. |
| | B) | The total costs of holding cash are at a maximum when the trading costs of holding cash equal the opportunity costs of holding cash. |
| | C) | Trading costs increase as the size of the cash balance increases. |
| | D) | Firms tend to trade marketable securities less often when they maintain a low cash balance relative to a high cash balance. |
| | E) | The optimal cash balance occurs at the point where the opportunity costs of holding cash are zero. |
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| 5 | |
Which one of the following correctly depicts the relationship that the trading costs and the opportunity costs of holding cash have to one another? |
| | A) | Both trading and opportunity costs increase as the average cash balance increases. |
| | B) | Both trading and opportunity costs decrease as the average cash balance increases. |
| | C) | Trading costs increase while opportunity costs decrease as the cash balance increases. |
| | D) | Trading costs decrease while opportunity costs increase as the cash balance increases. |
| | E) | Both trading costs and opportunity costs move in a random fashion. |
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| 6 | |
Which of the following variables are used in the computation of the target cash balance using the Baumol model?
I. the fixed cost of selling securities
II. the market risk premium
III. the amount of cash needed for transaction purposes for the time period
IV. the interest rate on marketable securities |
| | A) | I and III only |
| | B) | II, III, and IV only |
| | C) | I, III, and IV only |
| | D) | I, II, and III only |
| | E) | I, II, III, and IV |
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| 7 | |
A firm has an initial cash balance of $3.4 million. What are the opportunity costs of holding cash if the interest rate on marketable securities is 4.5 percent? |
| | A) | $38,250 |
| | B) | $76,500 |
| | C) | $98,750 |
| | D) | $145,000 |
| | E) | $153,000 |
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| 8 | |
A firm has an initial cash balance of $248,000 and replenishes that balance every three weeks. The interest rate on marketable securities is 10 percent. What is the average cash balance? |
| | A) | $8,267 |
| | B) | $24,800 |
| | C) | $62,000 |
| | D) | $82,667 |
| | E) | $124,000 |
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| 9 | |
Nelson Stone Works requires $5.6 million a year for transaction costs. The fixed cost of selling securities is $500. What are the trading costs if the initial cash balance is $480,000? |
| | A) | $5,500 |
| | B) | $5,650 |
| | C) | $5,833 |
| | D) | $6,000 |
| | E) | $6,333 |
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| 10 | |
Specter House Antiques requires $2.62 million a year for transaction costs. The fixed cost of selling securities is $750 and the interest rate on marketable securities is 9 percent. What are the firms total cost of cash balances given that cash is replenished by $250,000 transfers? |
| | A) | $19,110 |
| | B) | $20,260 |
| | C) | $21,212 |
| | D) | $23,333 |
| | E) | $23,607 |
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