CF Chap 27

Financial managers frequently broaden their definition of cash to include:

• A) currency, bank checking accounts, as well as stock and bond investments.
• B) currency, bank checking accounts, and bond investments.
• C) cash, bond investments, bank checking accounts, and short-term marketable securities.
• D) currency, bank checking accounts, and short-term marketable securities.
• E) cash and bank accounts only.

Determining the appropriate cash balance involves assessing the trade-off between:

• A) income and diversification.
• B) the benefits and costs of liquidity.
• C) balance sheet strength and transaction needs.
• D) short-term and long-term investment returns.
• E) cash needs and cash preferences

An appropriate cash balance is reached when the:

• A) interest on any marketable security is maximized.
• B) interest foregone from not investing in Treasury bills is minimized.
• C) value of cash liquidity equals interest foregone on an equivalent amount of Treasury bills.
• D) liquidity value is greater than the interest foregone on an equivalent amount of Treasury bills.
• E) balance is maintained at a zero level.

Firms would need to hold zero cash for transaction purposes if all outgoing cash transactions could be:

• A) greater than total cash inflows.
• B) less than total cash inflows.
• C) separated from all incoming transactions.
• D) perfectly synchronized with cash inflows.
• E) performed electronically.

Firms hold cash to satisfy the transaction motive. This means that cash is held to:

• A) meet disbursements for normal operations.
• B) balance the flow between cash inflows and outflows.
• C) meet unexpected emergency cash needs.
• D) meet disbursements for normal operations and to balance the flow between cash inflows and outflows.
• E) offset fees that would otherwise be charged by the firm's bank

Firms hold cash, in part, to satisfy compensating balance requirements. Compensating balances are cash balances held at:

• A) the firm in excess of its transactions needs.
• B) the firm that are below that of its transactions needs.
• C) the firm in excess of its cash inflows.
• D) commercial banks to pay implicitly for bank services.
• E) commercial banks as emergency funds.

The cost of holding cash:

• A) is the opportunity cost of the lost investment income.
• B) is zero because it is the most liquid asset a firm can hold.
• C) decreases as cash holdings increase.
• D) increases as market rates decline.
• E) is irrelevant in today's electronic world.

Most large firms hold a larger cash balance than most models imply because:

• A) it is too difficult to estimate the costs of security transactions.
• B) banks are compensated by account balances for payment of services.
• C) corporations have few bank accounts and it is difficult to manage their cash.
• D) cash is costless and need not be managed closely.
• E) the costs of holding cash for these firms is negligible.

The difference between available cash and book cash is called:

• A) float.
• B) disbursement float.
• C) surplus.
• D) collection float.
• E) the net deficit

All the following can create disbursement float except the:

• A) payment of wages.
• B) payment for raw materials.
• C) disbursement of funds to a supplier.
• D) distribution of cash dividends.
• E) sale of an asset.