Strayer University Finance 550 Quiz

Q1) If a company increases its safety stock, then its EOQ will go up.

True

False

Q2) Cartwright Computing expects to order 126,000 memory chips for inventory during the coming year, and it will use this inventory at a constant rate. Fixed ordering costs are $200 per order; the purchase price per chip is $25; and the firm’s inventory carrying costs is equal to 20 percent of the purchase price. (Assume a 360-day year.) If Cartwright holds a safety stock equal to a 30-day supply of chips, what is Cartwright’s minimum cost of ordering and carrying inventory?

a) $28,500

b) $15,950

c) $68,440

d) $34,220

e) $47,693

Q3) Which of the following is true of the EOQ model? Note that the optimal order quantity, Q, will be called EOQ.

a) If the annual sales, in units, increases by 20%, then EOQ will increase by 20%.

b) If the average inventory increases by 20%, then the total carrying costs will increase by 20%.

c) If the average inventory increases by 20% the total order costs will increase by 20%.

d) The EOC is the same for all companies.

Q4) If the fixed per order cost increases by 20%, then EOQ will increase by 20%. Cartwright Computing expects to order 126,000 memory chips for inventory during the coming year, and it will use this inventory at a constant rate. Fixed ordering costs are $200 per order; the purchase price per chip is $25; and the firm’s inventory carrying costs is equal to 20 percent of the purchase price. (Assume a 360-day year.) If Cartwright holds a safety stock equal to a 30-day supply of chips, what is its average inventory level?

a) 12,088

b)3,175

c)15,750

d)13,675

e)8,124

Q5) Humphrey’s Housing has been practicing cash management for some time by using the Baumol model for determining cash balances. Some time ago, the model called for an average balance (C*/2) of $500; at that time, the rate on marketable securities was 4 percent. A rapid increase in interest rates has driven the interest rate up to 9 percent. What is the appropriate average cash balance now?

a) $200

b)$333

c) $414

d) $500

e) $666

Q6) Assume that Palmer Executive Pens uses 1,440,000 gallons of ink each year. Further, assume that Palmer can order the ink at a cost of $2 per gallon plus fixed ordering costs of $100 per order. The firm’s carrying cost is 20 percent of the inventory value, at cost. What is the firm’s EOQ?

a) 26,833

b) 30,040

c) 43,987

d) 13,563

e) 21,456

Q7) A just-in-time system is designed to stretch accounts payable as long as possible.

True

False

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Q8) Gemini Inc.’s optimal cash transfer amount, using the Baumol model, is $60,000. The firm’s fixed cost per cash transfer of marketable securities to cash is $180. In addition, the total estimated cash costs (transfers and carrying cost) for the firm, based on 16 transactions per year, are $5,760. On what opportunity cost of holding cash was this analysis based?

a) 19.2%

b) 10.4%

c) 6.3%

d) 12.1%

e) 9.6%

Strayer University Finance 550 Quiz

Q9) For some firms, holding highly liquid marketable securities is a substitute for holding cash because a marketable securities portfolio can accomplish the same objective as cash.

True

False

Q10) If a company increases its safety stock, then its average inventory will go up.

True

False

Q11) Assume that Palmer Executive Pens uses 1,440,000 gallons of ink each year. Further, assume that Palmer can order the ink at a cost of $2 per gallon plus fixed ordering costs of $100 per order. The firm’s carrying cost is 20 percent of the inventory value, at cost. Now, suppose the manufacturer offers a discount of 0.5 percent for orders of a least 40,000 gallons. Should Palmer increase its ordering quantity to take the discount?

a) Yes; it will save $827 if it takes the discount.

b) No; it will lose $827 if it takes the discount.

c) Yes; it will save $14,400 if it takes the discount.

d) Yes; it will save $13,573 if it takes the discount.

e) No; it will lose $13,573 if it takes the discount

Q12) Cartwright Computing expects to order 126,000 memory chips for inventory during the coming year, and it will use this inventory at a constant rate. Fixed ordering costs are $200 per order; the purchase price per chip is $25; and the firm’s inventory carrying costs is equal to 20 percent of the purchase price. (Assume a 360-day year.) Assume that Cartwright holds a safety stock equal to a 30-day supply of chips. What is the maximum amount of inventory that will have on hand at any time, that is, what will be the inventory level right after a delivery is made?

a) 9,216

b) 3,175

c) 6,243

d) 13,675

e) 8,124

Q13) The easier a firm’s access to borrowed funds the higher its precautionary balances will be, in order to protect against sudden increases in interest rates.

True

False

Q14) The Duckett Group is trying to determine its optimal average cash balance. The firm has determined that it will need $5,000,000 net new cash during the coming year. The fixed transaction cost of converting securities to cash is $50, and the firm earns 10 percent on its marketable securities investments. Refer to Exhibit 28.1. What will be the total cost to Duckett of maintaining the optimal average cash balance, as determined by the Baumol model?

a) $35,356

b) $7,071

c) $18,493

d) $70,711

e) $53,190

Q15) The cash balances of most firms consist of transactions, compensating, precautionary, and speculative balances. We can produce a total desired cash balance by calculating the amount needed for each purpose and then summing them together.

True

False