Company A is a retailer operating in several cities. The individual store managers deposit daily collections at a local bank in a non-interest bearing checking account. Twice per week, the local bank issues a depository transfer check DTC) to the central bank at headquarters. The controller of the company is considering using a wire transfer instead.The additional cost of each transfer would be US $25. collections would be accelerated by 2 days, and the annual interest rate paid by the central bank is 7.2% 0.02% per day).At what amount of dollars transferred would it be economically feasible to use a wire transfer instead of the DTC? Assume a 360-day year.
Answer(s): D
Given a US $25 fee and an interest rate of 0.02% per day for 2 days, the breakeven amount is US $62,500 [$25 transfer fee 2 x .02% interest rate)]. Thus, the interest earned on a transfer of any amount greater than US $62,500 would exceed the US $25 fee.
A working capital technique that increases the payable float and therefore delays the outflow of cash is:
Answer(s): B
Payment by draft, a three-parry instrument in which the drawer orders the drawer to pay money to the payee, is a means of slowing cash outflows A check is the most common type of draft. Check float arises from the delay between an expenditure and the clearing of the check through the banking system.
A compensating balance:
Answer(s): A
Banks sometimes require a borrower to keep a certain percentage of the face amount of a loan in a noninterest-bearing checking account. This requirement raises the effective rate of interest paid by the borrower. This greater rate compensates a bank for services provided and results in greater profitability for the financial institution. Funds kept as a compensating balance can often be withdrawn if a certain average balance is maintained.
Company B's bank requires a compensating balance of 20% on a US $100.000 loan. If the stated interest on the loan is 7%, what is the effective cost of the loan?
Interest on the loan is US $7,000 7% x $100,000) Given that the borrower has to maintain a 20% compensating balance, only US $80,000 [$100,000 20% x 100,000)] is available for use. Thus, the company is paying US $7.000 for the use of US $80.01 ii a in funds at an effective cost of 8.75% US. $7.000 ÷ 80,000).
Which or the following models is essentially an application to cash management of the inventory economic order quantity EDO) formula?
The Baumol cash management model is essentially the inventory EOQ model in that it minimizes the total of fixed trading costs and cash carrying costs. It is a deterministic model in the same way that the EOQ model is deterministic.
Post your Comments and Discuss IIA IIA-CIA-PART3-3P exam prep with other Community members:
Our website is free, but we have to fight against AI bots and content theft. We're sorry for the inconvenience caused by these security measures. You can access the rest of the IIA-CIA-PART3-3P content, but please register or login to continue.