AAT L4 Cash and Treasury Management 2

Question 1

A company has average daily sales of £50,000, average receivables of £300,000, average payables of £180,000, and average inventory of £240,000. What is the cash conversion cycle?

Accepted Answer

12.6 days

Answer

7.2 days

Answer

5.4 days

Answer

9.6 days

Question 2

A company has surplus cash of £500,000 for 90 days. It places this in a money market deposit at 4% per annum. How much interest will it earn?

Accepted Answer

£5,000

Answer

£20,000

Answer

£4,932

Answer

£1,233

Question 3

What is the primary difference between a forward exchange contract and a currency option when hedging foreign exchange risk?

Accepted Answer

A forward contract guarantees the exchange rate; an option gives the right but not obligation to exchange at the agreed rate

Answer

A forward contract costs more than an option premium

Answer

An option provides a worse exchange rate than the spot rate

Answer

A forward contract can only be used for imports, not exports

Question 4

Which of the following best describes 'concentration banking' as a cash management technique?

Accepted Answer

Sweeping cash from multiple regional accounts into a central account to improve control and investment returns

Answer

Keeping all company cash in a single high-interest account

Answer

Requiring all customers to pay into a single bank account

Answer

Netting off intercompany loans to reduce gross debt

Question 5

A company has a bank overdraft of £200,000 at 8% per annum and a debtor (receivable) outstanding for 45 days of £150,000. It offers the debtor a 2% early payment discount for payment within 5 days. The debtor accepts. Is this discount cost-effective?

Accepted Answer

No, because the annualised cost of the discount (approximately 18.25%) exceeds the overdraft rate

Answer

Yes, because 2% is less than 8% annual rate

Answer

Yes, because the annualised cost of the discount (approximately 18.25%) exceeds the overdraft rate

Answer

No, because discounts should never be offered to debtors

Question 6

What does 'interest rate risk' mean for a business that has borrowed at a variable (floating) rate?

Accepted Answer

The risk that interest rates will rise, increasing the company's interest payments

Answer

The risk that the lender will demand early repayment of the loan

Answer

The risk that the company's credit rating will be downgraded

Answer

The risk that the Bank of England will reduce base rates