CTP Corporate Liquidity and Cash Management 4 — Questions and Answers
Question 1: A multinational corporation wants to centralize liquidity across its European subsidiaries in different countries. Which structure BEST minimizes cross-border legal and tax complications while achieving effective cash pooling?
- Physical sweeping to a single header account in each country
- In-house banking with intercompany loans (Correct answer)
- Notional pooling through a single pan-European bank
- Establishing a captive finance subsidiary in Luxembourg
Correct answer: In-house banking with intercompany loans
In-house banking with properly documented intercompany loans can achieve centralized liquidity while respecting local regulations and creating clear audit trails.
Question 2: Under ASC 230 (GAAP), which of the following would be classified as an operating cash flow?
- Proceeds from issuance of long-term debt
- Payment of cash dividends to shareholders
- Collections from customers on accounts receivable (Correct answer)
- Purchase of property, plant, and equipment
Correct answer: Collections from customers on accounts receivable
Under ASC 230, cash collected from customers is an operating activity as it relates to the primary revenue-generating activities of the business.
Question 3: A company's investment policy statement (IPS) typically addresses all of the following EXCEPT:
- Eligible investment instruments and minimum credit ratings
- Maximum maturity limits for short-term investments
- Target returns benchmarked against equity market indices (Correct answer)
- Concentration limits per issuer or instrument type
Correct answer: Target returns benchmarked against equity market indices
Corporate IPS documents focus on safety and liquidity of cash reserves, not equity-benchmarked returns, which are inappropriate for short-term corporate cash.
Question 4: Which payment method typically creates the MOST favorable disbursement float for a corporate payer?
- ACH (Automated Clearing House) payments
- Wire transfers
- Paper checks mailed to distant locations (Correct answer)
- Same-day ACH credits
Correct answer: Paper checks mailed to distant locations
Paper checks mailed to distant locations generate maximum disbursement float due to mail time, processing time, and clearing time before funds are withdrawn.
Question 5: The Miller-Orr cash management model differs from the Baumol model primarily in that it:
- Assumes constant and certain cash outflows
- Accounts for uncertainty and random variation in daily cash flows (Correct answer)
- Focuses on investment portfolio optimization rather than cash balances
- Applies only to international cash management scenarios
Correct answer: Accounts for uncertainty and random variation in daily cash flows
The Miller-Orr model sets upper and lower control limits to manage cash stochastically, accommodating the unpredictable nature of daily cash flows.
Question 6: A company with $50M in short-term investments wants to extend its weighted average maturity (WAM) to enhance yield. The PRIMARY risk of doing so is:
- Increased credit risk from lower-rated issuers
- Reduced liquidity if unexpected cash needs arise before maturity (Correct answer)
- Higher transaction costs from more frequent rollovers
- Greater exposure to foreign exchange fluctuations
Correct answer: Reduced liquidity if unexpected cash needs arise before maturity
Extending WAM improves yield but reduces liquidity, as longer-dated investments may need to be sold at a loss if unexpected cash needs arise.
Question 7: Which bank compensation method allows a company to offset bank service charges using the earnings credit derived from its deposit balances?
- Fee-for-service billing
- Compensating balance arrangement
- Earnings credit rate (ECR) method (Correct answer)
- Net settlement billing
Correct answer: Earnings credit rate (ECR) method
The ECR method calculates a credit based on average deposit balances, which is applied against monthly bank service charges to reduce or eliminate fees.
CTP Corporate Liquidity and Cash Management 4
A multinational corporation wants to centralize liquidity across its European subsidiaries in different countries.
Which structure BEST minimizes cross-border legal and tax complications while achieving effective cash pooling?