CTP Corporate Liquidity and Cash Management 5 — Questions and Answers
Question 1: A company is evaluating whether to factor its receivables or use them as collateral for a revolving credit facility. Which factor MOST favors factoring?
- The company wants to retain collections responsibility
- The company needs to improve its leverage ratios on the balance sheet
- The company has high-quality receivables and needs immediate off-balance-sheet financing
- The company's receivables have long collection cycles averaging 90+ days with credit risk concerns (Correct answer)
Correct answer: The company's receivables have long collection cycles averaging 90+ days with credit risk concerns
Factoring is most beneficial when receivables have extended terms and credit risk, as the factor assumes collection risk and provides immediate liquidity.
Question 2: In a controlled disbursement account arrangement, the bank notifies the company each morning of the EXACT dollar amount of checks that will clear that day. This information is used PRIMARILY to:
- Detect fraudulent checks before they clear
- Fund only the precise amount needed, minimizing idle balances (Correct answer)
- Calculate the company's DSO for the current period
- Determine the optimal lockbox concentration strategy
Correct answer: Fund only the precise amount needed, minimizing idle balances
Controlled disbursement gives same-day funding information so the company can fund the account with the exact clearing amount, eliminating excess idle balances.
Question 3: A foreign subsidiary holds €10M in a European account. The parent company wants to access this liquidity without a formal dividend or intercompany loan. Which technique BEST achieves this within a banking structure?
- Cross-border physical cash pooling with same-day repatriation (Correct answer)
- Currency swap agreement with the subsidiary
- Establishing a shared service center in the eurozone
- Selling the subsidiary's receivables to the parent at a discount
Correct answer: Cross-border physical cash pooling with same-day repatriation
Cross-border physical pooling sweeps subsidiary balances to the parent's header account daily, accessing foreign liquidity without formal dividend or loan structures.
Question 4: When a treasury manager says a company has 'adequate liquidity,' this MOST precisely means the company:
- Has no outstanding debt obligations
- Can meet all financial obligations as they come due without distress (Correct answer)
- Maintains cash balances equal to at least one month of operating expenses
- Has a current ratio greater than 2.0
Correct answer: Can meet all financial obligations as they come due without distress
Liquidity adequacy means having sufficient resources—cash, equivalents, and credit capacity—to meet all obligations on time without asset fire sales.
Question 5: Which risk is MOST directly mitigated by a company maintaining a committed revolving credit facility as a liquidity reserve?
- Interest rate risk on fixed-rate debt
- Refinancing risk if capital markets become inaccessible (Correct answer)
- Currency translation risk on foreign operations
- Counterparty credit risk on derivatives
Correct answer: Refinancing risk if capital markets become inaccessible
A committed revolving credit facility provides assured access to liquidity even when capital markets close, directly mitigating refinancing and liquidity risk.
Question 6: A company's bank offers an earnings credit rate (ECR) of 2.5% on average collected balances of $4M. Monthly bank fees are $8,500. What is the NET monthly bank fee owed?
- $0 (fully offset)
- $167 owed to bank (Correct answer)
- $333 surplus credit
- $8,500 owed (ECR doesn't apply)
Correct answer: $167 owed to bank
Monthly ECR credit = ($4,000,000 × 2.5%) / 12 = $8,333; net fee = $8,500 - $8,333 = $167 still owed to the bank.
Question 7: Under SEC Rule 2a-7, money market funds must maintain a minimum percentage of assets in 'weekly liquid assets.' What is the current minimum threshold?
- 10%
- 20%
- 30% (Correct answer)
- 50%
Correct answer: 30%
SEC Rule 2a-7 (post-2023 reform) requires money market funds to maintain at least 30% of total assets in weekly liquid assets to ensure redemption capacity.
CTP Corporate Liquidity and Cash Management 5
A company is evaluating whether to factor its receivables or use them as collateral for a revolving credit facility.
Which factor MOST favors factoring?