question

Understand why financial management is important in today's uncertain economy.

answer

Financial management consists of all activities concerned with obtaining money and using it effectively. Financial management can be viewed as a two-sided problem. On one side, the uses of funds often dictate the type or types of financing needed by a business. On the other side, the activities a business can undertake are determined by the types of financing available. Financial managers must ensure that funds are available when needed, that they are obtained at the lowest possible cost, and that they are used as efficiently as possible. In the wake of the economic crisis, the Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law. And today, there is an ongoing debate if more regulations are needed. Still, there are a number of rewarding jobs in finance for qualified job applicants.

question

Identify a firm's short- and long-term financial needs.

answer

Short-term financing is money that will be used for one year or less. There are many short-term needs, but cash flow, speculative production, and inventory are three for which financing is often required. Long-term financing is money that will be used for more than one year. Such financing may be required for a business start-up, for a merger or an acquisition, for new product development, for long-term marketing activities, for replacement of equipment, or for expansion of facilities. According to financial experts, business firms will find it more difficult to raise both short- and long-term financing in the future because of increased regulations and more cautious lenders. Financial managers must also consider the risk-return ratio when making financial decisions. The risk-return ratio is based on the principle that a high-risk decision should generate higher financial returns for a business. More conservative decisions generate lesser returns.

question

Summarize the process of planning for financial management.

answer

A financial plan begins with an organization's goals and objectives. Next, a firm's goals and objectives are "translated" into departmental budgets that detail expected income and expenses. From these budgets, which may be combined into an overall cash budget, the financial manager determines what funding will be needed and where it may be obtained. Whereas departmental and cash budgets emphasize short-term financing needs, a capital budget can be used to estimate a firm's expenditures for major assets and its long-term financing needs. The four principal sources of financing are sales revenues, equity capital, debt capital, and proceeds from the sale of assets. Once the needed funds have been obtained, the financial manager is responsible for monitoring and evaluating the firm's financial activities.

question

Identify the services provided by banks and financial institutions for their business customers.

answer

Banks and other financial institutions offer today's business customers a tempting array of services. Among the most important and attractive banking services are savings accounts and certificates of deposit, checking accounts, short- and long-term loans, and credit-card and debit-card processing. Increased use of electronic funds transfer systems (automated teller machines, automated clearinghouse systems, point-of-sale terminals, and electronic check conversion) also will change the way that business firms bank and conduct typical business transactions. For firms in the global marketplace, a bank can provide letters of credit and banker's acceptances that will reduce the risk of nonpayment for sellers. Banks and financial institutions also can provide currency exchange to reduce payment problems for import or export transactions

question

Describe the advantages and disadvantages of different methods of short-term debt financing.

answer

Most short-term financing is unsecured; that is, no collateral is required. Sources of unsecured short-term financing include trade credit, promissory notes issued to suppliers, unsecured bank loans, and commercial paper. Sources of secured short-term financing include loans secured by inventory and accounts receivable. A firm may also sell its receivables to factors. Trade credit is the least-expensive source of short-term financing. The cost of financing through other sources generally depends on the source and on the credit rating of the firm that requires the financing. Factoring is generally the most expensive approach.

question

Evaluate the advantages and disadvantages of equity financing.

answer

The first time a corporation sells stock to the general public is referred to as an initial public offering (IPO). With an IPO, the stock is sold in the primary market. Once sold in the primary market, investors buy and sell stock in the secondary market. Usually, secondary market transactions are completed through a securities exchange or the over-the-counter market. Common stock is voting stock; holders of common stock elect the corporation's directors and often must approve changes to the corporate charter. Holders of preferred stock must be paid dividends before holders of common stock are paid any dividends. Another source of equity funding is retained earnings, which is the portion of a business's profits not distributed to stockholders. Venture capital—money invested in small (and sometimes struggling) firms that have the potential to become very successful—is yet another source of equity funding. Finally, a private placement can be used to sell stocks and other corporate securities

question

Evaluate the advantages and disadvantages of long-term debt financing.

answer

For a small business, debt financing is generally limited to loans. Large corporations have the additional option of issuing corporate bonds. Regardless of whether the business is small or large, it can take advantage of financial leverage. Financial leverage is the use of borrowed funds to increase the return on owners' equity. The rate of interest for long-term loans usually depends on the financial status of the borrower, the reason for borrowing, and the kind of collateral pledged to back up the loan. Long-term business loans are normally repaid in 3 to 7 years but can be as long as 15 to 20 years. Money realized from the sale of corporate bonds must be repaid when the bonds mature. In addition, the corporation must pay interest on that money from the time the bonds are sold until maturity. The interest rate the corporation must pay often depends on the financial health of the firm issuing bonds. Maturity dates for bonds generally range from 10 to 30 years after the date of issue. Three types of bonds—debentures, mortgage bonds, and convertible bonds—are sold to raise debt capital. When comparing the cost of long-term financing, the ongoing costs of using stock (equity) to finance a business are low. The most expensive is a long-term loan (debt).

question

Cash flow can be defined as the amount of accounts payable and accounts receivable of a firm. a. True b. False

answer

b. False

question

Financial experts believe that it will be easier for business firms to raise capital in the future. a. True b. False

answer

a. True

question

One important aspect of a goal is that is must be reasonable and realistic. a. True v b. False

answer

a. True

question

A budget projects future expenditures, it does not project income. a. True b. False

answer

b. False

question

A cash budget always estimates cash receipts and cash expenditures over a one-year period. a. True b. False

answer

b. False

question

For a sole proprietorship, equity capital comes from the sale of shares of ownership in the company. a. True b. False

answer

b. False

question

Profits not distributed to stockholder is called financial leverage. a. True b. False

answer

b. False

question

A trustee is an individual or independent firm that acts as the stock owners' representative. a. True b. False

answer

b. False

question

The maturity of a bond is the date when the corporation is to repay the borrowed money. a. True b. False

answer

a. True

question

Which of the following is NOT a type of bond: a. debenture bond b. mortgage bond c. convertible bond d. bond indenture

answer

d. bond indenture

question

The three ways a corporation can gain by issuing convertible bonds include all but which one of the following: a. If the bondholder convers to common stock, the corporation no longer has to redeem the bond at maturity. b. Convertibles usually carry a lower interest rate than conconvertible bonds. c. The conversion feature attracts investors who are interested in the speculative gain that conversion to common stock may provide. d. Convertible bonds stimulate the economy.

answer

d. Convertible bonds stimulate the economy.

question

The risk-return ratio is based on the principle that: a. high-risk decisions should generate higher financial returns. b. low risk decisions should generate higher financial returns. c. risky decisions result in risky financial planning. d. high risk decisions should generate lower financial returns. e. a risk is only as good as the economic forecasting available.

answer

a. high-risk decisions should generate higher financial returns.

question

To ensure that sufficient funds are available when needed in order to redeem bonds, the firm can issue bonds that mature on different dates. Which type of bonds would be the best to issue? a. Debenture b. Serial c. Corporate d. Registered e. Convertible

answer

b. Serial

question

MexAmerica Tile sells a wide array of Mexican- and Southwest-style tiles for home and office projects. MexAmerica has long been committed to the regional university and the business internship program. The company has just brought its sixth intern on staff for a six-month period—often hiring the intern after the internship is completed. TJ Corea is the new intern. He's devoted to understanding more about the financing of MexAmerica. The plan is to gradually ease TJ into the finances of the organization. If all goes as planned, near the end of the six months, TJ will be considering a long-term career with MexAmerica and MexAmerica will be considering extending him an offer. MexAmerica uses ___ for the purpose of redeeming bond issues. a. financial leverage b. retained earnings c. a par value d. a sinking fund e. a private placement

answer

d. a sinking fund

question

MexAmerica Tile sells a wide array of Mexican- and Southwest-style tiles for home and office projects. MexAmerica has long been committed to the regional university and the business internship program. The company has just brought its sixth intern on staff for a six-month period—often hiring the intern after the internship is completed. TJ Corea is the new intern. He's devoted to understanding more about the financing of MexAmerica. The plan is to gradually ease TJ into the finances of the organization. If all goes as planned, near the end of the six months, TJ will be considering a long-term career with MexAmerica and MexAmerica will be considering extending him an offer. TJ knows that if he were to accept a career position with MexAmerica, his employers would have expectations that he would be able to recommend short-term loan solutions as needed. TJ can anticipate that they might needshort-term financing for a. cash flow problems. b. new product development. c. mergers and acquisitions. d. replacement of equipment. e. expansion of facilities.

answer

a. cash flow problems.

question

Equity capital is obtained from a. banks. b. stockholders. c. insurance companies. d. bondholders. e. credit unions.

answer

b. stockholders.

question

The interest rates and repayment terms for term loans are based on which factor? a. All of these factors are considered. b. Available working capital c. Reasons for borrowing d. Value of the collateral e. Borrowing firm's credit rating

answer

a. All of these factors are considered.

question

The steps in effective financial planning are, in order, a. establishing objectives, budgeting, and identifying sources of funds. b. establishing goals, setting objectives, and working the plan. c. developing plans, monitoring plans, and evaluating the results. d. establishing objectives, identifying sources, and budgeting. e. identifying financial resources, budgeting, and establishing goals.

answer

a. establishing objectives, budgeting, and identifying sources of funds.

question

banker's acceptance

answer

a written order for a bank to pay a third party a stated amount of money on a specific state

question

bond indenture

answer

a legal document that details all the conditions relating to a bond issue

question

budget

answer

a financial statement that projects income, expenditures, or both over a specified future period

question

capital budget

answer

a financial statement that estimates a firm's expenditures for major assets and its long-term financing needs

question

cash budget

answer

a financial statement that estimates cash receipts and cash expenditures over a specified period

question

cash flow

answer

the movement of money into and out of an organization

question

certificate of deposit (CD)

answer

A document stating that the bank will pay the depositor a guaranteed interest rate on money left on deposit for a specified period of time

question

check

answer

a written order for a bank or other financial institution to pay a stated dollar amount to the business or person indicated on the face of the check

question

chief financial officer (CFO)

answer

a high-level corporate executive who manages a firm's finances and reports directly to the company's chief executive officer or president

question

collateral

answer

real estate or property pledged as security for a loan

question

commercial paper

answer

a short-term promissory note issued by a large corporation.

question

common stock

answer

stock whose owners may vote on corporate matters but whose claims on profits and assets are subordinate to the claims of others

question

convertible bond

answer

a bond that can be exchanged, at the owner's option, for a specified number of shares of the corporation's common stock

question

corporate bond

answer

a corporation's written pledge that it will repay a specified amount of money with interest

question

debenture bond

answer

a bond backed only by the reputation of the issuing corporation

question

debit card

answer

a card that electronically subtracts the amount of a customer's purchase from her or his bank account at the moment the purchase is made

question

debt capital

answer

borrowed money obtained through loans of various types

question

electronic funds transfer (EFT) system

answer

a means of performing financial transactions through a computer terminal or telephone hookup

question

equity capital

answer

money received from the owners or from the sale of shares of ownership in a business

question

factor

answer

a firm that specializes in buying other firms' accounts receivable

question

financial leverage

answer

the use of borrowed funds to increase the return on owners' equity

question

financial management

answer

all the activities concerned with obtaining money and using it effectively

question

financial plan

answer

a plan for obtaining and using the money needed to implement an organization's goals and objectives

question

initial public offering (IPO)

answer

occurs when a corporation sells common stock to the general public for the first time

question

investment banking firm

answer

an organization that assists corporations in raising funds, usually by helping to sell new issues of stocks, bonds, or other financial securities

question

letter of credit

answer

a legal document issued by a bank or other financial institution guaranteeing to pay a seller a stated amount for a specified period of time.

question

line of credit

answer

a loan that is approved before the money is actually needed

question

long-term financing

answer

money that will be used for longer than one year

question

maturity date

answer

the date on which a corporation is to repay borrowed money

question

mortgage bond

answer

a corporate bond secured by various assets of the issuing firm

question

over-the-counter (OTC) market

answer

a network of dealers who buy and sell the stocks of corporations that are not listed on a securities exchange

question

preferred stock

answer

stock whose owners usually do not have voting rights but whose claims on dividends and assets are paid before those of common-stock owners

question

primary market

answer

a market in which an investor purchases financial securities (via an investment bank) directly from the issuer of those securities

question

prime interest rate

answer

the lowest rate charged by a bank for a short-term loan

question

private placement

answer

occurs when stock and other corporate securities are sold directly to insurance companies, pension funds, or large institutional investors

question

promissory note

answer

a written pledge by a borrower to pay a certain sum of money to a creditor at a specified future date

question

registered bond

answer

a bond registered in the owner's name by the issuing company

question

retained earnings

answer

the portion of a corporation's profits not distributed to stockholders

question

revolving credit agreement

answer

a guaranteed line of credit

question

risk-return ratio

answer

a ratio based on the principle that a high-risk decision should generate higher financial returns for a business and more conservative decisions often generate lower returns

question

secondary market

answer

a market for existing financial securities that are traded between investors

question

securities exchange

answer

a marketplace where member brokers meet to buy and sell securities

question

serial bonds

answer

bonds of a single issue that mature on different dates

question

short-term financing

answer

money that will be used for one year or less

question

sinking fund

answer

a sum of money to which deposits are made each year for the purpose of redeeming a bond issue

question

speculative production

answer

the time lag between the actual production of goods and when the goods are sold

question

term-loan agreement

answer

a promissory note that requires a borrower to repay a loan in monthly, quarterly, semiannual, or annual installments

question

trade credit

answer

a type of short-term financing extended by a seller who does not require immediate payment after delivery of merchandise

question

trustee

answer

an individual or an independent firm that acts as a bond owner's representative

question

unsecured financing

answer

financing that is not backed by collateral; unsecured short-term financing offers several options

question

zero-base budgeting

answer

a budgeting approach in which every expense in every budget must be justified

question

A budget is a historical record of the previous year's financial activities.

answer

False

question

When you use a debit card to make a purchase, a financial institution is extending credit to you and expects to be paid in the future.

answer

False

question

With a banker's acceptance, certain conditions, such as delivery of the merchandise, may be specified before payment is made.

answer

False

question

Most lenders do not require collateral for short-term financing.

answer

True

question

A revolving credit agreement is a guaranteed line of credit.

answer

True

question

Factoring of accounts receivable typically is the highest cost method of short-term financing.

answer

True

question

Normally, the usual repayment period for a long-term loan is three to seven years.

answer

True

question

The usual face value for most corporate bonds is .

answer

False

question

A capital budget estimates a firm's expenditures for labor costs and other monthly expenses.

answer

False

question

A written order for a bank or other financial institution to pay a stated dollar amount to a specified business or person is called a check. deposit slip. notes receivable. receipt. debit memorandum.

answer

check.

question

Judy Martinez, owner of Judy's Fashions, received a tax refund. She deposited the money in Chase Bank. The terms of the agreement are that she must leave the money on deposit for three years and the bank will pay her interest. Her account is a line of credit. certificate of deposit. checking account. commercial paper agreement. savings account.

answer

certificate of deposit.

question

An invoice in the amount of $200 carries cash terms of "2/10, net 30." If the buyer takes advantage of the discount terms, how much will the buyer pay? $100 $120 $140 $160 $196

answer

$196

question

When a firm sells its accounts receivable to raise short-term cash, it is engaging in a strategy called factoring. financial planning. equity financing debt financing. drafting.

answer

factoring

question

Retained earnings, as a form of equity financing, are gross earnings. profits before taxes. profits after taxes. undistributed profits. total owners' equity.

answer

undistributed profits.

question

Since prices are extremely low, the Pipeline Supply Company wants to purchase a special line of pipes from a company going out of business. Pipeline, however, will need to borrow money to make this deal. Which assets will Pipeline most commonly pledge as collateral for this short-term loan? delivery equipment notes payable manufacturing equipment owners' equity inventory

answer

inventory

question

The most basic form of corporate ownership that has voting rights is preferred stock. common stock. retained stock. deferred value stock. treasury stock.

answer

common stock.

question

A short-term promissory note issued by large corporations is known as debenture agreement. equity agreement. commercial paper. draft agreement. loan commitment.

answer

commercial paper.

question

Each of the following causes a cash flow problem except embezzlement of company funds. an unexpected slow selling season. a large number of credit sales. slow-paying customers. customers who pay on time.

answer

customers who pay on time.

question

The primary sources of funds available to a business include all of the following except debt capital. equity capital. sales revenue. government grants. sale of assets.

answer

government grants.

question

For businesses, recent new regulations could increase the time and cost of obtaining both short- and long-term financing. a. True b. False

answer

a. True

question

During the recent economic crisis, many corporations were able to borrow more money than usual. a. True b. False

answer

b. False

question

Debt capital is borrowed money. a. True b. False

answer

a. True

question

Zero-base budgeting requires that only new expenses be justified. a. True b. False

answer

b. False

question

Common stock and preferred stock are types of debt financing. a. True b. False

answer

b. False

question

Which of the following is not usually a short-term financing need? a. Cash-flow problems b. Speculative production c. Inventory needs d. New product development e. Unexpected emergencies

answer

d. New product development

question

An IPO can only happen two times for the same company. a. True b. False

answer

b. False

question

A CFO position in a company is usually a mid-management status. a. True b. False

answer

b. False

question

A corporation can acquire equity financing through the sale of stock or the use of profits not distributed to owners. a. True b. False

answer

a. True

question

A goal is an end result that an organization expects to achieve over a long-term, possibly up to 20-yearperiod. a. True b. False

answer

b. False

question

Short-term debt financing is usually easier to obtain than long-term financing. a. True b. False

answer

a. True

GEB1101:M2-C16: Mastering Financial Management – Flashcards

Unlock all answers in this set

Haven't found what you were looking for?

Search for samples, answers to your questions and flashcards