Deck 16: Mastering Financial Management

Question 1

Short-term financing is used to start a new business.

Answer 1

False

Question 2

Most financial managers consider long-term financing to be money that will be used for longer than one year.

Answer 2

True

Question 3

According to the risk-return ratio,conservative decisions actually result in more risk when compared to decisions that are often considered high-risk decisions.

Answer 3

False

Question 4

Equity capital generally provides the greatest part of a firm's financing.

Question 5

The first step in building a budget is to identify sources of debt financing.

Question 6

Selling a firm's unneeded assets is a reasonable last resort when neither equity capital nor debt capital can be found to meet a firm's need for capital.

Question 7

A cash budget estimates a firm's expenditures for major assets like replacement of obsolete equipment and mergers and acquisitions.

Question 8

In order to catch problems before they get out of hand,a business firm should compare its financial performance against various budgets.

Question 9

Debt capital is borrowed money that does not have to be repaid.

Question 10

Effective financial management involves careful planning to determine the best financial sources and to ensure that projected uses are in keeping with the organization's goals.

Question 11

Short-term financing is used to finance a merger or expansion.

Question 12

For a manufacturer,it is impossible to have cash-flow problems before peak sales periods.

Question 13

Florida-based Swim and Fin Products often experiences a time lag between the time goods are produced and the time that retailers pay for the finished products.In this situation,the Swim and Fin's financial problems are the result of speculative production.

Question 14

Zero-base budgeting is a budgeting approach in which every expense must be justified in every budget.

Question 15

When constructing budgets,most managers begin with departmental budgets for sales and various expenses that are then combined into a company-wide cash budget.

Question 16

During the recent economic crisis,the number of business bankruptcies actually declined.

Question 17

All of the activities concerned with obtaining money and using it effectively are called financial management.

Question 18

When a firm makes the decision to borrow money,it is a clear sign that the firm is in financial trouble.

Question 19

One of the most important priorities for someone interested in careers in finance is honesty.

Question 20

For the majority of businesses,newly-proposed financial reforms by the U.S.House of Representatives and the Senate will likely increase the time and cost of obtaining financing.

Question 21

Trade credit is the most popular form of short-term financing available for most businesses.

Question 22

An initial public offering occurs anytime that a corporation sells stock to the general public.

Question 23

Long-term loans and the sale of corporate bonds are common sources of equity financing.

Question 24

A firm with questionable credit should expect to pay the prime interest rate minus 2 percent.

Question 25

Inventories and accounts receivable are the assets most commonly used as collateral for short-term financing.

Question 26

The Nasdaq is the largest and probably best-known securities exchange market in the world.

Question 27

The Nasdaq only carries small company's stocks;by regulation,large firms' stock must trade on the NYSE,not on the Nasdaq.

Question 28

A POS terminal is a computerized cash register located in a retail store and connected to a bank's computer.

Question 29

The quality of a firm's accounts receivables is the credit standing of the firm's customers,coupled with the customers' ability to repay their credit obligations.

Question 30

Short-term business loans must be repaid within 5 years.

Question 31

A revolving credit agreement is a guaranteed line of credit.

Question 32

Commercial paper is short-term promissory notes issued by large corporations.

Question 33

Commercial paper short-term financing is usually available only to large firms.

Question 34

The lowest interest rate charged by a bank for a short-term loan is called the discount rate.

Question 35

Collateral is not required for most short-term financing.

Question 36

The terms 2/10,net 30 are used with most promissory notes.

Question 37

The Electronic Funds Transfer Act protects the customer in case a bank makes an error or the customer's credit or debit card is stolen.

Question 38

A promissory note is a written pledge by a borrower to pay a certain sum of money to a creditor at a specified future date.

Question 39

The most expensive form of short-term financing is factoring of accounts receivable.

Question 40

A factor is a financial firm that specializes in buying other firms' accounts receivables.

Question 41

It is not necessary to give most lenders a current business plan or audited financial statements when requesting a long-term business loan.

Question 42

The maturity date is the date on which the corporation is to repay the money borrowed from bondholders.

Question 43

The interest rate and repayment terms for term loans often are based on such factors as the reasons for borrowing,the borrowing firm's credit rating,and the value of collateral.

Question 44

A term-loan agreement is a promissory note that requires a borrower to repay a loan in monthly,quarterly,semiannual,or annual installments.

Question 45

Most small businesses can expect to obtain venture capital financing if they have a good credit history of paying their bills on time.

Question 46

If a firm's earnings should drop below the interest cost of borrowed money,the return on owners' equity will increase.

Question 47

Although a corporation does not have to pay dividends on common stock,it is required to pay dividends on preferred stock.

Question 48

When compared to common stockholders,preferred stockholders have a priority claim on corporate assets.

Question 49

Private placements are used to sell stock to individual investors.

Question 50

The most basic form of corporate ownership is common stock.

Question 51

Corporate profits reinvested in the business are called retained earnings.

Question 52

Venture capital is money invested in small firms that have the potential to become very successful.

Question 53

The denominations for corporate bonds range from $1,000 to $50,000.

Question 54

Interest on corporate bonds is paid quarterly.

Question 55

Financial leverage is the use of borrowed funds to increase the return on owners' equity.

Question 56

The costs of selling stock to the general public are referred to as flotation costs.

Question 57

The distribution of a corporation's earnings to the stockholders is called paying a dividend.

Question 58

Bonds that can be exchanged for a specified number of shares of common stock are called convertible bonds.

Question 59

While common stockholders have the right to receive dividends,holders of preferred stock elect the board of directors and approve or disapprove major corporate actions.

Question 60

Bonds that are secured by various assets of the issuing corporation are called debenture bonds.

Question 61

Erick's Transition Erick is currently a manager of a small financial planning firm.He is seeking a new career with a large corporation in the banking industry.He recently applied for the financial manager opening at G & T Bank.He is concerned that the transition from his small firm to a large corporation will be difficult.To better prepare himself for this change,he has decided to enroll in a few business classes to strengthen his understanding of corporate finance.The business classes have proven to be a valuable tool for learning the critical skills needed to fully understand a financial plan,equity financing,and debt financing.Erick now believes he has strengthened his competitive advantage in his quest for the job.
Refer to Erick's Transition.When Erick has to counsel clients on short-term versus long-term financing needs,which of the following should he identify as a short-term financing need?

A) Speculative production
B) Business start-up costs
C) Acquisitions and mergers
D) Replacement of equipment
E) Expansion of facilities

Question 62

In order to repay some corporate bonds,a firm may be required to deposit a specified sum of money each year until the bond's maturity in a sinking fund.

Question 63

Erick's Transition Erick is currently a manager of a small financial planning firm.He is seeking a new career with a large corporation in the banking industry.He recently applied for the financial manager opening at G & T Bank.He is concerned that the transition from his small firm to a large corporation will be difficult.To better prepare himself for this change,he has decided to enroll in a few business classes to strengthen his understanding of corporate finance.The business classes have proven to be a valuable tool for learning the critical skills needed to fully understand a financial plan,equity financing,and debt financing.Erick now believes he has strengthened his competitive advantage in his quest for the job.
Refer to Erick's Transition.During his job interview,Erick was asked to talk about money received from the owners or from the sale of shares of ownership in a business.Which of the following would best describe these funds?

A) Debt capital
B) Equity capital
C) Proceeds from a merger or acquisition
D) Proceeds from the sale of assets
E) Sales revenue

Question 64

Erick's Transition Erick is currently a manager of a small financial planning firm.He is seeking a new career with a large corporation in the banking industry.He recently applied for the financial manager opening at G & T Bank.He is concerned that the transition from his small firm to a large corporation will be difficult.To better prepare himself for this change,he has decided to enroll in a few business classes to strengthen his understanding of corporate finance.The business classes have proven to be a valuable tool for learning the critical skills needed to fully understand a financial plan,equity financing,and debt financing.Erick now believes he has strengthened his competitive advantage in his quest for the job.
Refer to Erick's Transition.When Erick creates a financial plan,his first step should be which of the following?

A) Identify available sources of financing.
B) Decide which goals to finance.
C) Describe which type of financing to use.
D) Establish a set of valid goals and objectives.
E) Determine how much money is needed to accomplish each goal.

Question 65

Each of the following causes a cash flow problem except

A) a large proportion of credit sales.
B) embezzlement of company funds.
C) unexpected slow selling seasons.
D) slow-paying customers.
E) customers who pay early.

Question 66

With regard to ongoing expenses,the most expensive type of long-term financing is the sale of common stock.

Question 67

Rollins,Inc. Mat Rollins,CEO of Rollins,Inc.,decided that upon his retirement,he would elect his son Chris to become the new CEO.Mat thought it would be a good idea to have Chris shadow him at work to understand the roles and responsibilities of a CEO.Chris shadowed his father for months in order to learn every aspect of the business.Mat knew that the best way for Chris to learn was to actually perform some of the tasks he did on a daily basis,rather than simply describe them.The company generally focused on short-term financing,and Mat felt that it was important for Chris to understand the different types of financing.Chris learned about the type of bonds that the company usually offered to raise capital.These bonds allow the purchasers of the bond to keep them until maturity.Chris also learned the process of obtaining bonds and the various types of long-term financing methods.Job shadowing was indeed a worthwhile experience for Chris.
Refer to Rollins,Inc.At one point,Chris was not sure about which type of bond was backed only by the reputation of the issuing corporation.Which of the following would you suggest?

A) Mortgage bond
B) Convertible bond
C) Debenture bond
D) Registered bond
E) Corporate bond

Question 68

Rollins,Inc. Mat Rollins,CEO of Rollins,Inc.,decided that upon his retirement,he would elect his son Chris to become the new CEO.Mat thought it would be a good idea to have Chris shadow him at work to understand the roles and responsibilities of a CEO.Chris shadowed his father for months in order to learn every aspect of the business.Mat knew that the best way for Chris to learn was to actually perform some of the tasks he did on a daily basis,rather than simply describe them.The company generally focused on short-term financing,and Mat felt that it was important for Chris to understand the different types of financing.Chris learned about the type of bonds that the company usually offered to raise capital.These bonds allow the purchasers of the bond to keep them until maturity.Chris also learned the process of obtaining bonds and the various types of long-term financing methods.Job shadowing was indeed a worthwhile experience for Chris.
Refer to Rollins,Inc.If Chris were to offer advice to a client about obtaining a loan,which of the following would be the first step?

A) Get to know potential lenders before requesting debt financing.
B) Have the financial manager meet with the loan officer.
C) Fill out a loan application.
D) Show current business plan.
E) Have your CPA prepare financial statements.

Question 69

Erick's Transition Erick is currently a manager of a small financial planning firm.He is seeking a new career with a large corporation in the banking industry.He recently applied for the financial manager opening at G & T Bank.He is concerned that the transition from his small firm to a large corporation will be difficult.To better prepare himself for this change,he has decided to enroll in a few business classes to strengthen his understanding of corporate finance.The business classes have proven to be a valuable tool for learning the critical skills needed to fully understand a financial plan,equity financing,and debt financing.Erick now believes he has strengthened his competitive advantage in his quest for the job.
Refer to Erick's Transition.Having taken the classes,Erick should describe cash flow as which of the following?

A) The movement of money from one account to another
B) Money that will be used for one year or less
C) The movement of money into and out of an organization
D) Money that will be used for longer than one year
E) Proceeds from any sales transactions only

Question 70

Greg Warner's responsibility at his company is overseeing all the activities concerned with obtaining money and using it effectively.Greg is a(n)

A) accountant.
B) financial manager.
C) financial planner.
D) investment advisor.
E) loan officer.

Question 71

Bonds from a single issue that have staggered maturity dates are called serial bonds.

Question 72

Erick's Transition Erick is currently a manager of a small financial planning firm.He is seeking a new career with a large corporation in the banking industry.He recently applied for the financial manager opening at G & T Bank.He is concerned that the transition from his small firm to a large corporation will be difficult.To better prepare himself for this change,he has decided to enroll in a few business classes to strengthen his understanding of corporate finance.The business classes have proven to be a valuable tool for learning the critical skills needed to fully understand a financial plan,equity financing,and debt financing.Erick now believes he has strengthened his competitive advantage in his quest for the job.
Refer to Erick's Transition.Erick's business classes taught him that the financial manager should do which of the following?

A) Determine the best way to raise money.
B) Ensure the business success of the company.
C) Ensure that projected uses are in keeping with the organization's goals.
D) Both A and B.
E) Both A and C.

Question 73

The movement of money into and out of an organization is called

A) equity financing.
B) a revolving credit agreement.
C) factoring.
D) cash flow.
E) budgeting.

Question 74

In regards to cash flow,a firm should ideally have

A) enough money coming into the firm to cover the expenses in that period.
B) more cash flowing out than in since this represents growth.
C) to use short-term financing only two to three times a year.
D) a constant need for short-term financing.
E) most of its cash going to its customers.

Question 75

Rollins,Inc. Mat Rollins,CEO of Rollins,Inc.,decided that upon his retirement,he would elect his son Chris to become the new CEO.Mat thought it would be a good idea to have Chris shadow him at work to understand the roles and responsibilities of a CEO.Chris shadowed his father for months in order to learn every aspect of the business.Mat knew that the best way for Chris to learn was to actually perform some of the tasks he did on a daily basis,rather than simply describe them.The company generally focused on short-term financing,and Mat felt that it was important for Chris to understand the different types of financing.Chris learned about the type of bonds that the company usually offered to raise capital.These bonds allow the purchasers of the bond to keep them until maturity.Chris also learned the process of obtaining bonds and the various types of long-term financing methods.Job shadowing was indeed a worthwhile experience for Chris.
Refer to Rollins,Inc.From his work experience,Chris should have learned that ____ has a repayment period of thirty to sixty days.

A) factoring
B) a promissory note
C) commercial paper
D) trade credit
E) a secured loan

Question 76

The legal document detailing all the conditions relating to a bond issue is called a bond indenture.

Question 77

XYZ Company experienced a significant increase in sales as a result of its new promotional campaign.Yesterday,however,it realized that because most of those sales were on credit,it did not have enough money in the bank to pay this month's bills.XYZ can take care of this situation temporarily by

A) obtaining long-term financing.
B) disallowing credit sales.
C) selling commercial drafts.
D) obtaining short-term financing.
E) issuing stock.

Question 78

All of the activities concerned with obtaining money and using it effectively are called

A) financial management.
B) long-term financing.
C) budgeting.
D) financial planning.
E) unsecured financing.

Question 79

Money that will be used for one year or less is called

A) open credit.
B) equity capital.
C) short-term financing.
D) nonsecured financing.
E) long-term financing.

Question 80

Rollins,Inc. Mat Rollins,CEO of Rollins,Inc.,decided that upon his retirement,he would elect his son Chris to become the new CEO.Mat thought it would be a good idea to have Chris shadow him at work to understand the roles and responsibilities of a CEO.Chris shadowed his father for months in order to learn every aspect of the business.Mat knew that the best way for Chris to learn was to actually perform some of the tasks he did on a daily basis,rather than simply describe them.The company generally focused on short-term financing,and Mat felt that it was important for Chris to understand the different types of financing.Chris learned about the type of bonds that the company usually offered to raise capital.These bonds allow the purchasers of the bond to keep them until maturity.Chris also learned the process of obtaining bonds and the various types of long-term financing methods.Job shadowing was indeed a worthwhile experience for Chris.
Refer to Rollins,Inc.If Chris has learned and understood the business,he should know that today most corporate bonds are

A) convertible bonds.
B) mortgage bonds.
C) sinking fund bonds.
D) nonconvertible bonds.
E) registered bonds.