Deck 8: Finance: Acquiring and Using Funds to Maximize Value

Question 1

Cash budgets project cash inflows and outflows over a period of several years in order to help financial managers determine the best way to meet long-term financing needs.

Answer 1

False

Question 2

Historically, the most widely accepted goal of financial management has been to acquire new shareholders.

Answer 2

False

Question 3

Financial capital refers to the funds a firm uses to acquire its assets and finance its operations.

Answer 3

True

Question 4

Financial capital may be used to purchase a factory and equipment or to launch a new product line.

Question 5

Budgeting is a management tool that explicitly shows how firms will acquire and use the resources needed to achieve its goals over a specific time period.

Question 6

Financial managers have a legal and ethical obligation to make decisions consistent with the financial interests of their firm's owners.

Question 7

Budgets help managers evaluate progress and performance.

Question 8

The sales budget must be created after other operating budgets.

Question 9

There are two broad approaches to budget preparation: top-down and bottom-up.

Question 10

Pro forma statements are idealized financial statements that show the firm's average financial performance over the past 10 years.

Question 11

A commitment to meeting social responsibilities can contribute to a more profitable company and an increase in shareholder value.

Question 12

The risk-return trade-off suggests that the greater the risk, the lower the return.

Question 13

Companies have a variety of ways to acquire the financial capital they need, which includes direct contributions by owners.

Question 14

Finance is the functional area of business that is responsible for finding the best sources of funds and the best ways to use them.

Question 15

Financial managers have a legal and ethical obligation to make decisions consistent with the financial interests of their firm's owners.

Question 16

Financial capital is used to finance long-term investments and NOT short-term obligations.

Question 17

Cash budgets can help financial managers determine when their firms are likely to have short-term surpluses of cash available to pay off loans or invest in other assets.

Question 18

A cash budget identifies short-term fluctuations in cash flows, helping managers identify times when the firm might face cash flow problems-or when it might have extra cash that it could invest.

Question 19

When the goals of stakeholders conflict with each other, financial managers usually adopt the view that the preferences of internal stakeholders, such as managers and employees, should be given the most weight.

Question 20

Today many financial managers accept the view that serving the needs of other stakeholders can be consistent with the goal of maximizing the value of the firm to its owners.

Question 21

The development of pro forma income statements and balance sheets is an important step in the financial planning function performed by financial managers.

Question 22

Covenants are terms included in long-term loan agreements that are intended to protect borrowers from unfair policies imposed by lenders.

Question 23

Pro forma income statements forecast the assets a firm will need in the next accounting period.

Question 24

A factor is a company that provides long-term financing to firms by purchasing the firm's bonds and other long-term securities at a discount.

Question 25

Trade credit is credit granted by sellers when they provide firms with materials, parts, or finished goods without requiring payment until some period after delivery.

Question 26

Commercial paper is a short-term unsecured promissory note issued by large corporations.

Question 27

If an invoice contains the terms 2/10 net 30, the supplier is offering a 10 percent cash discount off the invoice price if the buyer pays quickly (within two days).

Question 28

A revolving credit agreement is a guaranteed line of credit in which a bank makes a binding commitment to provide a business with funds up to a specified credit limit at any time during the term of the agreement. In exchange for the bank's commitment, the firm pays a commitment fee on the unused funds.

Question 29

A covenant is a restriction lenders impose on borrowers as a condition of providing long-term debt financing.

Question 30

A pro forma balance sheet projects the types and amounts of revenues a firm will need to execute future plans and shows the amount of additional financing needed to acquire those assets.

Question 31

A line of credit is a financial arrangement between a firm and a bank in which the bank pre-approves credit up to a specified limit and guarantees that this credit will be available even if the borrower's credit rating deteriorates.

Question 32

When the economy is booming and profits are increase, retained earnings tend to decrease.

Question 33

Corporations sell commercial paper at a lower price than the amount the company will pay the holder when the paper comes due. The difference between the initial price and the price paid to the holder when the paper matures represents the interest earned on the note.

Question 34

A firm that extends credit for only 30 days is likely to receive its payments faster than a firm that allows customers 60 or 90 days, but such a policy is likely to cause a loss of sales.

Question 35

One key reason commercial paper is popular with companies is that it typically carries a lower interest rate than banks charge on short-term loans.

Question 36

Spontaneous financing arises as a natural result of a firm's business operations without the need for special arrangements.

Question 37

Seema Parvani runs a seasonal nursery business in British Columbia. Given the uneven nature of her cash payments and cash receipts, she probably wouldn't receive much benefit from developing a cash budget.

Question 38

A drawback of commercial paper is that it takes a long time to mature, thus making it a risky asset to hold if the firm is likely to need cash in the near future.

Question 39

Another way firms can meet long-term needs is by reinvesting their earnings. The profits that a firm reinvests are called retained earnings.

Question 40

Commercial paper is usually issued at a discount, meaning that it is initially sold at a lower price than the company will pay the holder when the paper comes due.

Question 41

One advantage of using factors as a source of short-term financing is that it allows the firm to outsource its collection efforts, thus avoiding the hassle of collecting accounts receivables from customers who pay late.

Question 42

Setting short credit periods increases sales.

Question 43

Bigbux and Lottadoe are two very similar businesses in all respects except that Bigbux relies mainly on equity financing, while Lottadoe relies heavily on debt financing. This year both firms have enjoyed strong growth in net income. This is likely to result in a higher return on equity for Bigbux than for Lottadoe.

Question 44

T-bills are long-term IOUs issued by corporations and regulated by the federal government.

Question 45

Rather than borrowing from banks or other lenders, corporations sometimes issue their own formal IOUs, called corporate bonds.

Question 46

For corporations, equity financing comes from two major sources: bank loans and retained earnings.

Question 47

When an invoice lists the terms as 3/15 net 45, the "net 45" means that the seller requires payment in full within 45 days.

Question 48

One disadvantage of equity financing is that it locks the firm into making fixed payments.

Question 49

Capital budgeting is the procedure a firm uses to plan its cash flow strategy for the next year.

Question 50

Setting high credit standards reduces the likelihood a firm will have problems with customers who pay late (or not at all).

Question 51

Lentz-Tucker Incorporated reported net income of $3 million and paid no dividends to its shareholders. The shareholders have the legal right to sue the company for failure to provide a return on their investment.

Question 52

The Lottadoe Corporation is considering financing some new long-term investments by issuing additional long-term debt. One disadvantage of this approach is that it locks the firm into making fixed payments that could create cash flow problems if the firm's earnings are lower than expected.

Question 53

Retained earnings is the net income a firm makes when revenues exceed liabilities.

Question 54

An advantage of debt financing is that the firm acquires additional shareholders.

Question 55

Unlike debt, equity financing imposes no required payments.

Question 56

Allowing customers to buy on credit can significantly increase sales; however, credit sales can create cash flow problems.

Question 57

The interest payments a firm makes on debt are a tax-deductible expense.

Question 58

Money market mutual funds are an attractive cash equivalent for smaller firms.

Question 59

A corporation can raise additional equity financing by taking out a long-term loan from a bank.

Question 60

Retained earnings are considered a form of equity financing.

Question 61

Some small businesses have found that barter arrangements work better than demanding cash and can help them get at least some of what they are owed.

Question 62

Mirella Macedo works for Swictek Industries. Her primary responsibilities involve management of the firm's working capital and the analysis of long-term investment opportunities for Swictek. In which area is Mirella's job?

A) financial management
B) managerial accounting
C) operational budgeting
D) logistics

Question 63

How do today's financial managers generally feel about treating customers, employees, suppliers, creditors, and other stakeholders with fairness and respect?

A) They feel it often helps the firm build value for its owners.
B) They feel it is a job best left to other departments within the organization.
C) They feel it may be important from an ethical perspective but has little to do with meeting the firm's financial objectives.
D) They feel it is a more important goal than increasing the value of the firm to its owners.

Question 64

Net present value (NPV) is the sum of the present values of expected future cash flows from an investment minus the net cost of that investment. It measures the increase in shareholder value expected to result from an investment.

Question 65

Long-term capital budgeting proposals often incur negative cash flows in the initial time period, but eventually they often generate positive cash flows.

Question 66

The time value of money is based on the idea that inflation erodes the purchasing power of the dollar.

Question 67

Which of the following functions must financial managers perform?

A) evaluating the firm's recent financial performance and planning wise use of financial resources, including working capital decisions and investment opportunity decisions
B) segmenting the market for the firm and deciding on distribution strategies
C) the development of the organization design and reporting structure so that the CEO and other top executives can efficiently implement their long-term strategic decisions
D) the accounting, auditing, and bookkeeping functions for the firm.

Question 68

You have the opportunity to spend $1000 today to purchase an investment that will pay you $360 next year, $360 in two years, and $400 in three years. This is clearly a good deal because the total amount of money you will receive over this three-year period is $1120, which is more than the $1000 you'd have to pay for the investment.

Question 69

The time value of money is the principle that a dollar received today is worth less than a dollar received in the future.

Question 70

The net present value of an investment proposal is found by adding the present values of all of its estimated future cash flows and subtracting the initial cost of the investment from the sum.

Question 71

Which of the following determines the types of assets needed to achieve the goals of the organization and determines the best way to obtain the funds needed to acquire those assets?

A) finance
B) asset management
C) credit
D) debt financing

Question 72

A cash flow of $1000 received three years from today would have the same present value as a cash flow of $1000 received two years from today.

Question 73

A wealthy relative offers you $1000 today but doesn't actually get around to giving you the money until a year later. The delay in receiving the money causes you to lose the opportunity to earn a year's worth of interest. This example illustrates the rationale for the time value of money.

Question 74

The present value of a cash flow received in a future time period is the amount of money which, if invested today at a specified rate of interest, would grow to become that future amount of money.

Question 75

The capital budgeting process evaluates proposals such as replacing existing machinery with more advanced models to reduce cost and improve the efficiency of current operations.

Question 76

Money market mutual funds are a way for small investors to get into the market for securities that would otherwise be too expensive for them to afford.

Question 77

The sooner you receive a sum of money, the sooner you can put that money to work to earn even more money.

Question 78

Financial managers at Tuckerverse Corporation have just computed the NPV for a capital budgeting proposal and found that it is $1500. The financial managers are likely to approve this proposal.

Question 79

Leverage increases the expected return on paper of a shareholder's investments, but it also increases the firm's financial risk.

Question 80

Historically, what has been the goal of financial management?

A) to maximize the value of the firm to its owners
B) to minimize financial risk
C) to ensure an adequate degree of liquidity
D) to maximize market share