Deck 16: Mastering Financial Management

Question 1

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

Answer 1

True

Question 2

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.

Answer 2

True

Question 3

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

Answer 3

True

Question 4

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

Question 5

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

Question 6

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

Question 7

Interest on corporate bonds is paid quarterly.

Question 8

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 9

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

Question 10

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

Question 11

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 12

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

Question 13

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

Question 14

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

Question 15

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 16

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

Question 17

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 18

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

Question 19

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

Question 20

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

Question 21

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

Question 22

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

Question 23

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 24

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

Question 25

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 26

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

Question 27

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

Question 28

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

Question 29

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

Question 30

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

Question 31

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

Question 32

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

Question 33

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

Question 34

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

Question 35

Corporate profits reinvested in the business are called retained earnings.

Question 36

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 37

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

Question 38

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

Question 39

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

Question 40

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

Question 41

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

Question 42

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

Question 43

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

Question 44

Collateral is not required for most short-term financing.

Question 45

Private placements are used to sell stock to individual investors.

Question 46

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

Question 47

The most basic form of corporate ownership is common stock.

Question 48

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 49

A revolving credit agreement is a guaranteed line of credit.

Question 50

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

Question 51

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

Question 52

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

Question 53

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

Question 54

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

Question 55

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

Question 56

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 57

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

Question 58

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

Question 59

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

Question 60

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

Question 61

Tom Jackson, president of Jackson Manufacturing, suspects that the managers of two departments have been padding their budgets for the last three years. To eliminate this problem, Tom would

A)fire the managers.
B)hire an efficiency expert.
C)hire a new accountant.
D)use zero-base budgeting.
E)use traditional budgeting.

Question 62

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

A)financial planning.
B)investment management.
C)management leverage.
D)financial leverage.
E)return on leverage.

Question 63

Which of the following statements is incorrect?

A)The size of the investment banker's commission depends on the financial health of the corporation issuing stock.
B)Although a corporation can have only one IPO, it can sell additional stock after the IPO.
C)The cost of selling stock is referred to as flotation costs.
D)The ongoing costs associated with selling stock are low.
E)All of these statements are correct.

Question 64

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

Question 65

Melissa feels confident about obtaining short-term financing for her art gallery because, like many companies, she has a(n)

A)unlimited source of financing available to her.
B)relatively large amount of money she can borrow.
C)stockpile of cash to use in place of short-term financing.
D)relationship with the friend of her banker.
E)close working relationship with a lender.

Question 66

In the ____, Kia Corporation describes the basics of the bond issue, who the trustee is, when the bonds mature, and how the bonds will be paid off.

A)bond indenture
B)trustee agreement
C)bond prospectus
D)term-loan agreement
E)bond contract

Question 67

Downing, Inc., issues bonds to purchase new machinery for its factories. These bonds are secured by the machinery purchased with the proceeds of the bond issue. These are ____ bonds.

A)debenture
B)mortgage
C)convertible
D)indenture
E)sinking fund

Question 68

The Fruitiest Candy Company finds that from time to time it needs short-term funds to cover its operating expenses. It wants to establish a prearranged loan with a bank but has not found a bank that will guarantee such a loan. Perplexed by this, the management team asks you how they should proceed. You recommend that they

A)file a suit against the banks.
B)find a bank out of state or out of the country that will guarantee that the money will be available when needed.
C)simply file a claim with the FDIC.
D)retaliate by withdrawing all cash from the local bank and canceling all certificates of deposit.
E)set up a line of credit with a bank that offers a revolving credit agreement.

Question 69

Of the following, only ___ would not be considered proper financial management during both good and bad times.

A)investing excess cash in CDs, government securities, or conservative securities
B)making sure that funds are available to meet tax deadlines
C)paying bills promptly
D)investing all excess cash in long-term securities
E)planning for sufficient financing when needed

Question 70

The managers at Bally Manufacturing decided to borrow money to finance a new production facility. The loan agreement they signed required that they pay 10 percent interest on the loan. Based on this information, which of the following statements is true?

A)Bally doesn't have to pay the 10 percent if the firm isn't profitable.
B)Bally can pay the 10 percent whenever its managers vote to pay it.
C)The company will make more money if the firm earns less than a 10 percent return on its investment in the new plant.
D)Bally is using financial leverage to increase profits as long as the firm earns more than the 10 percent it pays to borrow the money required to finance the new plant.
E)Even if the new plant is extremely profitable, Bally should have found another way to finance the new plant.

Question 71

For a department store such as Macy's, the most likely need for short-term financing will be for

A)inventory.
B)employee wages.
C)extending credit policies.
D)new locations.
E)additional cash registers.

Question 72

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

Question 73

A factor will buy accounts receivable for

A)more than their face value.
B)less than their face value.
C)their present value.
D)their par value.
E)the interest that can be collected from them.

Question 74

​Money invested in small firms that have the potential to become very successful is called

A)​venture capital.
B)​small business loans.
C)​lines of credit.
D)​angel credit.

Question 75

Slater Co. has very old computers and manufacturing equipment and knows it needs to upgrade them or risk losing much of its business. Slater does not have the money to purchase the computers, so it will most likely need

A)a short-term loan.
B)to keep using the old computers.
C)to deduct the cost from employees' salaries.
D)long-term financing.
E)to use increased cash flow from sales.

Question 76

The date on the face of a bond telling when the face value is to be repaid is called the

A)date of issuance.
B)maturity date.
C)dividend declaration date.
D)discount rate.
E)date of record.

Question 77

Bonds that are backed only by the reputation of the issuing corporation are known as

A)mortgage bonds.
B)registered bonds.
C)debenture bonds.
D)bond indentures.
E)serial bonds.

Question 78

If money is reserved each year to guarantee that a bond will be paid off at maturity, the money will be held in a ____ fund.

A)capitalization
B)sinking
C)compounding
D)retirement
E)redemption

Question 79

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

Question 80

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.