Question 1

Theme Park Thrillers has plans to build a new $175 million theme park and intends to finance this project through the sale of additional shares of ownership in their firm. Selling new shares of stock represents ________ financing.

Accepted Answer

Selling new shares of ownership in a company is known as equity financing. This method involves raising funds by issuing new shares of stock, which gives investors partial ownership of the company in exchange for their investment. In this case, Theme Park Thrillers intends to finance its new theme park through the sale of additional shares of ownership, making it an example of equity financing.

Question 2

By selling shares of ownership in their company, Seattle Scientific acquires the funds needed to finance their research and development projects. Seattle Scientific provides for their long-term funding needs through ________ financing.

Accepted Answer

By selling shares of ownership, Seattle Scientific is engaging in equity financing.

Question 3

Typically, only highly regarded customers with financial stability receive

Accepted Answer

Unsecured loans are typically offered to highly regarded customers with financial stability because these loans do not require collateral, relying instead on the borrower's creditworthiness.

Question 4

Some suppliers hesitate to offer trade credit to firms with a poor credit history. In these cases, the supplier may insist that the customer sign a(n)

Accepted Answer

The supplier may insist that the customer sign a promissory note to ensure payment since the customer has a poor credit history, which increases the risk of default. A promissory note is a legal document that outlines the terms of a loan or debt, including the amount owed, interest rate, and repayment schedule. It serves as a guarantee that the customer will repay the supplier for the goods or services provided.

Question 5

Which of the following statements represents good advice prior to making capital expenditures?

Accepted Answer

It is important for companies to carefully consider all options before committing significant amounts of funds and extended time to major investments like capital expenditures. Therefore, choice D is the best advice prior to making such expenditures. Choices A and B are incorrect as they provide inaccurate information about what capital expenditures actually represent. Choice C is also incorrect as most firms do value capital expenditures on their balance sheets.

Question 6

Which of the following represents a source of short-term funding?

Accepted Answer

Commercial paper is a source of short-term funding that typically matures within 270 days and is issued by large corporations to meet short-term financing needs. Retained earnings represent profits that are reinvested back into the company and are not a source of external financing. Common stock represents ownership in the company and does not provide short-term financing. Corporate bonds are long-term debt instruments and do not provide short-term financing.

Question 7

A loan backed by collateral represents a(n)

Accepted Answer

A loan backed by collateral is a secured loan, where the borrower pledges assets such as property or vehicles to secure the loan. If the borrower defaults on the loan, the lender can seize the collateral to recover their losses. Bond trusts and debenture bonds are types of investments, and pledging factor is not a term commonly used in finance.

Question 8

The most widely used source of short-term funding is

Accepted Answer

Trade credit is the most widely used source of short-term funding, as it allows businesses to purchase goods or services from suppliers on credit terms, typically paying for them at a later date. This form of financing is common across various industries, making it a primary method for managing cash flow and operational expenses without immediate cash outlay.

Question 9

Finance managers spend the majority of their time managing

Accepted Answer

Finance managers typically spend the majority of their time managing short-term financial needs such as budgeting, forecasting, cash flow management, and accounts payable and receivable. While long-term financial needs and equity financing are important aspects of financial management, they do not typically require as much day-to-day attention as short-term financial needs.

Question 10

When Newport Industries renegotiated their loan agreement, they borrowed an additional $2 million. The new loan requires Liberty to repay the new amount in nine months. Liberty's activity represents ________ financing.

Accepted Answer

When Newport Industries renegotiated their loan agreement and Liberty borrowed an additional $2 million, it resulted in a new loan agreement. The fact that Liberty now owes this $2 million to the lender is considered debt financing.

Question 11

Which of the following represents a capital expenditure?

Accepted Answer

A capital expenditure refers to a long-term investment that involves acquiring fixed assets that are used to generate revenue for a business. Purchasing a building to be used for office space is a capital expenditure as it involves acquiring a fixed asset that will be used to generate revenue over an extended period. A, B, and C are all examples of operating expenses as they are costs incurred in the day-to-day operations of a business.

Question 12

A firm negotiates a(n) ________ with its bank. This arrangement gives the firm access to a specified amount of unsecured short-term funds, provided the bank has the funds available.

Accepted Answer

A line of credit is an arrangement between a firm and its bank that provides access to a specified amount of unsecured short-term funds, as long as the bank has the funds available. This type of funding can be useful for covering short-term cash flow needs, such as inventory purchases or payroll.

Question 13

Worldwide Wholesale Company wants to improve cash flow. Which of the following strategies would be most likely to help Worldwide achieve this objective?

Accepted Answer

Offering cash discounts to buyers who pay their accounts promptly would encourage faster payment and therefore improve cash flow. Relaxing the credit policy, accepting IOUs, and offering extended payment plans would all increase the amount of outstanding accounts receivable, potentially worsening cash flow.

Question 14

If you are at the Phoenix Sky Harbor International Airport, you will no longer get a pat-down if you go through the metal detector. The airport now has full body screening ports that scan the entire body and readily detect weapons or explosive devices that someone may want to take on board a plane. These expensive devices represent

Accepted Answer

Full body screening ports are expensive devices that represent a significant investment for the airport. As such, they would be classified as long-term assets on the airport's balance sheet.

Question 15

Rock Solid Concrete Company does not offer customers a cash discount for early payment of their accounts receivable. As a result, most customers wait to pay their bill on the last day before late penalties are charged. These customers apparently understand the

Accepted Answer

Customers waiting to pay their bill on the last day before late penalties are charged implies that they understand the time value of money, which refers to the potential increase or decrease in value of money over time due to interest or investment returns. This suggests that customers prefer to hold onto their cash for as long as possible to earn a return or avoid the opportunity cost of not having the money available for other uses.

Question 16

________ is a form of short-term financing. Businesses buy merchandise from their suppliers, but are not required to pay for their purchases until some future date.

Accepted Answer

Trade credit is a common form of short-term financing where businesses purchase goods from their suppliers but do not have to pay for them immediately. Instead, they have a set period of time in which they can pay their suppliers, typically 30 to 90 days. This allows businesses to manage their cash flow more effectively and maintain good relationships with their suppliers.

Question 17

The Making Ethical Decisions box "Good Finance or Bad Medicine" has an important message for managers who make financial decisions. Which of the following statements summarizes this message?

Accepted Answer

The message of the Making Ethical Decisions box is that managers should balance financial decisions with ethical considerations, specifically in the case of healthcare where decisions may impact patient care and wellbeing. Option B is incorrect as the message does not suggest that financial decisions should be solely based on insurance company payments. Option C is irrelevant and inaccurate. Option D is incorrect as it suggests that having a good law firm is always necessary without any context or explanation.

Question 18

According to the Not What the Doctor Ordered! box, a just-in-time inventory system allows a firm to

Accepted Answer

The Not What the Doctor Ordered! box specifically states that a just-in-time inventory system allows a firm to reduce their investment in inventory, making choice C the correct answer. The other choices (extending credit to new customers, providing sufficient inventory for most contingencies, and reducing capital expenditures) are not directly related to the benefits of a just-in-time inventory system as mentioned in the box.

Question 19

The CFO of a satellite radio company was trying to work his magic today as he solicited another telecommunications/entertainment company to invest in his company in order to prevent bankruptcy. Having refinanced the company less than a year ago, the satellite radio finance manager had a $75 million note coming due today. The current financing arrangement represents

Accepted Answer

The fact that the note is coming due today suggests that it is short-term debt financing. The other options - a long-term sale of stock, the issuance of long-term bonds, and a leveraged buy-out - do not fit the description of a note coming due in less than a year.

Question 20

The owners of Spokes Bicycle Shop worry that cash flow this winter may be insufficient to meet the current operating expenses. While they anticipate a surplus of cash inflow as warm weather approaches, they need funds now to meet the company's immediate obligations. The owners can best resolve cash flow concerns by obtaining ________ financing.

Accepted Answer

Short-term financing is designed to meet immediate cash flow needs and is typically used to cover operating expenses or bridge a temporary gap in funds. As the owners of Spokes Bicycle Shop are specifically concerned with meeting their current operating expenses in the winter, short-term financing would be the best option to address their immediate cash flow concerns. Intermediate, contingency, and long-term financing options may be better suited for longer-term projects or investments.

Quiz 18: Financial Management