Question 1

Financial managers should focus solely on meeting the financial needs of their firms in the short run, leaving the long-term financial issues to the top management.

Accepted Answer

Financial managers should balance both short-term and long-term financial needs to ensure the firm's sustainability and growth, as neglecting long-term issues can lead to future financial instability.

Question 2

Return-on-equity indicates how much net income a firm earned per share of common stock outstanding.

Accepted Answer

Return-on-equity (ROE) measures a company's profitability by showing how much net income is generated with shareholders' equity, not per share of common stock.

Question 3

David needs to acquire financial capital to purchase a printing press for his business. David can either acquire the financial capital for the press by borrowing money from a bank or by purchasing the press on credit from his supplier.

Accepted Answer

Both borrowing from a bank and purchasing on credit from a supplier are methods of acquiring financial capital.

Question 4

The extent to which retained earnings are used as a source of long-term capital for a firm, depends on the state of the economy.

Accepted Answer

The state of the economy can influence a firm's profitability and cash flow, affecting its ability to generate and retain earnings for reinvestment.

Question 5

Accounts receivable represents what customers who buy on credit owe the firm.

Accepted Answer

The answer of Accounts receivable represents what customers who buy...

Question 6

The current ratio is calculated by dividing a firm's current liabilities by its total assets.

Accepted Answer

The current ratio is calculated by dividing a firm's current assets by its current liabilities, not total assets.

Question 7

When conflicts arise between the long-term interests of owners and those of other stakeholders, the fiduciary duty required of financial managers generally leads them to make decisions that are most consistent with the interests of ownership.

Accepted Answer

Financial managers have a fiduciary duty to prioritize the interests of the owners or shareholders, which often means focusing on maximizing shareholder value, even if it conflicts with other stakeholders' interests.

Question 8

If an invoice lists the terms of trade credit as 2/10 net 30, it means that the supplier is offering a 10 percent cash discount off the invoice price if the buyer pays within 2 days.

Accepted Answer

The terms 2/10 net 30 mean a 2% discount is offered if payment is made within 10 days, not a 10% discount within 2 days.

Question 9

A disadvantage of debt financing is that creditors often impose covenants on the borrower.

Accepted Answer

Creditors may impose covenants to protect their investment, which can restrict the borrower's business operations and financial decisions.

Question 10

Commercial paper, which is sometimes issued for as little as two days, can be issued for up to 270 days.

Accepted Answer

Commercial paper is a short-term unsecured promissory note issued by corporations, typically with maturities ranging from a few days up to 270 days.

Question 11

A budgeted income statement is a projected financial statement that forecasts the types and amounts of assets a firm will need to implement its future plans and how the firm will finance those assets.

Accepted Answer

A budgeted income statement forecasts a company's expected revenues and expenses, not its assets and financing.

Question 12

Term loans issued by commercial banks are popularly used by financial institutions and large corporations because they typically carry lower interest rates than commercial paper.

Accepted Answer

Term loans typically carry higher interest rates than commercial paper because they are longer-term and involve more risk for the lender.

Question 13

Cash budgets normally cover a one-year period and show projected cash inflows and outflows for each month.

Accepted Answer

Cash budgets are typically prepared on a monthly basis for a one-year period to help businesses manage their cash flow by projecting monthly cash inflows and outflows.

Question 14

Benny-Duke Inc. reported a net income of $7 million but paid no dividends to its shareholders. The shareholders should sue the company for failure to provide a return on their equity investment.

Accepted Answer

Shareholders are not guaranteed dividends; companies may choose to reinvest profits for growth instead of paying dividends.

Question 15

The following questions must be answered when setting credit terms: How long should the firm extend credit? What type of cash discount should the firm offer to encourage early payments?

Accepted Answer

These questions are essential for determining the credit policy, which impacts cash flow and customer relationships.

Question 16

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

Accepted Answer

A factor is not a restriction; it is a financial intermediary that purchases receivables from a company to provide immediate cash flow. Restrictions imposed by lenders are typically referred to as covenants.

Question 17

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

Accepted Answer

A commitment to social responsibilities can enhance a company's reputation, attract customers and employees, and reduce risks, all of which can lead to increased profitability and shareholder value.

Question 18

A budgeted income statement is a detailed forecast of future cash flows that helps financial managers identify when their firm is likely to experience temporary shortages or surpluses of cash.

Accepted Answer

A budgeted income statement forecasts future revenues and expenses, not cash flows. Cash flow forecasts are typically detailed in a cash budget or cash flow statement.

Question 19

Because it is normally unsecured, commercial paper is only offered by firms with no credit ratings.

Accepted Answer

Commercial paper is typically issued by firms with high credit ratings, as it is unsecured and relies on the issuer's creditworthiness.

Question 20

Money market mutual funds raise money by selling shares to large numbers of investors.

Accepted Answer

Money market mutual funds pool money from many investors by selling shares, which they then use to invest in short-term, low-risk financial instruments.

Quiz 9: Finance: Acquiring Using Funds to Maximize Value