Question 1

Compensating balance refers to the portion of an unsecured loan that ________.

Accepted Answer

A) Compensating balance refers to the portion of an unsecured loan that is kept on deposit at a lending institution to protect the lender and increase the lender's return.

Question 2

Which of the following is a disadvantage of long-term loans?

Accepted Answer

E) Not all companies can qualify for long-term loans and acceptable terms. Payments tie up part of cash flow for the duration of the loan. Purchases made via loans require substantial down payments.

Question 3

________ is an agreement to use an asset in exchange for regular payment.

Accepted Answer

B) Lease is an agreement to use an asset in exchange for regular payment. It is similar to renting.

Question 4

________ is an arrangement in which a financial institution makes money available for use at any time after the loan has been approved.

Accepted Answer

C) Line of credit is an arrangement in which a financial institution makes money available for use at any time after the loan has been approved. It is a common example of an unsecured loan.

Question 5

Rex Associates has a poor credit rating and is finding it difficult to obtain loans.In order to fund a new project,the company decides to let out one of its buildings to a bank.The company obtains funds in return from the bank.This is an example of ________.

Accepted Answer

C) Leasing may be a good alternative for a company that has difficulty obtaining a loan because of a poor credit rating. Lease is an agreement to use an asset in exchange for regular payment. It is similar to renting.

Question 6

________ can be exchanged at the investor's option for a certain number of shares of the corporation's common stock.

Accepted Answer

E) Convertible bonds can be exchanged at the investor's option for a certain number of shares of the corporation's common stock. Because of this feature, convertible bonds generally pay lower interest rates.

Question 7

Frost Bank lends $500,000 to Arbex Manufacturer.Arbex has agreed to pay this amount back in fifty equal installments over a period of ten years.This is an example of a ________.

Accepted Answer

D) In long-term loans, a bank or other lender provides cash to borrowers. The borrower agrees to repay according to specific terms.

Question 8

Before a company can sell shares to the public in the United States,it must ________.

Accepted Answer

C) Before a company can sell shares to the public in the United States, it must first register with the SEC. This process includes submitting a prospectus.

Question 9

________ is an arrangement in which a financial institution makes money available for use at any time after the loan has been approved.

Accepted Answer

D) Line of credit is an arrangement in which a financial institution makes money available for use at any time after the loan has been approved. It is a common example of an unsecured loan.

Question 10

DS Bank is a bank specialized in buying shares of ownership from firms that want to sell it to investors.The bank sells the shares to investors on the company's behalf.DS Bank is a(n)________.

Accepted Answer

D) Underwriter is a specialized type of bank that buys the shares from the company preparing an IPO and sells them to investors. DS Bank, as described here, is an underwriter.

Question 11

________ are unsecured bonds,backed only by the corporation's promise to pay.

Accepted Answer

D) Debentures are unsecured bonds, backed only by the corporation's promise to pay. Debentures are riskier than other types of bonds.

Question 12

Which of the following is a source of long-term debt financing?

Accepted Answer

A) Corporate bond is an example of a long-term debt financing. Sources such as trade credit, credit card, factoring, and commercial paper are examples of short-term debt financing.

Question 13

________ is a specialized type of bank that buys the shares from the company preparing an IPO and sells them to investors.

Accepted Answer

B) Underwriter is a specialized type of bank that buys the shares from the company preparing an IPO and sells them to investors. To spread the risk, a lead underwriter usually assembles a syndicate of other underwriters.

Question 14

RS Bank provides short-term loans to small businesses.Many of the bank's customers take months to pay their bills.The bank often buys the companies' accounts receivable and pays them in return.This is an example of ________.

Accepted Answer

D) Factoring refers to obtaining funding by selling accounts receivable. Factoring is an alternative to short-term debt financing. The given situation is an example of factoring.

Question 15

With most bond issues,a corporation retains the right to pay off the bonds before maturity.Such bonds are called ________.

Accepted Answer

D) With most bond issues, a corporation retains the right to pay off the bonds before maturity. Bonds containing this provision are known as callable bonds, or redeemable bonds.

Question 16

Which of the following is a major advantage of raising funds through selling shares of ownership?

Accepted Answer

D) Equity financing, selling shares of ownership, has tremendous upside potential for the company as a whole and for any individual or organization that owns shares. Equity financing has fueled the growth of most of the major corporations in the world, and it has contributed to the financial security of millions of employees.

Question 17

Gordon Glass is a large manufacturer of glass products.The company's product range includes glass vessels,car glasses,mirrors and so forth.In order to raise money to open a new plant in Alaska,the company issues corporate bonds.The bonds are unsecured,but include the corporation's promise to pay an interest of 12 percent.The tenure of the bond is five years and neither party can change the maturity date.These bonds are examples of ________.

Accepted Answer

C) Debentures are unsecured bonds, backed only by the corporation's promise to pay. Debentures are riskier than other types of bonds. Gordon Glass is issuing a debenture in this case.

Question 18

Term bonds are bonds that ________.

Accepted Answer

A) Term bonds are bonds that mature all at the same time. Costs of retiring debt are high in such bonds.

Question 19

A company sells its accounts receivable to an intermediary.The intermediary collects the receivables from the customer.This is an example of ________.

Accepted Answer

B) Factoring refers to obtaining funding by selling accounts receivable. Factoring is an alternative to short-term debt financing.

Question 20

Incobar Steel is a large manufacturer of steel.The company decides to issue bonds to raise money to expand its operations.The final maturity term of the bonds is three years,but a portion of the outstanding bonds matures once in every six months.The bonds are backed only by the corporation's promise to pay.The bonds that Incobar Steel is issuing are best referred to as ________ bonds.

Accepted Answer

E) To ease the cash flow burden of redeeming its bonds all at once, a company can issue serial bonds, which mature at various times, as opposed to term bonds, which mature all at the same time.

Quiz 18: Financial Management

Compensating balance refers to the portion of an unsecured loan that ________.

Which of the following is a disadvantage of long-term loans?

________ is an agreement to use an asset in exchange for regular payment.

________ is an arrangement in which a financial institution makes money available for use at any time after the loan has been approved.

Rex Associates has a poor credit rating and is finding it difficult to obtain loans.In order to fund a new project,the company decides to let out one of its buildings to a bank.The company obtains funds in return from the bank.This is an example of ________.

________ can be exchanged at the investor's option for a certain number of shares of the corporation's common stock.

Frost Bank lends $500,000 to Arbex Manufacturer.Arbex has agreed to pay this amount back in fifty equal installments over a period of ten years.This is an example of a ________.

Before a company can sell shares to the public in the United States,it must ________.

________ is an arrangement in which a financial institution makes money available for use at any time after the loan has been approved.

DS Bank is a bank specialized in buying shares of ownership from firms that want to sell it to investors.The bank sells the shares to investors on the company's behalf.DS Bank is a(n) ________.

________ are unsecured bonds,backed only by the corporation's promise to pay.

Which of the following is a source of long-term debt financing?

________ is a specialized type of bank that buys the shares from the company preparing an IPO and sells them to investors.

RS Bank provides short-term loans to small businesses.Many of the bank's customers take months to pay their bills.The bank often buys the companies' accounts receivable and pays them in return.This is an example of ________.

With most bond issues,a corporation retains the right to pay off the bonds before maturity.Such bonds are called ________.

Which of the following is a major advantage of raising funds through selling shares of ownership?

Term bonds are bonds that ________.

A company sells its accounts receivable to an intermediary.The intermediary collects the receivables from the customer.This is an example of ________.