Question 1

Backstreet Books Is seeking financing to fund the opening of two more locations in a major university town. There is no need to consider debt financing for this project. It will require a sizeable investment in equity funds.

Accepted Answer

Debt financing should be considered as an option for funding business expansions, as it can provide necessary capital without diluting ownership through equity.

Question 2

Small businesses rely heavily on long-term financing.

Accepted Answer

Small businesses often rely more on short-term financing options, such as lines of credit, credit cards, and short-term loans, due to their flexibility and easier qualification criteria compared to long-term financing.

Question 3

Most small businesses are unable to secure long-term financing.

Accepted Answer

According to various surveys and studies, it has been found that a majority of small businesses struggle to secure long-term financing. This can be due to various factors such as lack of collateral, insufficient credit history, and high-risk nature of small businesses.

Question 4

White Palace operates a chain of restaurants specializing in hamburgers. The corporation plans to expand to new communities. The acquisition of land and construction of new restaurants represent major capital expenditures.

Accepted Answer

The statement describes major capital expenditures associated with expanding the business, indicating a need for significant investment in resources such as land and construction.

Question 5

Expansion into new markets (either domestic or global) is sometimes financed with long-term funds.

Accepted Answer

Expansion into new markets often requires significant capital investment, which may be financed with long-term funds such as loans or bonds. This allows the company to spread out the cost over time and better manage the financial impact of the expansion.

Question 6

Successful businesses establish restrictive credit policies encouraging customers to pay cash.

Accepted Answer

Making credit available helps make current customers happy and attracts new customers. Although extending credit ties up funds and entails risk, many businesses would have trouble surviving without making credit available to customers.

Question 7

Much of a financial manager's day-to-day activities involve managing the short-term financial needs of the firm.

Accepted Answer

Financial managers are responsible for various short-term financial activities such as managing cash flow, budgeting, and financing decisions. However, they also work on long-term financial planning and investment strategies for the firm.

Question 8

An effective strategy to manage cash flows requires retail businesses to eliminate their inventory.

Accepted Answer

Eliminating inventory is not an effective strategy for managing cash flows as it can lead to stockouts and lost sales. Instead, businesses should focus on optimizing their inventory levels, reducing costs, and improving cash flow through various tactics such as improving payment terms with suppliers and implementing efficient cash management practices.

Question 9

Based on the time value of money, $100 received a year from today is worth more than $100 received today.

Accepted Answer

According to the time value of money, money received today is worth more than money received in the future as the value of money decreases over time due to inflation and other factors. Therefore, $100 received today is worth more than $100 received a year from today.

Question 10

Debt financing refers to funds acquired from the profitable operations of a firm or through the sale of ownership in the firm.

Accepted Answer

Debt financing refers to funds acquired through borrowing or taking out loans, not from the profitable operations of a firm or sale of ownership in the firm.

Question 11

Allison Robards, owner of Backstreet Books, an eclectic bookstore near a large university, is seeking additional financing for books and CDs that she plans to buy and sell in the same fiscal year. Even though it will be a sizeable investment in inventory, Allison is seeking short-term financing.

Accepted Answer

Allison is seeking short-term financing for a sizeable investment in inventory, indicating that she is looking for financing to cover her current needs rather than long-term growth.

Question 12

After thoroughly studying the feasibility for expansion, Preferred Pet Care Inc, a mobile pet care company that operates in the greater Chicago area, plans to offer a similar service in the Indianapolis metropolitan area. This endeavor will require a large capital expenditure. Due to the nature of this project, the firm will only consider equity financing.

Accepted Answer

The answer of After thoroughly studying the feasibility for expansion,...

Question 13

As a financial manager for a large manufacturing firm, Gail evaluates the purchase of expensive machinery and construction of new facilities. She is analyzing capital expenditure proposals.

Accepted Answer

A financial manager in a manufacturing firm would indeed evaluate capital expenditure proposals for expensive machinery and new facilities.

Question 14

Financial managers devote the majority of their time obtaining long-term financing to fund the firm's capital expenditures.

Accepted Answer

While obtaining long-term financing is an important aspect of financial management, financial managers also focus on other areas such as managing cash flows, analyzing financial data, making financial decisions, and allocating resources.

Question 15

Money has time value due to the fact that if invested, it has the potential to earn more money at some point in the future.

Accepted Answer

Money that is invested has the potential to earn interest or returns, increasing in value over time. Therefore, the same amount of money invested now is worth more in the future because of the potential for it to grow.

Question 16

A firm will choose to seek debt financing only for the purpose of paying for short-term operating needs.

Accepted Answer

A firm may choose to seek debt financing for various reasons, such as funding long-term investments, expansion projects, or capital expenditures. It is not limited to short-term operating needs.

Question 17

Financial managers understand the time value of money. They try to maximize cash expenditures, as opposed to minimizing cash expenditures.

Accepted Answer

Financial managers try to minimize cash expenditures to free up funds for investment in interest-bearing accounts. The interest received from interest-bearing accounts contributes to profits.

Question 18

The finance manager at Preferred Pet Care Inc has asked the company's accountant to prepare a report that shows the amount the firm is spending monthly on veterinary supplies for its western suburb service area, in the hopes of negotiating better payment terms with its suppliers. The purpose of this effort is to increase cash levels within the firm.

Accepted Answer

The finance manager is requesting this report in order to negotiate better payment terms with the suppliers, which will ultimately increase cash levels within the firm.

Question 19

Offering cash discounts to customers who pay their bills by a certain date represents an effective technique to manage accounts receivable.

Accepted Answer

Offering cash discounts incentivizes customers to pay their bills earlier, which can help businesses manage their accounts receivable more effectively by improving cash flow and reducing the risk of bad debts.

Question 20

Anna operates a florist shop specializing in weddings. While she knows that her competitors allow customers to buy on credit, she is concerned about the risk and expense of unpaid customer accounts. One strategy to reduce risk and collect sales revenue more quickly would be to accept bank-issued credit cards.

Accepted Answer

Accepting bank-issued credit cards would reduce the risk of unpaid customer accounts since the payment would be made directly to the business by the credit card company. It would also increase the speed of collecting sales revenue since payments would be processed more quickly compared to waiting for customers to pay on credit.

Quiz 18: Financial Management