Question 1

The most widely used source of short-term funding is:
A) trade credit.
B) a line of credit.

Accepted Answer

Trade credit is the most widely used source of short-term funding as it allows businesses to purchase goods or services and pay the supplier at a later date.

Question 2

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.
A) asset drawing account
B) capital drawing agreement
C) reserve account
D) line of credit

Accepted Answer

The best choice is a line of credit. This is an agreement where a firm has access to a specific amount of unsecured short-term funds from its bank, provided the bank has the funds available. It differs from other options listed: an asset drawing account is not a common financial term, a capital drawing agreement is a structure for distributing partnership income, and a reserve account is a separate account to hold funds for specific purposes, such as to cover future expenses or losses.

Question 3

Typically, only highly regarded customers with financial stability receive .
A) secured loans
B) bank premiums
C) unsecured loans
D) commercial paper

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

Which of the following represents a source of short-term funding?
A) Retained earnings
B) Commercial paper
C) Common stock
D) Corporate bonds

Accepted Answer

Commercial paper represents a source of short-term funding, typically with maturities ranging from a few days to 270 days, used by corporations to cover immediate financial needs or bridge cash flow gaps. Retained earnings, common stock, and corporate bonds are sources of long-term funding.

Question 5

A refers to a line of credit that is guaranteed by the bank.
A) collateral trust fund
B) revolving credit agreement
C) contract credit agreement
D) commercial credit agreement

Accepted Answer

A revolving credit agreement refers to an arrangement in which a financial institution, usually a bank, guarantees a line of credit for a certain period of time. The borrower can use the funds as and when needed, up to a pre-arranged limit, and repay the borrowed amount along with the interest charged on the outstanding balance. The credit line is usually renewable after a certain period of time, and the borrower only pays interest on the amount borrowed, making it a flexible and cost-effective form of financing.

Question 6

offer short-term secured loans to high-risk borrowers. These loans usually require collateral.
A) Commercial finance companies
B) Reserve banks
C) Credit brokers
D) Investment bankers

Accepted Answer

Commercial finance companies are known to offer short-term secured loans to high-risk borrowers, meaning they are the best choice for this scenario. The other options, such as reserve banks, credit brokers, and investment bankers, may not necessarily offer high-risk loans or require collateral.

Question 7

The CFO of a well known 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:
A) A long-term sale of stock to private investors
B) Short-term debt financing
C) The issuance of long-term bonds
D) A leveraged buy-out

Accepted Answer

The $75 million note coming due today represents short-term debt financing, indicating that the company has borrowed money for a short period of time and needs to repay it soon. This also suggests that the company may be facing financial difficulties and needs immediate cash flow.

Question 8

Which of the following represents a capital expenditure?
A) issuing paychecks to workers
B) paying for advertising on a local radio station
C) purchasing raw materials to be used in the production of a firm's product
D) purchasing a building to be used for office space

Accepted Answer

Purchasing a building for office space is a capital expenditure as it involves a significant investment intended to provide long-term benefit to the company, such as owning a property or infrastructure. Issuing paychecks and paying for advertising are both operational expenses, while purchasing raw materials can be both operational and capital, depending on the quantity and type of materials purchased.

Question 9

Finance managers spend the majority of their time managing .
A) cash flow
B) long-term financial needs
C) short-term financial needs
D) equity financing

Accepted Answer

Finance managers spend a significant amount of their time managing short-term financial needs, such as overseeing day-to-day expenses, managing accounts payable and receivable, and ensuring there is enough cash on hand to cover operational costs. While they also need to consider long-term financial needs and may be involved in equity financing, managing cash flow on a short-term basis is a crucial aspect of their job.

Question 10

When Liberty 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.
A) equity
B) debt
C) revitalized
D) secured

Accepted Answer

Liberty Industries borrowed an additional $2 million, which creates a new debt for the company to repay in nine months. Therefore, the activity represents financing through debt.

Question 11

Since commercial finance companies offer loans to higher risk customers than commercial banks, the interest rates they charge are usually than rates charged by banks.
A) higher
B) lower
C) more predictable
D) subject to lower taxes

Accepted Answer

Commercial finance companies offer loans to customers who are considered higher risk due to factors such as poor credit history, lack of collateral and other reasons. Due to this higher level of risk, they charge higher interest rates compared to commercial banks.

Question 12

By selling shares of ownership in their company, California Scientific acquires the funds needed to finance their research and development projects. California Scientific provides for their long-term funding needs through financing.
A) debt
B)equity
C)retained
D)asset

Accepted Answer

By selling shares of ownership in their company, California Scientific acquires funds through equity financing.

Question 13

Lending institutions may offer a borrower a percentage of the value of the borrower's accounts receivable so the borrowing firm can continue to operate while it waits to collect on its credit sales. This process is called .
A) establishing a line of credit
B) inventory valuation
C) pledging
D) revolving credit

Accepted Answer

The process described in the question is called pledging. When a firm pledges their accounts receivable, they are using the value of that asset as collateral for a loan, allowing them to continue operating while they wait for credit sales to be paid. Establishing a line of credit is a different process where a lender agrees to provide a borrower with a set amount of credit, which can be used at any time. Inventory valuation refers to the process of determining the value of a firm's inventory, and revolving credit is a type of credit where the borrower can continually borrow and repay funds up to a certain limit.

Question 14

In 2009, it was rumored that the previous owners of Skype (the internet calling service), were interested in buying it back from its current owner, eBay. The two way, the purchase of Skype would be financed with .
A) leverage
B) bonds
C) debt
D) equity

Accepted Answer

The answer of In 2009, it was rumored that the...

Question 15

A loan backed by collateral represents a(n):
A) bond trust.
B) debenture bond.
C) pledging factor.
D) secured loan.

Accepted Answer

A loan backed by collateral is a secured loan, where the borrower pledges assets (collateral) to the lender as a form of security against defaulting on the loan. This provides the lender with a safety net and reduces their risk, making it easier to obtain approval for the loan.

Question 16

offers financially stable corporations a technique to raise short-term funds by issuing unsecured promissory notes to the general public with the promise of repayment within 270 days.
A) Trade credit
B) A line of credit
C) Factoring
D) Commercial paper

Accepted Answer

The described technique of raising short-term funds by issuing unsecured promissory notes to the general public with the promise of repayment within 270 days is known as commercial paper.

Question 17

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):
A) indenture agreement.
B) promissory note.
C) line of credit.
D) factoring agreement.

Accepted Answer

A promissory note is a written promise to pay a specified amount on a specified date or on demand. It is a legally binding agreement that provides some assurance to the supplier that they will receive payment for their goods or services. This can be especially important for suppliers who are hesitant to offer trade credit to customers with a poor credit history.

Question 18

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.
A) Secured credit
B) Trade credit
C) Revolving credit
D) Factoring

Accepted Answer

Trade credit is a common form of short-term financing where a business is allowed to purchase goods or services from a supplier but is not required to pay immediately. Instead, the payment is deferred to a future date, typically ranging from 30 to 90 days. This type of credit is often used to help manage a company's cash flow and can provide flexibility in managing inventory levels and meeting customer demand.

Question 19

Winter Haven, Florida has begun charging victims of accidents a fee when police officers and firefighters respond to the scene of the accident. In order to alleviate problems during recessions, cities, counties, and even states must pass along some of the costs that are normally covered by taxes.
A) accounts payable
B) inventory
C) cash flow
D) capital expenditure

Accepted Answer

Cash flow refers to the total amount of money being transferred into and out of a business, especially as affecting liquidity. Charging fees for services like police and firefighter responses helps maintain cash flow during economic downturns.

Question 20

Allison O'Toole sells high end accessories at her resort boutique in Destin, FL. During the past ten years, Allison's business has performed quite well. Even when she made the decision to expand her store by purchasing the building next door, she financed this event by reinvesting her profits. Up until now, Allison has:
A) utilized a significant amount of debt financing.
B) leveraged her financing.
C) utilized equity to finance large capital expenditures.
D) successfully found equity financing through the sale of stock.

Accepted Answer

The passage clearly states that Allison financed the expansion of her store by "reinvesting her profits." This indicates that she utilized equity (i.e. retained earnings) to finance the large capital expenditure rather than taking on debt financing (A) or leveraging her financing (B). The passage does not provide any indication that she sold stock or used external equity financing (D). Therefore, the best choice is C.

Quiz 18: Financial Management

The most widely used source of short-term funding is:

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.

Typically, only highly regarded customers with financial stability receive .

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

A refers to a line of credit that is guaranteed by the bank.

offer short-term secured loans to high-risk borrowers. These loans usually require collateral.

Which of the following represents a capital expenditure?

Finance managers spend the majority of their time managing .

When Liberty 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.

Since commercial finance companies offer loans to higher risk customers than commercial banks, the interest rates they charge are usually than rates charged by banks.

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

Lending institutions may offer a borrower a percentage of the value of the borrower's accounts receivable so the borrowing firm can continue to operate while it waits to collect on its credit sales. This process is called .

In 2009, it was rumored that the previous owners of Skype (the internet calling service) , were interested in buying it back from its current owner, eBay. The two way, the purchase of Skype would be financed with .

A loan backed by collateral represents a(n) :

offers financially stable corporations a technique to raise short-term funds by issuing unsecured promissory notes to the general public with the promise of repayment within 270 days.

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) :

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.

Winter Haven, Florida has begun charging victims of accidents a fee when police officers and firefighters respond to the scene of the accident. In order to alleviate problems during recessions, cities, counties, and even states must pass along some of the costs that are normally covered by taxes.