Question 1

What is a budget? How is it used by a business firm?

Accepted Answer

A budget is a financial plan that outlines the expected revenues and expenses of a business over a specific period of time, typically a year. It serves as a roadmap for the company's financial activities and helps in managing and controlling the firm's resources.

In a business firm, a budget is used in several ways. Firstly, it helps in setting financial goals and targets for the organization. By estimating the expected revenues and expenses, the firm can set realistic targets for sales, production, and cost control. This provides a clear direction for the company and helps in aligning the efforts of different departments towards common objectives.

Secondly, a budget is used for financial control and monitoring. By comparing the actual financial performance with the budgeted figures, the management can identify any variations or discrepancies and take corrective actions. This helps in ensuring that the company's financial resources are being used efficiently and effectively.

Additionally, a budget is used for decision-making purposes. It helps in evaluating the financial feasibility of new projects or investments and in allocating resources to different departments or activities. By having a clear budget in place, the management can make informed decisions about resource allocation and prioritize the use of funds.

Overall, a budget is an essential tool for a business firm as it helps in planning, controlling, and decision-making. It provides a framework for managing the company's finances and ensures that the organization is working towards its financial objectives.

Question 2

Since the financial crisis peak in 2009, what goals were proposed by the U.S. House of Representatives and Senate? Briefly discuss the benefits and drawbacks of such proposals.

Accepted Answer

Since the financial crisis peak in 2009, the U.S. House of Representatives and Senate proposed several goals to address the economic challenges. Some of the proposed goals included implementing financial regulations to prevent future crises, stimulating job growth through infrastructure projects, and providing relief for struggling homeowners.

The benefits of these proposals included the potential to stabilize the financial system, create jobs, and provide much-needed assistance to homeowners facing foreclosure. Additionally, implementing financial regulations could help prevent future economic downturns and protect consumers from predatory lending practices.

However, there were also drawbacks to these proposals. Some critics argued that the proposed regulations could stifle economic growth and innovation, while others believed that the government should not intervene in the housing market. Additionally, there were concerns about the cost of implementing these proposals and the potential for government overreach in the financial sector.

Overall, the proposed goals by the U.S. House of Representatives and Senate aimed to address the economic challenges following the financial crisis, but they also sparked debates about the balance between government intervention and free market principles.

Question 3

What does it mean to use equity financing? Why might a large corporation want to do this?

Accepted Answer

Equity financing refers to raising capital by selling shares of ownership in a company. This means that investors become partial owners of the company in exchange for their investment.

A large corporation might choose to use equity financing for several reasons. Firstly, it allows the company to raise a significant amount of capital without taking on additional debt. This can be particularly beneficial for a large corporation that may already have a substantial amount of debt on its balance sheet.

Additionally, equity financing can provide access to a broader pool of capital from investors who are willing to take on the risk of owning a portion of the company in exchange for potential returns. This can be especially advantageous for a large corporation that is looking to fund expansion, research and development, or other long-term projects.

Furthermore, using equity financing can also help to improve the company's financial flexibility and reduce its overall financial risk. By having a diverse mix of capital sources, including equity, the company may be better positioned to weather economic downturns or other financial challenges.

Overall, using equity financing can be an attractive option for a large corporation looking to raise capital while minimizing debt and diversifying its sources of funding.

Question 4

Explain the problems a firm might encounter in a rapidly growing market if long- term debt or equity financing were not available.

Accepted Answer

The answer of Explain the problems a firm might encounter...

Question 5

What is speculative production and how does it impact a firm's financial planning?

Accepted Answer

The answer of What is speculative production and how does...

Question 6

Are there any risks for a corporation that uses long-term debt financing? Support your answer.

Accepted Answer

The answer of Are there any risks for a corporation...

Question 7

Your small business has been very successful and has amassed a large amount of accounts receivable from reputable firms, but you find yourself short of ready cash to replace inventory. How could a factor help you?

Accepted Answer

The answer of Your small business has been very successful...

Question 8

Morgan's Transition
Morgan is currently a manager of a small financial planning firm. He is seeking a new career with a large corporation in the banking industry. He recently applied for the financial manager opening at G & T Bank. He is concerned that the transition from his small firm to a large corporation will be difficult. To better prepare himself for this change, he has decided to enroll in a few business classes to strengthen his understanding of corporate finance. The business classes have proven to be a valuable tool for learning the critical skills needed to fully understand a financial plan, equity financing, and debt financing. Morgan now believes he has strengthened his competitive advantage in his quest for the job.
-Refer to Morgan's Transition. Having taken the classes, Morgan should describe cash flow as which of the following?

Accepted Answer

Cash flow is the movement of money into and out of an organization. This involves cash inflows and outflows, which are critical components of financial planning and management. By understanding cash flow, Morgan can better manage the financial activities of a large corporation and make important financial decisions.

Question 9

What is the main difference between unsecured short-term financing and secured short-term financing? Which method is better from the viewpoint of the borrower?

Accepted Answer

The answer of What is the main difference between unsecured...

Question 10

Often high-risk decisions generate larger returns while conservative decisions generate lesser returns. From a financial management standpoint does this make sense? Also, what can a financial manager do to reduce risk while increasing the firm's financial return?

Accepted Answer

The answer of Often high-risk decisions generate larger returns while...

Question 11

What types of businesses obtain venture capital financing? How does venture capital differ from a private placement?

Accepted Answer

The answer of What types of businesses obtain venture capital...

Question 12

Explain the primary differences between the primary market and the secondary market. Which is needed (or both) in order for a corporation to raise capital for the firm by selling stock?

Accepted Answer

The answer of Explain the primary differences between the primary...

Question 13

Describe the characteristics and traits required for a successful career in financial management.

Accepted Answer

The answer of Describe the characteristics and traits required for...

Question 14

What is cash flow? Why is cash flow important to a business?

Accepted Answer

The answer of What is cash flow? Why is cash...

Question 15

In what situations would you seek short-term financing? In what situations would you seek long-term financing?

Accepted Answer

The answer of In what situations would you seek short-term...

Question 16

Compare the traditional approach to budgeting with the zero-base budgeting approach.

Accepted Answer

The answer of Compare the traditional approach to budgeting with...

Question 17

Compare the relative costs of using long-term equity financing and those of using long-term debt financing.

Accepted Answer

The answer of Compare the relative costs of using long-term...

Question 18

Morgan's Transition
Morgan is currently a manager of a small financial planning firm. He is seeking a new career with a large corporation in the banking industry. He recently applied for the financial manager opening at G & T Bank. He is concerned that the transition from his small firm to a large corporation will be difficult. To better prepare himself for this change, he has decided to enroll in a few business classes to strengthen his understanding of corporate finance. The business classes have proven to be a valuable tool for learning the critical skills needed to fully understand a financial plan, equity financing, and debt financing. Morgan now believes he has strengthened his competitive advantage in his quest for the job.
-Refer to Morgan's Transition. Morgan's business classes taught him that the financial manager should do which of the following?

Accepted Answer

Morgan's business classes have taught him about the critical skills needed in corporate finance, including the importance of ensuring that funds are available when needed (answer A) and that obtained funds are used efficiently (answer C). While ensuring business success (answer B) is important, it is not necessarily the primary responsibility of a financial manager. Therefore, the best choice is E, as it includes both correct answers.

Question 19

Assume you are a small retailer selling women's fashions. What actions can you take to build a credit relationship with a manufacturer or wholesaler to ensure that you can use trade credit to purchase needed inventory for your store?

Accepted Answer

The answer of Assume you are a small retailer selling...

Question 20

State the purpose of a promissory note. Describe why a supplier would use a promissory note for short-term financing instead of trade credit.

Accepted Answer

The answer of State the purpose of a promissory note....

Quiz 19: Mastering Financial Management