Question 1

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)

Accepted Answer

When a supplier is hesitant to offer trade credit to a firm with a poor credit history, they may require the customer to sign a promissory note. This is a legal document that outlines the terms of the loan or credit, including the amount owed, the interest rate, and the repayment schedule. It serves as a written commitment by the customer to repay the debt, which can give the supplier some assurance that they will be paid on time.

Question 2

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

Accepted Answer

Equity financing is generated through the sale of stock. It is also generated when a firm retains its earnings and reinvests those earnings back into the company.

Question 3

When Newport 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.

Accepted Answer

Debt financing refers to funds acquired through various forms of borrowing that must be repaid.

Question 4

Theme Park Thrillers has plans to build a new $175 million theme park and intends to finance this project through the sale of additional shares of ownership in their firm. Selling new shares of stock represents ________ financing.

Accepted Answer

Equity financing refers to funds raised from either selling shares of ownership or from retained earnings.

Question 5

The most widely used source of short-term funding is

Accepted Answer

Trade credit is the most widely used source of short-term funding, as it allows businesses to purchase goods or services from suppliers on credit terms, typically paying for them at a later date. This form of financing is common across various industries, making it a primary method for managing cash flow and operational expenses without immediate cash outlay.

Question 6

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

Accepted Answer

Commercial paper is a short-term debt instrument with a maturity of less than 270 days that is issued by companies to finance short-term financial obligations such as payroll, accounts payable, or inventory purchases. Retained earnings, common stock, and corporate bonds are not sources of short-term funding.

Question 7

According to the Not What the Doctor Ordered! box, a just-in-time inventory system allows a firm to

Accepted Answer

Using a carefully planned and managed inventory control system, like just-in-time inventory, reduces the amount of cash an organization has tied up in inventory.

Question 8

Which of the following statements represents good advice prior to making capital expenditures?

Accepted Answer

In many organizations the purchase of major assets-such as land for future expansion, manufacturing plants to increase production capabilities, research to develop new-product ideas, and equipment to maintain or exceed current levels of output-is essential. Expanding into new markets, however, can be expensive with no guarantee of success. There is no guarantee that this investment will result in good returns for the firm. These investments must be thoroughly evaluated.

Question 9

The CFO of a 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

Accepted Answer

Debt financing refer to funds raised through various forms of borrowing that must be repaid. In this case, the money was raised less than a year ago, and it is already due to be repaid. This represents a short-term loan.

Question 10

The owners of Spokes Bicycle Shop worry that cash flow this winter may be insufficient to meet the current operating expenses. While they anticipate a surplus of cash inflow as warm weather approaches, they need funds now to meet the company's immediate obligations. The owners can best resolve cash flow concerns by obtaining ________ financing.

Accepted Answer

Short-term financing is intended to meet the immediate funding needs of an organization. These are funds that will be repaid within a year.

Question 11

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.

Accepted Answer

A line of credit is an agreement between a firm and its bank that provides the firm with access to a specified amount of unsecured short-term funds, provided the bank has the funds available. This allows the firm to borrow funds as needed, up to the limit of the credit line, without having to go through the process of applying for a new loan each time. The other options listed are not typical agreements between firms and banks for short-term funding.

Question 12

________ 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.

Accepted Answer

Trade credit allows businesses to purchase goods from suppliers without immediately paying for them, and is a form of short-term financing. Secured credit involves the use of collateral, revolving credit provides a maximum credit limit for a set period of time, and factoring involves selling accounts receivable to a third party at a discount.

Question 13

If you are at the Phoenix Sky Harbor International Airport, you will no longer get a pat-down if you go through the metal detector. The airport now has full body screening ports that scan the entire body and readily detect weapons or explosive devices that someone may want to take on board a plane. These expensive devices represent

Accepted Answer

Large capital expenditures such as represented by expensive machinery are long-term assets. These are purchased by businesses with the understanding that they will be used in the business's operation for several years.

Question 14

Which of the following represents a capital expenditure?

Accepted Answer

Capital expenditures are major investments in long-term assets such as land, buildings, and equipment; or intangible assets such as patents.

Question 15

Rock Solid Concrete Company does not offer customers a cash discount for early payment of their accounts receivable. As a result, most customers wait to pay their bill on the last day before late penalties are charged. These customers apparently understand the

Accepted Answer

Money has a time value because of the interest-paying investments that are available. To encourage customers to pay earlier, New World would need to reward them with a discount. This would compensate the customers for missed investment opportunities.

Question 16

A loan backed by collateral represents a(n)

Accepted Answer

A loan backed by collateral is a secured loan, which means the borrower has pledged an asset (collateral) as security for the loan. If the borrower defaults on the loan, the lender can seize the collateral in order to recoup their losses. Bonds and debentures may or may not be backed by collateral, and pledging factor is not a commonly used term in finance.

Question 17

Worldwide Wholesale Company wants to improve cash flow. Which of the following strategies would be most likely to help Worldwide achieve this objective?

Accepted Answer

Businesses often provide cash or quantity discounts to buyers who pay their accounts by a certain date. By continually turning accounts receivable into cash, the firm is increasing cash flow.

Question 18

The Making Ethical Decisions box "Good Finance or Bad Medicine" has an important message for managers who make financial decisions. Which of the following statements summarizes this message?

Accepted Answer

The story is about a hospital finance manager who wants to limit drug inventories in order to boost cash flow. Doctors want immediate access to any and all medicines that may be important to treat patients. The ethical dilemma is about balancing the need to limit costs with the need to support the needs of doctors and their patients in a timely way.

Question 19

Typically, only highly regarded customers with financial stability receive

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 20

Finance managers spend the majority of their time managing

Accepted Answer

Finance managers typically spend a majority of their time managing short-term financial needs, such as budgeting, forecasting, and managing liquidity. While they also play a role in managing long-term financial needs and equity financing, these tasks are typically less frequent and require less daily attention than managing short-term finances.

Quiz 18: Financial Management