Exam 9: Finance: Acquiring Using Funds to Maximize Value

The financial managers at the Swictek Corporation want to ensure that the company has a binding commitment from their bank for a guaranteed amount of money over the next year. They can achieve this result by arranging a line of credit with their banker.

Royal Beds Inc. is a company that sells mattresses and wooden beds. Its capital structure indicates that it a highly leveraged company. Which of the following scenarios would Royal Beds have to encounter in case it was hit by a financial crisis like recession?

Accounts receivable represents what customers who buy on credit owe the firm.

In the context of the sources of financing, a factor is a company that provides long­term financing to firms by purchasing the firm's bonds and other long­ term securities at a discount.

Capital structure is the value of a firm's physical assets, such as its buildings and other permanent structures, minus the accumulated depreciation.

A disadvantage of debt financing is that it requires the firm to make fixed payments.

Define NPV and describe how it is used to evaluate capital budgeting proposals.

Violet Shades Corporation is considering financing some fixed assets through additional long­term debt. One disadvantage of this approach is that it requires the firm to make fixed payments that could create cash flow problems if the firm's earnings are lower than expected.

Lentz­Tucker Inc. reported a net income of $3 million but paid no dividends to its shareholders. The shareholders should sue the company for failure to provide a return on their equity investment.

As a short­term credit arrangement, banks sometimes extend _____, which are guaranteed lines of credit in which the borrowing firm pays a commitment fee on the unused portions of the funds the bank has committed.

Finance is the area of business responsible for finding the best sources of funds and the best ways to use them.

A revolving credit agreement is a guaranteed line of credit in which a bank makes a binding commitment to provide a business with funds up to a specified credit limit at any time during the term of the agreement. In exchange for the bank's commitment, the firm pays a commitment fee based on the unused funds.

Tucker Enterprises has $100,000 worth of debt financing and $200,000 in equity financing. This year it paid $8,000 in interest on its debt and paid $8,000 in dividends to stockholders. The CFO of Tucker Enterprises is considering raising more capital via debt financing. One reason why debt financing is more attractive than equity financing is that:

The time value of money is the principle that a dollar received today is worth less than a dollar received in the future.

_____ is the functional area of business that is responsible for finding, among many alternatives, the best sources of funds and the best ways to use them.

As part of the financial planning process, planners create budgeted income statements and budgeted balance sheets which are also known as _____ financial statements.

Which of the following best describes the fiduciary duty of financial managers of a firm?

Financial managers should focus solely on meeting the financial needs of their firms in the short run, leaving the long­term financial issues to the top management.

Which of the following raises money by selling shares to large numbers of investors and then pools those funds to purchase short­term, liquid securities?

A disadvantage of debt financing is that creditors often impose covenants on the borrower.