Exam 8: Finance: Acquiring and Using Funds to Maximize Value

Bigbux and Lottadoe are two very similar businesses in all respects except that Bigbux relies mainly on equity financing, while Lottadoe relies heavily on debt financing. This year both firms have enjoyed strong growth in net income. This is likely to result in a higher return on equity for Bigbux than for Lottadoe.

What are the two primary sources of equity financing?

What do we call financing provided by a firm's owners?

The present value of a cash flow received in a future time period is the amount of money which, if invested today at a specified rate of interest, would grow to become that future amount of money.

A line of credit is a financial arrangement between a firm and a bank in which the bank pre-approves credit up to a specified limit and guarantees that this credit will be available even if the borrower's credit rating deteriorates.

Mirella Macedo works for Swictek Industries. Her primary responsibilities involve management of the firm's working capital and the analysis of long-term investment opportunities for Swictek. In which area is Mirella's job?

Which of the following is used to predict when a firm will likely experience temporary shortages or surpluses of cash?

Commercial paper is usually issued at a discount, meaning that it is initially sold at a lower price than the company will pay the holder when the paper comes due.

The capital budgeting process evaluates proposals such as replacing existing machinery with more advanced models to reduce cost and improve the efficiency of current operations.

Which of the following tells us that a dollar received today is worth more than a dollar received in the future?

Define the two primary sources of equity financing.

Capital budgeting is the procedure a firm uses to plan its cash flow strategy for the next year.

You have the opportunity to spend $1000 today to purchase an investment that will pay you $360 next year, $360 in two years, and $400 in three years. This is clearly a good deal because the total amount of money you will receive over this three-year period is $1120, which is more than the $1000 you'd have to pay for the investment.

Setting high credit standards reduces the likelihood a firm will have problems with customers who pay late (or not at all).

Trade credit is credit granted by sellers when they provide firms with materials, parts, or finished goods without requiring payment until some period after delivery.

A drawback of commercial paper is that it takes a long time to mature, thus making it a risky asset to hold if the firm is likely to need cash in the near future.

Some small businesses have found that barter arrangements work better than demanding cash and can help them get at least some of what they are owed.

Leverage increases the expected return on paper of a shareholder's investments, but it also increases the firm's financial risk.

What is the main advantage of financial leverage?

The sales budget must be created after other operating budgets.