Deck 9: Finance: Acquiring Using Funds to Maximize Value

Question 1

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

Answer 1

False

Question 2

Return-on-equity indicates how much net income a firm earned per share of common stock outstanding.

Answer 2

False

Question 3

David needs to acquire financial capital to purchase a printing press for his business. David can either acquire the financial capital for the press by borrowing money from a bank or by purchasing the press on credit from his supplier.

Answer 3

True

Question 4

The extent to which retained earnings are used as a source of long-term capital for a firm, depends on the state of the economy.

Question 5

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

Question 6

The current ratio is calculated by dividing a firm's current liabilities by its total assets.

Question 7

When conflicts arise between the long-term interests of owners and those of other stakeholders, the fiduciary duty required of financial managers generally leads them to make decisions that are most consistent with the interests of ownership.

Question 8

If an invoice lists the terms of trade credit as 2/10 net 30, it means that the supplier is offering a 10 percent cash discount off the invoice price if the buyer pays within 2 days.

Question 9

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

Question 10

Commercial paper, which is sometimes issued for as little as two days, can be issued for up to 270 days.

Question 11

A budgeted income statement is a projected financial statement that forecasts the types and amounts of assets a firm will need to implement its future plans and how the firm will finance those assets.

Question 12

Term loans issued by commercial banks are popularly used by financial institutions and large corporations because they typically carry lower interest rates than commercial paper.

Question 13

Cash budgets normally cover a one-year period and show projected cash inflows and outflows for each month.

Question 14

Benny-Duke Inc. reported a net income of $7 million but paid no dividends to its shareholders. The shareholders should sue the company for failure to provide a return on their equity investment.

Question 15

The following questions must be answered when setting credit terms: How long should the firm extend credit? What type of cash discount should the firm offer to encourage early payments?

Question 16

A factor is a restriction lenders impose on borrowers as a condition of providing long-term debt financing.

Question 17

A commitment to meeting social responsibilities can contribute to a more profitable company and an increase in shareholder value.

Question 18

A budgeted income statement is a detailed forecast of future cash flows that helps financial managers identify when their firm is likely to experience temporary shortages or surpluses of cash.

Question 19

Because it is normally unsecured, commercial paper is only offered by firms with no credit ratings.

Question 20

Money market mutual funds raise money by selling shares to large numbers of investors.

Question 21

Financial managers evaluate a firm's current strengths and weaknesses by computing ratios that compare values of key accounts listed on their firm's:

A) prospectus and operating budget.
B) statement of cash flows.
C) balance sheet and income statement.
D) cost budget statements.

Question 22

Financial capital refers to the:

A) money that a business earns in sales, minus the expenses.
B) costs a business incurs when its expenses are greater than its revenues.
C) funds a firm uses to acquire its assets and finance its operations.
D) returns that a firm pays its owners for their investments in the company.

Question 23

Yellow Dustur, a textile company, converts its overseas assets into cash in order to pay its debts to different companies the following year. In the given scenario, which of the following financial ratios is most likely being analyzed by Yellow Dustur?

A) Leverage ratios
B) Liquidity ratios
C) Asset management ratios
D) Profitability ratios

Question 24

Which of the following statements is true of a socially responsible firm?

A) It increases the bargaining power of buyers.
B) It has high employee turnover.
C) It has an obligation to respect the needs of all stakeholders.
D) It emphasizes maximizing shareholder value.

Question 25

Trumbeak Inc., an electronics company, needs to pay its debt to Breston Bank the following year. Trumbeak Inc. sells half of its shares to other companies and is able to acquire the cash it needs to pay its debt. In this scenario, Trumbeak Inc.'s ability to sell its shares to other companies in order to pay its debt to Breston Bank is measured by calculating _____.

A) asset management ratios
B) profitability ratios
C) leverage ratios
D) liquidity ratios

Question 26

Financial managers emphasize the goal of maximizing the market price of stock because:

A) they have a fiduciary duty.
B) they have to safeguard owner's investments.
C) their money is at risk.
D) they are socially responsible.

Question 27

_____ measure the ability of an organization to convert assets into the cash it needs to pay off liabilities that come due in the following year.

A) Profitability ratios
B) Activity ratios
C) Liquidity ratios
D) Leverage ratios

Question 28

In the context of accounting for the time value of money, discount rate remains constant in a specified number of time periods.

Question 29

A manufacturing firm does not necessarily need an inventory of parts and materials to assemble its products.

Question 30

Dora works for PowTran Corp. Her primary responsibilities include managing the firm's working capital and analyzing long-term investment opportunities for the firm. Dora is most likely a part of the firm's _____ team.

A) administrative management
B) logistics management
C) financial management
D) production management

Question 31

In finance, a _____ is one that can be quickly converted into cash with little risk of loss.

A) capital asset
B) fixed asset
C) tangible asset
D) liquid asset

Question 32

A firm's _____ include cash and other assets expected to be converted into cash in the following year.

A) current assets
B) fixed assets
C) tangible assets
D) capital assets

Question 33

Maurio Pena, a petroleum company, needs to pay $2 million to Zaiten Inc. Maurio Pena sells its old assets to another company and obtains enough money to pay its debt. In this scenario, Maurio Pena's ability to sell its old assets to another company in order to pay its debt to Zaiten is measured by analyzing _____.

A) leverage ratios
B) asset management ratios
C) liquidity ratios
D) profitability ratios

Question 34

Lean inventory policies can be ineffective in a firm, although they do not leave the firm vulnerable to supply disruptions.

Question 35

Mort Zuba, an automobile company, needs to pay off its loans to banks the following year. The company plans to sell its factories in Astonsia in order to pay its debts. In this scenario, Mort Zuba's ability to sell its factories in Astonsia to pay its debts is measured by calculating _____.

A) leverage ratios
B) asset management ratios
C) liquidity ratios
D) profitability ratios

Question 36

In financial management, risk is referred to as the:

A) environmental factors that may affect a business adversely.
B) internal factors that may disrupt the smooth functioning of a company.
C) degree of uncertainty about the actual outcome of a decision.
D) various strategies implemented by managers to increase returns.

Question 37

Projects with potential for high returns generally have a low degree of uncertainty and risk.

Question 38

Certificate of deposit is an interest-earning deposit that requires the funds to remain deposited for a fixed term.

Question 39

Which of the following is the most commonly used liquidity ratio?

A) Inventory turnover ratio
B) Debt ratio
C) Debt to equity ratio
D) Current ratio

Question 40

Financial managers use _____ to assess the financial strengths and weaknesses of their firm.

A) financial leverage
B) value stream mapping
C) cost accounting
D) financial ratio analysis

Question 41

_____ are ratios that measure the extent to which a firm relies on debt financing in its capital structure.

A) Liquidity ratios
B) Activity ratios
C) Leverage ratios
D) Profitability ratios

Question 42

Which of the following statements is true of financial leverage?

A) It indicates earnings per dollar invested by the owners of the company.
B) It is the use of debt in a firm's capital structure.
C) It indicates how much net income a firm earned per share of common stock outstanding.
D) It is the net income per share of common stock outstanding.

Question 43

In the context of liquidity ratios, a firm's _____ are the debts that must be repaid in the following year.

A) fixed assets
B) current liabilities
C) long-term liabilities
D) capital assets

Question 44

Which of the following statements best describes a highly leveraged firm?

A) It is a firm that relies heavily on equity.
B) It is a firm that has equity that is twice its debt.
C) It is a firm that relies heavily on debt.
D) It is a firm that has higher current assets than current liabilities.

Question 45

A high inventory turnover ratio is good because it indicates that:

A) a firm can continue its daily operations with a small amount of inventory on hand.
B) it is easier for a firm to pay its short-term debts.
C) a firm's customers are paying for their purchases more quickly.
D) a firm produces a larger return to shareholders than investment by the stockholders.

Question 46

Nemfembo, a pharmaceutical company, gains most of its net income by outsourcing its manufacturing plants to foreign countries. For every product it manufactures, the demand for those products becomes more pronounced. Which of the following financial ratio analyses can be used to measure how effectively Nemfembo is using its resources to generate revenues?

A) Asset management ratios
B) Capital budgeting ratios
C) Leverage ratios
D) Profitability ratios

Question 47

Bon Suede, a shoe manufacturing company, produces ten thousand units of shoes of a distinct design. In 2015, the company was able to sell all the units within six months of manufacture, prompting the company to produce an additional ten thousand units. Which of the following financial ratios has most likely been analyzed in the given scenario?

A) Leverage ratios
B) Asset management ratios
C) Capital budgeting ratios
D) Profitability ratios

Question 48

Nestrum, a real estate management company, employs qualified analysts to predict customers' buying habits and budgets. Hence, the company has been able to acquire at least one customer per month. In the given scenario, the analysts most likely need to analyze the company's _____ to measure how effectively it has been using its assets to generate revenues.

A) leverage ratios
B) profitability ratios
C) capital budgeting ratios
D) asset management ratios

Question 49

Hevron Hrist, a multinational company, finances itself each year by procuring 25 percent of its yearly budget through loans from banks. The remaining budget is covered by the company itself. The given scenario suggests that the firm most likely relies on measuring _____ to decide its capital structure.

A) asset management ratios
B) leverage ratios
C) profitability ratios
D) liquidity ratios

Question 50

The _____ measures how many times a firm's stock is sold and replaced each year.

A) inventory turnover ratio
B) asset turnover ratio
C) working capital turnover ratio
D) accounts receivable turnover ratio

Question 51

_____ are also sometimes called activity ratios.

A) Asset management ratios
B) Capital budgeting ratios
C) Leverage ratios
D) Profitability ratios

Question 52

Which of the following statements is true of current ratio?

A) The larger a firm's current ratio, the harder it is for the firm to pay its short-term debts.
B) The current ratio is a type of leverage ratio.
C) A current ratio that is below 1.0 signifies a company's inability to pay its short-term liabilities with its current assets.
D) The current ratio is computed by dividing a firm's current liabilities by its current assets.

Question 53

Leverage ratios measure the extent to which a firm uses _____.

A) financial leverage
B) operating leverage
C) accounting leverage
D) notional leverage

Question 54

Initiatium, a software development firm, utilized $2 million to create a new software. Half of the total budget was acquired from loans from different sponsors while the rest was funded by the firm. The debt ratio amounts to 0.5. The given scenario illustrates the analysis of _____.

A) leverage ratios
B) asset management ratios
C) liquidity ratios
D) profitability ratios

Question 55

The term _____ refers to the use of debt to meet a firm's funding needs.

A) financial leverage
B) operating leverage
C) accounting leverage
D) notional leverage

Question 56

Which of the following is a difference between liquidity ratios and leverage ratios?

A) Liquidity ratios measure how effectively a firm uses its assets to generate revenue, whereas leverage ratios compare the amount of profit to some measure of resources invested.
B) Liquidity ratios compare the amount of profit to some measure of resources invested, whereas leverage ratios measure how effectively a firm uses its assets to generate revenue.
C) Liquidity ratios measure a firm's ability to pay its short-term liabilities as they come due, whereas leverage ratios measure the extent to which a firm relies on debt to meet its financing needs.
D) Liquidity ratios measure the net income per share of common stock outstanding, whereas leverage ratios indicate the earnings per dollar by the owners of a company.

Question 57

Ponlinaytion, a clothing company, imports its raw materials from different countries. To cover the cost of expensive raw materials, Ponlinaytion takes a yearly loan of $5 million from Heritage Rimier, a finance company. The remaining budget is covered by the company itself. The given scenario indicates that the firm most likely relies on measuring _____ to decide how it finances its overall operations and growth by using different sources of funds.

A) profitability ratios
B) liquidity ratios
C) asset management ratios
D) leverage ratios

Question 58

Omnimenium, an automobile company, incurred a debt of $20 million for the fiscal year of 2016. The company used that money with an additional $20 million of its own to buy out a rival company. The ratio of the company's debt to its investment is 0.5. The given scenario illustrates the analysis of _____.

A) liquidity ratios
B) profitability ratios
C) leverage ratios
D) asset management ratios

Question 59

_____ measure how effectively an organization uses its resources to generate net income.

A) Asset management ratios
B) Capital budgeting ratios
C) Leverage ratios
D) Profitability ratios

Question 60

Umbero Nix, a garment manufacturing company, produces twenty thousand units of sweaters. These units are sold within three months and replenished with another twenty thousand units. In one year, Umbero Nix replaces its inventory of sweaters four times over. Umbero Nix most likely analyzes _____ to measure how many times its inventory is sold and replaced each year.

A) capital budgeting ratios
B) profitability ratios
C) leverage ratios
D) asset management ratios

Question 61

_____ helps financial managers determine the amount of additional financing a firm must arrange to acquire the assets needed to implement its future plans.

A) The budgeted income statement
B) The budgeted balance sheet
C) A line of credit
D) A revolving credit agreement

Question 62

Munit Exon, an automobile company, sells 100 cars in a year. The net income earned by the company is relatively more than the amount invested by it, thereby giving larger returns to its shareholders. To reach this conclusion, Munit Exon most likely analyzed its _____.

A) profitability ratios
B) liquidity ratios
C) asset management ratios
D) leverage ratios

Question 63

Since common stockholders are the true owners, preferred stockholders' dividends are deducted from net income before computing _____.

A) the debt ratio
B) the current ratio
C) return-on-equity
D) earnings per share

Question 64

The _____ of a firm uses information from the sales budget and various cost budgets to develop a forecast of net earnings for the planning period.

A) budgeted balance sheet
B) budgeted income statement
C) cash flow statement
D) statement of financial position

Question 65

_____ measures the income earned per dollar invested by the stockholders of a firm.

A) The current ratio
B) Return-on-equity
C) Earnings per share
D) The debt ratio

Question 66

Kitsure, a cosmetics company, was able to sell 20 percent more than its estimated sales in a year. The company was able to acquire its investment along with a higher turnover for its shareholders. Which of the following financial ratios provides the measure of Kitsure's earnings?

A) Leverage ratios
B) Asset management ratios
C) Liquidity ratios
D) Profitability ratios

Question 67

Which of the following is a similarity between angel investors and venture capitalists?

A) Both require firms to pledge collateral, such as inventories or accounts receivable.
B) Both invest in risky opportunities that offer the possibility of high rates of return.
C) Both typically provide funds without requiring a share of ownership.
D) Both are key sources of long-term funds, which are backed by commercial paper.

Question 68

Which of the following is a leverage ratio?

A) The current ratio
B) The inventory turnover ratio
C) The average collection period
D) The debt ratio

Question 69

Trestone, a guitar manufacturing company, produces a thousand units of electric guitars each year. The company has been able to sell all its guitars by the end of the fiscal year and earn twice the amount spent on production and marketing. The given scenario indicates that Trestone most likely analyzes _____ for its financial planning.

A) liquidity ratios
B) profitability ratios
C) leverage ratios
D) asset management ratios

Question 70

Garry, a financial manager at AtoZ technologies, wants to know when his firm will need to arrange for short-term financing and when the firm is likely to have surplus cash available to pay off loans or to invest in short-term liquid assets. These concerns suggest that Garry would want to develop a _____.

A) cash budget
B) pro forma income statement
C) sales forecast
D) projected balance sheet

Question 71

The _____ is an asset management ratio that measures how quickly a firm sells its stock to generate revenue.

A) current ratio
B) inventory turnover ratio
C) debt ratio
D) working capital turnover ratio

Question 72

Yennex Inc., a textile company, planned to sell its stock products in two months' time. The company was able to sell those products within a month's time. Therefore, it was able to sell double the estimated amount in a year. Given the scenario, which of the following ratio analyses is most likely to have been analyzed by Yennex Inc. to achieve this success?

A) Leverage ratios
B) Asset management ratios
C) Liquidity ratios
D) Profitability ratios

Question 73

_____ compares assets that will provide cash in the following year to debts that will come due in the following year.

A) The current ratio
B) Earnings per share
C) The debt ratio
D) Return-on-equity

Question 74

_____ forecasts the types and amounts of assets a firm will need to implement its future plans and help financial managers determine the amount of additional financing the firm must arrange in order to acquire those assets.

A) A query report
B) The cash budget
C) A statement of cash flows
D) The budgeted balance sheet

Question 75

A _____ can help a firm evaluate how much internal financing (funds generated by earnings) will be available for a planning period.

A) budgeted income statement
B) budgeted balance sheet
C) line of credit
D) revolving credit agreement

Question 76

_____ are ratios that measure the rate of return a firm is earning on various measures of investment.

A) Liquidity ratios
B) Activity ratios
C) Leverage ratios
D) Profitability ratios

Question 77

_____ measures how long it takes for a firm to receive payment from customers who buy on credit.

A) The current ratio
B) The average collection period
C) The debt-to-asset ratio
D) Return-on-equity

Question 78

Wild Trails Inc., an adventure resort in Texas, has 500 shares of outstanding common stock and has not issued any preferred stock. Its net income is $27,500. Wild Trails Inc.'s earnings per share (EPS) is _____.

A) $55
B) $0.018
C) $13,750
D) $27,000

Question 79

Which of the following statements is true of angel investors?

A) They usually fund start-ups and often require the firms to pledge collateral to back the fund.
B) They typically invest in low-risk opportunities that offer the possibility of marginal rates of return.
C) They usually fund mature firms that have an established track record.
D) They typically provide funds to start-ups in exchange for a share of ownership.

Question 80

The _____ is a common measure of leverage that compares liabilities to assets.

A) current ratio
B) average collection period
C) debt ratio
D) inventory turnover ratio