Deck 16: Financial Management and Securities Markets

Question 1

Financial management is limited to business organizations.

Answer 1

False

Question 2

Commercial certificates of deposit (CDs) work exactly the same way as consumer certificates of deposit, except that commercial CDs must be held until maturity.

Answer 2

False

Question 3

New issues of stocks and bonds are sold directly to the public and to institutions in what is known as the secondary market.

Answer 3

False

Question 4

The terms current and short term are used interchangeably when discussing assets and liabilities because these assets and liabilities

A) will always be more current than previously established assets and liabilities.
B) are constantly evolving, so they are constantly considered to be current.
C) are replaced with new assets and liabilities every five years.
D) are usually replaced by new assets and liabilities within a week.
E) are usually replaced by new assets and liabilities within three or four months, and always within a year.

Question 5

Valerie is a financial manager for a large office supply store. One of the most important facets of her job is ensuring that sufficient, but not excessive, funds are on hand to meet the store's obligations. What current asset is Valerie managing in this scenario?

A) accrued taxes
B) temporary investments
C) inventory
D) cash
E) accounts receivable

Question 6

Esther is a financial manager who focuses on current assets and liabilities. Her chief goal is to maximize returns on all of the following EXCEPT

A) cash.
B) inventory.
C) temporary investments of idle cash.
D) accounts receivable.
E) accrued taxes.

Question 7

Fabulous Finds, a large home decorating company with stores located nationwide, wants to collect cash from its customers quickly but pay out cash to its suppliers slowly. How might Fabulous Finds succeed in accomplishing this goal?

A) use electronic funds transfers to collect payments and checks to make payments
B) use checks to collect payments and electronic funds transfers to make payments
C) have customers send payments directly to its mailing address and send payments to suppliers via their lockboxes
D) use electronic funds transfers for both, but set the delivery dates to one day for payments from customers and three or four days for payments to suppliers
E) use checks for both, but require customers to send checks via express mail and send checks to suppliers via regular mail

Question 8

When Frank's Fertilizer Company bills its customers, it has them send their payments to an address that is just for receiving payments, instead of directly to the company's mailing address. Although this system costs Frank's Fertilizer Company a lot of money, it is worth it because the company receives thousands of checks from customers each business day. What system is this company using to receive its payments?

A) a treasury account
B) a safety deposit box
C) a P.O. box
D) a lockbox
E) a transaction box

Question 9

Callie's Curtain Shop invests the cash it earns in marketable securities, for periods as short as one day or for as long as one year, until it is needed. What temporary investment would Callie's Curtain Shop most likely use to invest these funds?

A) certificates of deposit
B) tradable equities
C) transaction balances
D) stock dividends
E) cash deposits

Question 10

Which type of marketable securities are the safest?

A) U.S. Treasury bills
B) commercial paper
C) certificates of deposit
D) eurodollar deposits
E) cash deposits

Question 11

A company invests its excess cash in a commercial certificate of deposit (CD). If a cash shortage occurs, what will the company most likely do?

A) return the CD to the commercial bank or brokerage company and get its money back
B) trade the CD for a lower cost CD to obtain needed funds
C) sell the CD on the open market and obtain needed funds
D) find an unrelated way to obtain needed funds, since CDs must be held until maturity
E) wait for the CD to reach maturity and then trade it in for the needed funds

Question 12

During 2007 and 2008, the market for which short-term investment stopped functioning and had to be rescued by the Federal Reserve?

A) consumer certificates of deposit
B) eurodollars
C) Treasury bills
D) commercial certificates of deposit
E) commercial paper

Question 13

Rhea is traveling internationally, selling her company's computer software. While she is in Ireland, she makes a deposit of $10,000 in a bank there. What short-term investment does this scenario describe?

A) an international deposit
B) a eurodollar deposit
C) commercial paper
D) a commercial certificate of deposit
E) an international certificate of deposit

Question 14

Money owed to a business by credit customers is referred to as

A) accounts receivable.
B) accounts payable.
C) trade credit.
D) working capital.
E) idle cash.

Question 15

Classic Cars Corporation makes the vast majority of its car sales on credit. What is something Classic Cars Corporation may do to encourage quick payment of these accounts receivable?

A) Offer customers discounts if they pay off their balances within a specified time period.
B) Threaten to charge customers extra money if they pay their balances after the specified time period is over.
C) Offer customers a free upgrade to a nicer car model if they pay their balances off on time.
D) Send customer accounts to collections if they do not pay off their balances on time.
E) Extend credit to customers who don't have good credit ratings to encourage them to feel obligated to pay their balances quickly.

Question 16

King Construction Company receives weekly shipments of lumber, vinyl siding, and stone slabs from one of its materials suppliers. Since King Construction Company is a regular customer, the supplier has made an agreement to give the company discounts if it pays its bill early. This is an example of

A) accounts receivable.
B) a certificates of deposit.
C) a line of credit.
D) trade credit.
E) a discount window.

Question 17

Pipe Supply Company offers its customers trade credit terms of 2/10 net 30. What does this mean?

A) Customers have 2 days to pay 10 percent of their bill, and then, they have 30 days to pay the rest.
B) Customers can save 2 percent off the invoice amount if they pay within 10 days, or they can pay the entire amount within 30 days.
C) Customers can save 30 percent off their invoice amount if they pay 10 percent of the bill within 2 days.
D) Customers can save $2 for every $10 they spend if they pay within 30 days.
E) Customers can save 10 percent off the invoice amount if they pay within 2 days, or they can pay the entire amount within 30 days.

Question 18

A surfboard manufacturer orders 100 units of fiberglass material and promises to pay the supplier at a later date. The surfboard manufacturer will record the amount to be paid as

A) a secured loan.
B) accounts receivable.
C) a serial bond.
D) accounts payable.
E) trade credit.

Question 19

Mauricio owns a catering business, and he has put all his savings into running this business. During the busy holiday season, he realizes that he needs short-term help financing the business' operations, so he goes to the bank to request $25,000. The bank agrees to lend Mauricio this amount of money. What type of bank loans does this scenario best describe?

A) an unsecured loan
B) a certificate of deposit
C) a trade credit
D) a secured loan
E) a line of credit

Question 20

If Talia borrows $30,000 to buy a car and ends up paying the lender a total of $35,000, the $5,000 represents the

A) principal.
B) collateral.
C) trade credit.
D) discount.
E) interest.

Question 21

Dawn owns a hair salon and wants to open another store in the downtown shopping district. She goes to the bank to get a loan to start her business, and the bank gives her a loan that is backed by her good reputation and previous credit rating. Which type of bank loan does this scenario best describe?

A) a secured loan
B) an unsecured loan
C) a line of credit
D) a prime rate loan
E) a collateral loan

Question 22

When Angelica started her own fabric company, she took out a loan from her local bank. Angelica took a second mortgage on her home as collateral for the loan. Which type of bank loan does this scenario best describe?

A) a secured loan
B) an unsecured loan
C) a line of credit
D) a credit rating loan
E) a prime rate loan

Question 23

Which type of commercial loan offers an advantage when interest rates are falling but represents a distinct disadvantage when interest rates are rising?

A) a floating-rate loan
B) a non-variable loan
C) an unsecured loan
D) a secured loan
E) a flexible loan

Question 24

When Mel's Mattress Company struggles financially, Mel decides to sell his accounts receivable to a finance company, known as a factor, which pays him $60,000 for receivables with a total face value of $100,000. In this instance, how does the factor earn a profit?

A) The factor only profits if it can secure more sales from these customers.
B) The factor only profits if the customers don't know that a factor has bought their receivables.
C) The factor profits if it can produce the same products the company did at a lower cost.
D) The factor profits if it can collect more than what it paid for the accounts.
E) The factor profits only if new accounts receivable are acquired.

Question 25

Bill's Travel Company provides inexpensive bus trips to several large cities. This company's offices, buses, and bus depots are examples of its ________ assets.

A) current
B) floating
C) unsecured
D) fixed
E) junk

Question 26

Big Beverage Bottling Inc., a company that bottles beverages for small beverage companies uses expensive equipment in its bottling process. The equipment used in the bottling process for this company is an example of a

A) current asset.
B) fixed asset.
C) principal asset.
D) short-term asset.
E) trade asset.

Question 27

Stitch and Sew is a garment manufacturing company. What would be a fixed asset for this company?

A) U.S. Treasury bills
B) temporary workers
C) $5,000 in Treasury bills
D) $1000 trade credit
E) office furniture

Question 28

Preston is a financial manager. He is in the process of analyzing the needs of the company and selecting the fixed assets that will maximize its value. Preston is involved in the process of

A) capital leasing.
B) asset maximization.
C) factoring.
D) pricing long-term money.
E) capital budgeting.

Question 29

Isadora, a finance manager, is budgeting for the company's new line of production equipment. This equipment, which will be used for 20 years or more, is handled out of a(n) ________ budget.

A) investment
B) asset
C) fixed
D) operating
E) capital

Question 30

Which statement is TRUE regarding capital budgeting?

A) It ends with the selection and purchase of a particular asset.
B) All assets and projects much be evaluated just once during acquisition.
C) If a particular asset does not live up to expectations, management must take necessary corrective action.
D) Capital budgeting is an exact process.
E) Managers must rigidly hold to the information on which their companies were founded.

Question 31

Lance owns a large robotics company. He is trying to decide whether or not to develop a new robotic house cleaning product. When making his decision, Lance should consider every item EXCEPT

A) how he can use his competitor's equipment.
B) the stability of the marketplace.
C) how long the project is expected to last.
D) the state of the world economy as a whole.
E) the competitive nature of the marketplace.

Question 32

Marcus works for a gaming company that is developing a new online car racing game. Since developing new software is expensive, the company takes a loan. What is true regarding this scenario?

A) As long as this company develops a fun game, regardless of costs versus returns, the company will profit.
B) The returns from this project must cover the costs of operating the project but also the cost of capital used to finance the project.
C) Since the finance company pays for the operating expenses, the gaming company only needs the returns from the project to cover the interest expenses for the loan.
D) Since this type of business loan is interest-free, the returns from this project only need to cover the gaming company's operating expenses.
E) Even if this company can't cover all of its costs, it will eventually succeed because the market is strong.

Question 33

All of the following are TRUE regarding long-term investments in any given enterprise EXCEPT

A) only a limited supply of funds is available.
B) the most efficient and profitable companies attract the lowest-cost funds.
C) newer and less prosperous firms must pay higher costs to attract capital.
D) an unlimited supply of funds is available.
E) if companies manage their financial resources wisely, they can reduce the costs of their funds.

Question 34

When it comes to long-term liabilities, the key word is

A) security.
B) debt.
C) credit.
D) profit.
E) equity.

Question 35

To help itself succeed in the competitive technology marketplace, a company started selling bonds to raise long-term funds. What is the company most likely to do with regard to these bonds?

A) hold onto them until they reach maturity
B) hold onto the bonds even past the maturity date
C) keep its bond prices constant on the open market
D) pay bondholders the face value of the bond without any interest
E) transfer its bonds to secondary markets of brokers and dealers

Question 36

Workplace Furniture is an e-commerce company that sells office furniture. In an attempt to raise long-term funds, the company decides to issue bonds to lenders. These bonds do not have fixed interest payments, and the rate of interest changes depending on economic conditions. The bonds issued by Workplace Furniture are examples of ________ bonds.

A) floating-rate
B) junk
C) secured
D) serial
E) debenture

Question 37

Fatima recently started her own tutoring firm to offer study help for high school students. To help finance her new business, which has a very limited track record, she issued bonds that offered relatively high rates of interest and had higher inherent risks. Which type of bond is Fatima most likely using in this scenario?

A) floating-rate bonds
B) junk bonds
C) secured bonds
D) serial bonds
E) debenture bonds

Question 38

What type of bonds became an attractive way of financing corporate mergers in the mid-1980s?

A) secured bonds
B) serial bonds
C) unsecured bonds
D) junk bonds
E) floating-rate bonds

Question 39

Whether secured or unsecured, bonds may be repaid

A) only after the maturity date passes.
B) only when bondholders decide to cash out the bond.
C) in daily installments.
D) in one lump sum or with many payments spread out over a period of time.
E) in payments that start after the maturity date and continue for several years.

Question 40

Clean Eating, a large chain of health food stores, sells its common stock at a par value of $20, and the offering price of the stock is $10. This means that the capital in excess of par is

A) $2.00.
B) $5.00.
C) $5.50.
D) $7.00.
E) $10.00.

Question 41

If the offering price of a stock is $4 and its capital in excess of par is $1, the par value of the stock is

A) $2.00.
B) $3.50.
C) $5.00.
D) $7.00.
E) $10.00.

Question 42

Marguerite owns her own fashion store. In her store's stock quote, its beta is listed as 0.35. What does this indicate?

A) Its stock price is 35 percent as volatile as the Standard & Poor's 500 Index.
B) Its stock price is only 35 percent of what it should be, compared to other companies' stock prices.
C) Its stock price is 35 percent higher than it should be, compared to other companies' stock prices.
D) The par value of its stock is $35 per share.
E) The market value of its stock is $35 per share.

Question 43

Michael bought stock in a large consumer products company. As a stockholder, he is prioritized in the distribution of a firm's dividends, but he doesn't have voting and control rights. What type of stockholder is Michael?

A) a common stockholder
B) a proxy stockholder
C) a preemptive stockholder
D) a secured stockholder
E) a preferred stockholder

Question 44

At the end of the year, Phil's Pool and Spa has money in a retained earnings account. The amount in this account represents

A) profits that must be paid to shareholders.
B) the money saved by withholding corporate bonuses.
C) funds paid to the firm by the government.
D) the part of the company's profit that is taxable.
E) profits the company kept and reinvested in the firm's assets.

Question 45

How is the dividend yield calculated?

A) the dividend of a stock is subtracted from the par value
B) the market value of a stock is subtracted from the dividend
C) the dividend of a stock is divided by the price
D) the dividend of a stock is divided by the market cap
E) the capital of a stock is added to the dividend

Question 46

Which type of company is most likely to pay out large proportions of their earnings in the form of dividends?

A) fast-growing firms
B) companies with fewer growth opportunities
C) firms that can earn high rates of return on reinvested earnings
D) smaller companies
E) companies that are preferred by investors

Question 47

Trendy Fashions is a national chain of clothing stores that is offering its stock to the public for the first time. What does this scenario best describe?

A) an initial public offering
B) a public debut
C) a public premiere
D) a new issue
E) a public issue

Question 48

What is a difference between primary and secondary markets?

A) In secondary markets, investors trade with companies that issue stocks and bonds; whereas in primary markets, investors can trade their securities with other investors.
B) Primary market transactions raise cash for the issuing corporations, whereas secondary market transactions do not.
C) Primary markets include stock exchanges and over-the-counter markets, while secondary markets are where firms raise financial capital.
D) Primary markets are private, while secondary markets are public.
E) Primary markets allow investors to trade with other investors, while secondary markets allow corporations to sell new issues of stocks and bonds directly to the public and to institutions.

Question 49

Donna is an investor who wants to sell her stocks and bonds to other investors. Which market provides a mechanism for her to buy and sell stocks and bonds?

A) prediction markets
B) securities markets
C) primary markets
D) futures markets
E) foreign exchange markets

Question 50

Cecil is a dealer who trades small stocks and illiquid bank stocks using his computer. He trades with other dealers all over the country without having to go to a physical location. Which type of market does this scenario best describe?

A) stock market
B) primary market
C) over-the-counter market
D) foreign exchange market
E) futures market

Question 51

All of the following are reasons that performance measures, such as averages and indexes, are important EXCEPT

A) investors want to know how well their investments are performing relative to the market as a whole.
B) financial managers need to know how their companies' securities are performing when compared with their competitors' securities.
C) they greatly diminish competition among companies' securities.
D) they indicate the performance of a particular securities market.
E) they provide a measure of the overall health of the economy.

Question 52

Natalia is an investor who buys securities when everyone else is panicked and prices are low. As a result, she is considered a ________ investor.

A) conservative
B) contrarian
C) short-term
D) deliberate
E) prime

Question 53

Discuss securities markets. How are securities sold in primary and secondary markets?