Deck 15: Finacial Decisions and Risk Management

Question 1

Henry has received notice from a supplier that all invoices must be paid within 30 days rather than 60 days as previously given. Which of the following will be impacted by this change?

A) Inventories
B) Raw materials inventory
C) Accounts receivable
D) Capital expenditures
E) Cash flow

Answer 1

E

Question 2

The three basic areas of responsibility for financial managers are

A) cash flow management, financial control, and financial planning.
B) risk management, portfolio diversification, and cash flow management.
C) credit policy, cash flow management, and policy decisions on equity vs. debt financing.
D) short-term, medium-term, and long-term financing.
E) none of these.

Answer 2

A

Question 3

The business activity that is concerned with determining a firm's long-term investments, obtaining the funds to pay for those investments, and conducting the firm's everyday financial activities is

A) bookkeeping.
B) corporate finance.
C) investment brokers.
D) chartered banks.
E) money markets.

Answer 3

B

Question 4

Which of the following represents the overall objective of financial managers?

A) To ensure that the company has enough funds on hand to purchase materials needed to produce goods and services
B) To ensure that the company has enough money to pay for its debts
C) To increase the supply of money for the economy
D) To increase the value of the firm and thus to increase shareholder wealth
E) To manage the firm's cash flow

Question 5

Jenex Corp. has a credit policy that reads "2/10, net 30." This means that

A) the company is offering a 10 percent discount if the customer pays within 2 days.
B) the company will give a net reduction of 30 percent in the amount owed if the customer pays within 10 days.
C) the customer will have to pay at least 10 percent of the bill by the end of 30 days.
D) the customer will have to pay at least 30 percent of the bill by the end of 10 days.
E) none of these.

Question 6

Why is it necessary for a business firm to establish a credit policy?

A) A credit policy is necessary to determine how much money the business can borrow to purchase supplies.
B) A credit policy is necessary to determine how dividends will be distributed to the shareholders.
C) A credit policy is necessary to determine which suppliers the firm needs to pay.
D) A credit policy is a means of accounting for the dollar value of inventory-in-process.
E) A credit policy provides financial managers with expected dates of payment from buyers of the firm's products and services.

Question 7

Sellers adjust credit terms in order to influence

A) when dividends are paid.
B) when customers pay their bills.
C) their net profit.
D) their goods-in-process inventory.
E) their accounts payable.

Question 8

All of the following are responsibilities of the financial manager except

A) determining a firm's long-term investments.
B) obtaining funds to pay for those investments.
C) developing the firm's financial statements.
D) conducting the firm's everyday financial activities.
E) managing the risks that the firm takes.

Question 9

When managers at Kraft Foods anticipate how much cheddar cheese Safeway supermarkets will buy each month and when Safeway will pay for those purchases, Kraft is managing its

A) accounts payable.
B) accounts receivable.
C) credit policies.
D) capital expenditures.
E) inventories.

Question 10

A credit policy of "2/10, net 30" means

A) That if a customer pays its bill within 10 days, it will receive a 30 percent discount.
B) That if a customer pays its bill within 30 days, it will receive a 10 percent discount.
C) That if a customer pays its bill within 2 days, it will receive a 10 percent discount.
D) That if a customer pays its bill within 10 days, it will receive a 2 percent discount.
E) None of these are correct.

Question 11

When a firm ensures that it always has enough funds on hand to purchase the materials and human resources that it needs to produce goods and services, it is exercising

A) cash flow management.
B) government tax reporting.
C) accounting.
D) financial planning.
E) financial control.

Question 12

Which of the following terms would a firm use to speed up cash flow?

A) 1/10; net 60
B) 1/10; net 30
C) 3/10; net 30
D) 2/10; net 60
E) 2/10; net 30

Question 13

What does a credit policy of "2/10, net 30" mean?

A) That the selling company offers a 10 percent discount if the customer pays within 2 days. The customer has 30 days to pay the regular price.
B) That if the buyer pays the net bill within 10 days, a 2 percent discount will be given.
C) That the selling company offers a 2 percent discount if the customer pays within 10 days. The customer has 30 days to pay the regular price.
D) That the buyer has two months to pay the bill. If the buyer pays before that time, a 10 percent discount will be given.
E) None of these are correct.

Question 14

Scott is managing a company and he has been advised by his financial manager that his largest source of short-term debt is too high. What source of funding is Scott's financial manager probably talking about?

A) Inventory loans
B) Bank notes
C) Credit cards
D) Commercial paper
E) Accounts payable

Question 15

In 2012, Canadian Pacific Railway Ltd. announced that it would make investments totaling $1.2 billion in order to improve its operating ratio, which in 2011 was the worst among North America's Big Six railways. This activity is CPR's

A) cash flow management plan.
B) financial plan.
C) leveraging.
D) budget.
E) financial control.

Question 16

The "measuring stick" against which performance is evaluated is provided by

A) a budget.
B) a cash flow statement.
C) a financial plan.
D) a balance sheet.
E) debt levels.

Question 17

Tony is responsible for planning and controlling the acquisition and dispersal of the company's financial assets. What is Tony's job title?

A) Management information systems manager
B) Financial manager
C) Purchasing manager
D) Accounting manager
E) Chief risk manager

Question 18

Sally is looking at an invoice dated July 1st for $1000 that has terms of 2/10; net 30. If she pays the bill on July 3rd how much should she write the cheque for?

A) $900
B) $980
C) $998
D) $1000
E) $700

Question 19

David is looking at a bill for supplies his company bought. It is dated May 1st and the terms are 2/10; net 30. In order to pay the least amount, when should he pay the bill?

A) Any day in May
B) May 10
C) May 21
D) May 31
E) May 15

Question 20

Which of the following is correct with respect to chief financial officers (CFOs)?

A) About 50 percent of CEOs were formerly CFOs.
B) CFOs do much more than simply focus on financial documents.
C) In recent years, fewer CFOs have been appointed as chief executives officers (CEOs).
D) The skill set of CFOs is narrowing because they have to sharpen their focus on financial issues.
E) All of these are correct.

Question 21

Mega has just shipped one of its products to Compucell on faith that they will pay the invoice. This is a(n)

A) trade acceptance.
B) revolving credit agreement.
C) line of credit.
D) open-book credit.
E) promissory note.

Question 22

Jack is setting up a global operation. The form of trade credit that is particularly useful for Jack's international transactions would be

A) revolving credit agreement.
B) promissory notes.
C) trade acceptance.
D) line of credit.
E) open-book credit.

Question 23

For a specific firm, which of the following is most likely to carry the lowest interest rate?

A) Loan secured by fixed assets
B) Commercial paper
C) Loan secured by finished goods
D) Unsecured loan
E) Loan secured by raw materials

Question 24

What is a promissory note?

A) A "gentleman's agreement" to pay for products which were shipped on faith that the payment would be forthcoming
B) A short-term loan which uses accounts receivable as collateral for a loan
C) An agreement signed by the buyer stating when and how much money will be paid to the seller in return for immediate credit
D) The requirement for a firm to maintain a certain amount of funds on deposit with the lending bank
E) The right given to a bank to seize certain assets if payment is not made when due

Question 25

The main source of collateral for companies like accounting firms and law firms is

A) cash flow.
B) equipment and buildings.
C) accounts receivable.
D) accounts payable.
E) goodwill

Question 26

Cut out but not-yet-sewn jeans are part of the ________ inventory at a clothing manufacturer.

A) raw materials
B) work-in-process
C) finished goods
D) just-in-time
E) last in, first out

Question 27

Sallyanne is selling merchandise to a retailer using the terms of a trade draft. As a new employee of Sallyanne's, you find out that a trade draft is

A) a means of pledging accounts receivable.
B) an agreement to meet certain terms, which is attached to the shipment and which must be signed before the goods are delivered to the buyer.
C) a legal agreement promising to pay for the goods, which is signed by the buyer before the seller will ship the goods.
D) a type of secured loan with trade products serving as collateral.
E) the seller ships products on faith that payment will be forthcoming.

Question 28

Which term is used to identify the granting of credit by one firm to another?

A) A line of credit
B) A commitment fee
C) Trade credit
D) A secured loan
E) An interfirm understanding of commercial intent

Question 29

How may a firm obtain an unsecured short-term bank loan?

A) Obtain open-book credit
B) Provide a fixed asset as a guarantee of payment
C) Pledge accounts receivable
D) Obtain a line of credit agreement
E) Obtain an inventory loan

Question 30

Which of the following guarantees that funds will be available?

A) Trade credit
B) Pledging assets
C) Trade draft
D) Line of credit
E) Revolving credit agreement

Question 31

Scott has been informed by his financial manager that his accounts receivable are being paid much too late. To fix this problem, Scott should

A) develop a credit policy.
B) call the companies and request the funds.
C) charge higher interest rates.
D) demand that the money be paid.
E) sell the late accounts to collection agents.

Question 32

For Levi Strauss' jean-making operation, rolls of denim are considered ________, while cut-but-not-yet-sewn jeans are considered ________.

A) work-in-process inventory; raw materials inventory
B) short-term capital; long-term capital
C) capital stock; supplies
D) raw materials inventory; work-in-process inventory
E) short-term credit; long-term credit

Question 33

The most common form of trade credit is

A) the trade acceptance.
B) the trade draft.
C) the promissory note.
D) open-book credit.
E) none of these.

Question 34

Which of the following requires a commitment fee?

A) Line of credit
B) Factoring
C) Revolving credit agreement
D) Trade acceptance
E) Commercial paper

Question 35

Long-term expenditures are usually more carefully planned than short-term outlays because

A) they represent a binding commitment of company funds that continues long into the future.
B) they are usually sold at high-profit margins.
C) they can be used to pay off accounts payable.
D) the expenditures must finance items that are easily liquidated.
E) all of these.

Question 36

With respect to inventory, which of the following is correct?

A) Inventory is not an asset.
B) All inventory is an asset except work-in-process inventory.
C) Factoring inventory is generally a bad idea.
D) Finished goods inventory is twice the value of work-in-process inventory.
E) Rolls of denim at a Levi's factory are raw materials inventory.

Question 37

Sallyanne is selling merchandise to Jack's Machine Shop. Sallyanne felt secure in receiving payment because she had Jack sign a promissory note. Sallyanne felt secure because a promissory note is

A) an agreement signed by the buyer stating when and how much money will be paid to the seller in return for immediate credit.
B) the requirement for a firm to maintain a certain amount of funds on deposit with the lending bank.
C) a "gentleman's agreement" to pay for products which were shipped on faith that the payment would be forthcoming.
D) the right given to a bank to seize certain assets if payment is not made when due.
E) basically the same thing as a trade acceptance.

Question 38

Capital expenditures differ from operating expenditures in that

A) they are much smaller.
B) they are shorter commitments.
C) they are part of working capital.
D) they are not budgeted.
E) they are not normally sold or converted into cash.

Question 39

Which term is used to identify a bank's requirement for the borrower to give the bank the right to seize certain assets if payments are not made as promised?

A) Pledging accounts payable
B) Open-book credit
C) Pledging accounts receivable
D) Collateral
E) Trade acceptance

Question 40

Secured, short-term loans are usually secured by

A) deposits with the bank.
B) fixed assets.
C) inventories.
D) commercial paper.
E) trade credit.

Question 41

What is the difference between a line of credit and a revolving credit agreement?

A) A line of credit is normally used by charitable and public-sector organizations, while a revolving credit agreement is usually used by private-sector business firms.
B) More money can be borrowed with a line of credit than with a revolving credit agreement.
C) There is no guarantee that the money will be available when it is requested in a line of credit, but there is an agreement that it will be available when requested in a revolving credit agreement.
D) A line of credit is only obtainable from a credit union, while a revolving credit agreement is only obtainable from a bank.
E) All of these are correct.

Question 42

In most cases, equity financing takes two forms

A) revolving credit agreements and lines of credit.
B) bank loans and commercial paper.
C) issuing common stock and retaining the firm's earnings.
D) issuing common stock and lines of credit.
E) commercial paper and retaining the firm's earnings.

Question 43

What is the major source of long-term debt financing for most large corporations?

A) Corporate bonds
B) Long-term loans
C) Trade credit
D) Equity financing
E) Retained earnings

Question 44

A factor buys $50 000 worth of receivables. How much will the factor eventually sell the receivables for?

A) $40 000
B) $45 000
C) $80 000
D) $85 000
E) It is impossible to know, given the information that is provided.

Question 45

Why is it necessary for a business firm to put up collateral when it takes out a loan?

A) So that the bank can keep a portion as advance payment on the loan
B) To show the bank that the business is big enough to require the loan
C) To assure the bank that loan payments will be made as promised
D) So the financial managers know dates of payment
E) So that the accounting people can generate accurate financial statements

Question 46

Manitoba Hydro has steady, predictable profits and cash flow patterns. Its best choice for long-term funding is most likely

A) factoring accounts receivable.
B) common stock.
C) either common or preferred stock but not bonds.
D) preferred stock.
E) bonds.

Question 47

Just like clockwork, Mr. and Mrs. Clark, an elderly retired couple, walk in the bank every year on November 1 to clip coupons from their bonds. What kind of bonds are these?

A) Registered
B) Secured
C) Callable
D) Bearer
E) Retirement

Question 48

Mega Computer needs a large amount of long-term financing for a long period of time. The best choice is most likely

A) loans.
B) preferred stock.
C) common stock.
D) commercial paper.
E) bonds.

Question 49

A ________ bond permits the issuing firm to retire portions of the bond issue at different predetermined dates.

A) municipal
B) serial
C) secured
D) callable
E) convertible

Question 50

Issuers of bonds are most likely to call them in when

A) the prevailing rate of interest exceeds that stipulated on the bonds.
B) when investor confidence goes down.
C) the prevailing rate of interest is less than that stipulated on the bonds.
D) when investor confidence goes up.
E) when the government revises its capital gains tax law.

Question 51

John is a factor who has just bought $40 000 worth of finished goods for $24 000. The profit that he will make on this transaction depends on

A) the quality of the receivables, the cost of collecting them, and interest rates.
B) the cash he has available, and the trade credit he is able to get.
C) the availability of government loans, the quality of the receivables, and the interest rate.
D) the interest rate, the cost of collecting the receivables, and the maturity date of bonds of his company.
E) the general state of the economy, the number of firms who might be interested in the receivables, and the amount of money those firms have available.

Question 52

What is the difference between factoring accounts receivable and using accounts receivable as collateral for a short-term loan?

A) Factoring is the collateral used when issuing commercial paper.
B) There is no difference.
C) Factoring involves selling the accounts receivable instead of using them to obtain a loan.
D) Factoring accounts receivable is accomplished through a finance company whereas using them as collateral is arranged with a bank.
E) Factoring involves agreeing to repurchase accounts receivable at a future date instead of using them as collateral to obtain a loan.

Question 53

Monolith Corp.'s credit rating is so high that it is able to issue ________, which is backed solely by the firm's promise to pay.

A) accounts receivable
B) commercial paper
C) promissory notes
D) trade credit
E) debentures

Question 54

What is the difference between registered bonds and bearer bonds?

A) Registered bonds have to be registered with the government of Canada, but bearer bonds do not.
B) Registered bonds generally pay lower rates of interest than bearer bonds.
C) Registered bondholders automatically receive interest cheques, but holders of bearer bonds have to clip coupons and send them to the company.
D) Registered bonds have lower financial risk than bearer bonds.
E) There is really no practical difference between registered and bearer bonds.

Question 55

Which of the following is correct with respect to long-term loans?

A) Businesses try to avoid them whenever possible because banks charge high interest rates.
B) Large borrowers may have trouble finding lenders to supply enough funds.
C) Once a loan's terms are set, they cannot be changed until all the money is paid back.
D) Loans are difficult to arrange quickly.
E) The time frame of the loan may be difficult to match with the borrower's needs.

Question 56

John bought $40 000 worth of receivables for 60 percent of that sum ($24 000). He will profit if the money he eventually collects exceeds the amount he paid for the receivables. John is involved in

A) pledging accounts receivable.
B) leveraging goods-in-process inventory.
C) collateralizing inventory.
D) factoring accounts receivable.
E) hedging.

Question 57

Which of the following is a financing method for short-term funds?

A) Retained earnings
B) Trade credit
C) Equity financing
D) Common stock
E) Bonds

Question 58

Which of the following is a source of long-term borrowing from outside the corporation?

A) Corporate bonds
B) Sale of equity shares
C) Commercial paper
D) Line of credit
E) Inventory loans

Question 59

What is an advantage of issuing a bond with a sinking fund provision?

A) This provision offers greater security to an investor because funds to retire the bond issue are set aside each year into the sinking fund.
B) The bonds may be converted to a specified number of shares of common stock at the firm's convenience.
C) The firm has the right to call in the outstanding bonds at any time and thus sink the bond issue.
D) The firm can decide to redeem the fund at any time.
E) The firm may retire portions of the bond issue at different predetermined dates.

Question 60

The two primary sources of long-term debt funds are

A) lines of credit and revolving credit agreements.
B) common stock and preferred stock.
C) trade credit and commercial paper.
D) commercial paper and bank loans.
E) long-term loans and the sale of bonds.

Question 61

Mega Computer issued stock with a face value of one cent and then sold the shares to the public for $20.00 each. Ted bought 10 shares at that price. Today, Ted sold his shares to David for $25.00 each. What is the par value of the stock?

A) $20.00
B) $25.00
C) $5.00
D) $19.99
E) $0.01

Question 62

The mix of debt and equity funding that a firm uses is called its

A) long-term funding mix.
B) financial mix.
C) corporate capital mix.
D) capital structure.
E) debt-to-equity ratio.

Question 63

Dennis can compute the market capitalization of the company he works for by

A) adding up all the fixed assets the company owns and subtracting the money still owed on those fixed assets.
B) multiplying the market price of one share of the company's stock by the total number of shares outstanding.
C) adding up all the funds the company has received through selling its stock.
D) adding up the book value, par value, and market value of the company's stock.
E) adding up the company's assets and subtracting its liabilities.

Question 64

Mega Computer's financial statements show 1000 shares of common stock with a par value of $10 000, retained earnings of $20 000, additional paid in capital of $10 000, and long-term debt of $30 000. What is the book value of a share of stock?

A) $70.00
B) $10.00
C) $40.00
D) $30.00
E) $50.00

Question 65

Mega Computer's financial statements show 1000 shares of common stock with a par value of $10 000, retained earnings of $20 000, additional paid in capital of $10 000, and long-term debt of $30 000. What is the market value of a share of Mega's stock?

A) $70.00
B) $20.00
C) $40.00
D) $30.00
E) It is not possible to tell from the information given.

Question 66

What is the meaning of "par value" when discussing common stock?

A) The current price of a share of stock
B) The selling price of the previous day's last transactions involving that stock
C) The average price paid on the previous day's trades
D) The face value of a share of common stock
E) One dollar

Question 67

Which of the following is correct?

A) The par value of stock is generally the best indicator of the real value of a share of stock.
B) The market value of a share of stock is determined almost solely by objective, financial considerations.
C) The book value of a share of stock is calculated by dividing stockholders' equity by the current market price of the stock.
D) A company's market capitalization is determined by multiplying the number of a company's outstanding shares times the market value of each share.
E) By law, subjective factors like rumours and stockbroker recommendations are not allowed to influence the market price of a share of stock.

Question 68

Regarding the issue of investor relations, it is correct to say that

A) investor relations activities do not have much impact on the price of a firm's stock.
B) investor relations may include inviting financial analysts to one of the operating sites of a firm.
C) investor relations is a relatively new idea that began to be practised in the late 1980s.
D) investor relations are not that important to a firm's success.
E) investor relations target individual buyers of corporate stock rather than brokers and financial analysts.

Question 69

Suppose you were interested in purchasing a printing company. This might be an attractive target if the ________ value of the stock was less than the ________ value.

A) book; market
B) par; market
C) book; par
D) market; book
E) market; par

Question 70

Corporation B had sales revenue last year of $20 million, operating expenses of $16 million, and net profit of $4 million. There are 2 million shares of stock oustanding. What is the par value of the company's stock?

A) $5
B) $4.83
C) $4
D) $10
E) The par value cannot be determined with the information given.

Question 71

Preferred stock with a $100 par value and a 6 percent dividend is currently trading on the market at $110 per share. What is the amount of the dividend the holder is entitled to receive each year?

A) $66
B) 6 percent of $110
C) $6 percent of the total book value of preferred shares
D) $6
E) $0

Question 72

From a company's perspective, which of the following is the most conservative mix of long-term funding?

A) 25% debt, 75% equity
B) 75% debt, 25% equity
C) 100% equity
D) 100% debt
E) 50% debt, 50% equity

Question 73

Which of the following is correct with regard to market capitalization?

A) There is considerable stability in the market capitalization of companies from year to year.
B) Market capitalization is computed by dividing owners' equity by the number of outstanding shares.
C) In Canada, most of the companies with the highest market capitalization are financial institutions or resource companies.
D) There is general agreement that market capitalization really doesn't tell us very much about the real value of a company.
E) All of these are correct.

Question 74

Preferred stock with a $100 par value and a 5 percent dividend is currently trading on the market at $90 per share. What is the amount of the dividend the holder is entitled to receive each year on each share?

A) $90 (i.e., 90 percent of $100)
B) 5 percent of $90
C) 5 percent of total corporate profits divided by the number of shares outstanding
D) $5
E) None of these

Question 75

Mega Computer issued stock with a face value of one cent and then sold the shares to the public for $20.00 each. Ted bought 10 shares at that price. Today, Ted sold his shares to David for $25.00 each. What are Ted's capital gains?

A) $19.99
B) $20.00
C) $25.00
D) $50.00
E) $0.01

Question 76

All of the following are features of debt financing except

A) it must be repaid by a deadline.
B) it makes regular and fixed claims on income.
C) it may lead to challenge for control of company.
D) its interest is tax deductible.
E) it constrains management flexibility.

Question 77

Mega Computer issued stock with a face value of one cent and then sold the shares to the public for $20.00 each. Ted bought 10 shares at that price. Today, Ted sold his shares to David for $25.00 each. What is the market value of the stock?

A) $50.00
B) $25.00
C) $20.00
D) $19.99
E) $0.01

Question 78

Rosella is financial manager who is comparing the effects of debt and equity financing. She finds that

A) debt financing affects management control, whereas equity financing does not.
B) debt financing makes a regular claim on income, whereas equity financing does not.
C) debt financing involves no fixed deadlines, whereas equity financing does.
D) debt financing does not affect management's flexibility, whereas equity financing does.
E) neither debt financing nor equity financing is tax deductible.

Question 79

The book value of a company's common stock is determined by

A) what buyers are willing to invest in a firm.
B) dividing total assets by the number of outstanding shares.
C) dividing total shareholders' equity by the number of outstanding shares.
D) dividing net profit by the number of outstanding shares.
E) stock brokers' opinions and ratings.

Question 80

Which of the following represents a stock's real value?

A) Profitability ratio
B) Market value
C) Price earnings ratio
D) Par value
E) Book value