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

Question 1

Financial managers usually focus almost exclusively on meeting the financial needs of their firms in the short run,leaving long-run financial issues to top management.

Answer 1

False

Question 2

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

Answer 2

False

Question 3

Historically,the goal of financial management has been to achieve a dominant market share.

Answer 3

False

Question 4

Each specific ratio developed by financial managers has a theoretically "ideal" value that financial managers strive to attain.

Question 5

Two firms that have very similar real-world financial performance might report very different profitability ratios if they use different but equally acceptable accounting procedures to develop their income statements and balance sheets.

Question 6

The debt-to-equity ratio measures the extent to which a firm relies on debt financing by dividing total debt by total owners' equity.The higher the value of this ratio,the more the firm is relying on debt.

Question 7

Return on assets is a profitability ratio that is found by dividing net income by average total assets.

Question 8

Evaluating recent financial performance,planning for effective use of one's financial resources,and evaluating long-run investments are all functions that are carried out by financial managers.

Question 9

Most common financial ratios are based on information taken from a firm's balance sheet and income statement.

Question 10

The closer the debt-to-asset ratio is to one,the greater the firm's reliance on debt.

Question 11

Earnings per share (EPS)is a profitability ratio measuring how much a firm earns per share of common stock outstanding.

Question 12

Today many financial managers accept the view that serving the needs of other stakeholders can be consistent with the goal of maximizing the value of the firm to its owners.

Question 13

Return on equity is a profitability ratio calculated by dividing net income by average common stock equity.If the firm issues preferred stock,the dividends paid to preferred shareholders are subtracted from net income.

Question 14

The evaluation of long-run investment opportunities is one responsibility of financial managers.

Question 15

One of the functions of financial management is to determine the best strategy for meeting a firm's long-term financing needs.

Question 16

When the goals of stakeholders conflict with each other,financial managers usually adopt the view that the preferences of internal stakeholders,such as managers and employees,should be given the most weight.

Question 17

The inventory turnover ratio is an asset management ratio that compares average inventory to total assets.

Question 18

The debt-to-asset ratio measures the extent to which a firm relies on debt financing by dividing total debt by total assets.

Question 19

Firms that sell goods that spoil easily or quickly become obsolete would want a very low inventory turnover ratio.

Question 20

The current ratio helps financial managers evaluate the ability of a firm to pay short-term liabilities as they come due.

Question 21

Cash budgets project cash inflows and outflows over a period of several years in order to help financial managers determine the best way to meet long-term financing needs.

Question 22

A pro forma balance sheet projects the types and amounts of revenues a firm will need to execute future plans and shows the amount of additional financing needed to acquire those assets.

Question 23

Pro forma income statements forecast the assets a firm will need in the next accounting period.

Question 24

The burn rate is used to track how quickly a firm is increasing its current asset balances.

Question 25

A low burn rate is an indication that the firm is losing cash at a faster rate than other firms in its industry.

Question 26

Jane Allgood runs a seasonal nursery business in the Midwest.Given the uneven nature of her cash payments and cash receipts,she probably wouldn't receive much benefit from developing a cash budget.

Question 27

Cash equivalents are long-term,unsecured but highly liquid assets that firms list in the fixed assets section on their balance sheet.

Question 28

The current ratio is calculated by dividing the firm's past expenses by current assets.

Question 29

Net working capital is the difference between a firm's current assets and its fixed assets.

Question 30

Companies with rapidly growing sales seldom experience cash flow problems.

Question 31

A money market mutual fund is a mutual fund that pools funds from many investors and uses the funds to purchase highly liquid short-term securities.

Question 32

The development of pro forma income statements and balance sheets is an important step in the financial planning function performed by financial managers.

Question 33

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.

Question 34

A cash budget is a detailed projection of cash flows that financial managers use to identify when a firm is likely to experience temporary shortages or surpluses of cash.

Question 35

Pro forma statements are idealized financial statements that show the firm's average financial performance over the past 10 years.

Question 36

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 on the unused funds.

Question 37

A high debt-to-equity ratio indicates that the firm is relying heavily on debt,or is "highly leveraged."

Question 38

Cash budgets can help financial managers determine when their firms are likely to have short-term surpluses of cash available to pay off loans or invest in other assets.

Question 39

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.

Question 40

Spontaneous financing arises as a natural result of a firm's business operations without the need for special arrangements.

Question 41

Corporations sell commercial paper at a lower price than the amount the company will pay the holder when the paper comes due.The difference between the initial price and the price paid to the holder when the paper matures represents the interest earned on the note.

Question 42

Commercial paper is a short-term unsecured promissory note issued by large corporations.

Question 43

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

Question 44

One advantage of using factors as a source of short-term financing is that it allows the firm to outsource its collection efforts,thus avoiding the hassle of collecting accounts receivables from customers who pay late.

Question 45

A firm that extends credit for only 30 days is likely to receive its payments faster than a firm that allows customers 60 or 90 days,but such a policy is likely to cause a loss of sales.

Question 46

A firm can never hold too much cash.

Question 47

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 48

If an invoice contains the terms 2/10 net 30,the supplier is offering a 10% cash discount off the invoice price if the buyer pays quickly (within 2 days).

Question 49

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.

Question 50

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.

Question 51

Money market mutual funds are a way for small investors to get into the market for securities that would otherwise be too expensive for them to afford.

Question 52

Net present value (NPV)is the sum of the present values of expected future cash flows from an investment minus the net cost of that investment.It measures the increase in shareholder value expected to result from an investment.

Question 53

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

Question 54

T-bills are long-term IOUs issued by corporations and regulated by the federal government.

Question 55

A factor is a company that provides long-term financing to firms by purchasing the firm's bonds and other long-term securities at a discount.

Question 56

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

Question 57

When an invoice lists the terms as 3/15 net 45,the "net 45" means that the seller requires payment in full within 45 days.

Question 58

Investing in fixed assets would be classified under operating budgeting.

Question 59

The Tuckerverse Corporation just received a shipment of parts from a supplier that contained the terms 2/15 net 30.Under these terms the firm has no real financial incentive to pay this bill earlier than its due date.

Question 60

Inventories include stocks of goods,materials,and work-in-process that firms hold as part of doing business.

Question 61

Long-term capital budgeting proposals are normally expected to incur negative cash flows in the initial time period,but eventually they should generate positive cash flows.

Question 62

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

Question 63

Retained earnings are considered a form of equity financing.

Question 64

A wealthy relative offers you $1000 today but doesn't actually get around to giving you the money until a year later.The delay in receiving the money causes you to lose the opportunity to earn a year's worth of interest.This example illustrates the rationale for the time value of money.

Question 65

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.

Question 66

The time value of money is based on the idea that inflation erodes the purchasing power of the dollar.

Question 67

The sooner you receive a sum of money the sooner you can put that money to work to earn even more money.

Question 68

A cash flow of $1000 received three years from today would have the same present value as a cash flow of $1000 received two years from today.

Question 69

Financial leverage is the use of debt in a firm's capital structure.

Question 70

Interest payments on a firm's debt are a tax-deductible expense.

Question 71

Retained earnings is the net income a firm makes when revenues exceed liabilities.

Question 72

Financial managers at Tuckerverse Corporation have just computed the NPV for a capital budgeting proposal and found that it is $1500.The financial managers are likely to approve this proposal.

Question 73

In the 21st century,managers use financial calculators and spreadsheet software to make computing present values easy by simply entering the amount and timing of the estimated cash flow into the calculator (or spreadsheet)along with the discount rate.

Question 74

One disadvantage of equity financing is that it locks the firm into making fixed payments.

Question 75

Covenants are restrictions placed on firms seeking to obtain debt financing.They are intended to protect the interests of the lenders.

Question 76

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

Question 77

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.

Question 78

Covenants are terms included in long-term loan agreements that are intended to protect borrowers from unfair policies imposed by lenders.

Question 79

Financial managers face a challenge in accurately forecasting cash flows as they must analyze only relevant cash flows.

Question 80

The net present value of an investment proposal is found by adding the present values of all of its estimated future cash flows and subtracting the initial cost of the investment from the sum.