Deck 18: Financial Management

Question 1

Highly leveraged companies will have adequate funds to spend on advertising,staffing,and product development.

Answer 1

False
Explanation: Companies that are highly leveraged (that is, carrying a lot of debt)are forced to devote more of their cash flow to debt service and therefore can't spend that money on advertising, staffing, or product development.

Question 2

Accounts receivable refers to the money owed to a firm by its customers.

Answer 2

True
Explanation: The money owed to a firm by its customers is referred to as accounts receivable.

Question 3

Long-term loans on real estate are called mortgages.

Answer 3

True
Explanation: Long-term loans on real estate are called mortgages. Such loans can provide substantial capital to businesses.

Question 4

Revenue obtained through selling assets is an example of an external source of income.

Question 5

Secured loans are backed up with assets that the lender can claim in case of default.

Question 6

Budget reflects expected revenues,cash receipts,and outlays.

Question 7

A business can use short-term financing to cover current expenses.Typically,short-term financing will be repaid in one year.

Question 8

Rolling forecasts are not based on revenue budgets and cost assumptions.

Question 9

Commercial paper is an arrangement in which a financial institution makes money available for use at any time after the loan has been approved.

Question 10

Inventory represents a cost while it is waiting to be sold.

Question 11

Factoring refers to lending a lump sum of cash via a promissory note or on-demand access without accepting any other securities.

Question 12

Financial decisions with high perceived risk will have low potential for rewards.

Question 13

Hedging refers to selling a product at a higher rate than what was determined.

Question 14

Equity financing refers to arranging funding by selling ownership shares in the company.

Question 15

Cost of capital is the average rate of interest a firm pays on its combination of debt and equity.

Question 16

Leverage is the technique of increasing the rate of return on an investment by financing it with borrowed funds.

Question 17

Shareholders of a firm have prior claims on the firm's assets.

Question 18

Term loans have maturities between three months to one year.

Question 19

A financial plan outlines the funds needed for a certain period of time.

Question 20

An operational budget outlines expenditures for real estate,new facilities,and major equipment.

Question 21

Accounts receivable refers to ________.

A) the total of owner's funds invested in a business
B) the total annual revenue of a company
C) amounts that a firm owes to other parties
D) the money owed to a firm by its customers
E) the total interest payments made by the firm

Question 22

Burn rate is a major concern when preparing a(n)________ budget.

A) start-up
B) operating
C) capital
D) project
E) master

Question 23

A lease is an agreement to use an asset in exchange for regular payment.

Question 24

When using ________,a company starts the year with a budget based on revenue and cost assumptions made at that point but then reviews economic performance every month or every quarter to see whether the budget needs to be modified as the year progresses.

A) hedge-based budgeting
B) scenario planning
C) rolling forecasts
D) product segmentation
E) judgmental forecasting

Question 25

USS Agro is a firm that markets agricultural products.The firm procures supplies from agricultural cooperatives across the world.The firm forms agreements with the cooperatives to provide supplies at a fixed price in the future to protect them against changing prices.This is an example of ________.

A) zero-based budgeting
B) inventorying
C) liquidation
D) hedging
E) standardization

Question 26

Venture capital is an example of private equity.

Question 27

Venture capital is one of the least specialized and most widely available forms of funding.

Question 28

Which of the following statements is TRUE of a company's inventory?

A) It is an example of a long-term asset that companies hold.
B) It is the most liquid current asset of a company.
C) It has the potential to be converted to cash.
D) It is classified under accounts receivable.
E) It is not associated with costs when it is waiting to be sold.

Question 29

________ budget identifies the money a new company will need to spend to launch operations.

A) Master
B) Start-up
C) Capital
D) Project
E) Operating

Question 30

Which of the following is an internal source for obtaining funds for business?

A) issuing corporate bonds
B) unsecured loans
C) factoring
D) commercial papers
E) selling assets to obtain revenue

Question 31

A ________ is a planning and control tool that reflects expected revenues,operating expenses,and cash receipts and outlays.

A) data structure
B) financial plan
C) cash flow
D) budget
E) capital structure

Question 32

________ refers to the rate at which the company is using up the funds from its initial investors.

A) Capital ratio
B) Order rate
C) Hedge rate
D) Burn rate
E) Current ratio

Question 33

An underwriter is a specialized type of bank that buys the shares from the company preparing an IPO and sells them to investors.

Question 34

Hedging refers to forming contracts that allow a company to ________.

A) obtain funds for a short period without paying interest
B) buy supplies in the future at designated prices
C) finance long-term debt on a continuous basis
D) engage in buyer-seller relationships with many firms
E) issue letters of credit to buyers exterior to the home country

Question 35

Which of the following is the best example of an external source for obtaining funds for business?

A) revenue from selling assets
B) funds from shareholders
C) interest from deposits
D) issuing corporate bonds
E) earnings from investments

Question 36

Debentures are backed by specific assets that will be given to bondholders if the borrowed amount is not repaid.

Question 37

A company keeps $150,000 cash reserve to meet day-to-day expenses.The cash reserve is centralized and various branches can access money from the reserve to meet every-day expenses.This cash reserve is part of the company's ________ account.

A) trade credit
B) project budget
C) fixed budget
D) working capital
E) capital budget

Question 38

Which of the following is a component of a firm's working capital account?

A) long-term loans
B) debentures
C) inventory
D) mortgage bonds
E) convertible bonds

Question 39

________ accounts represent a firm's cash on hand as well as economic value that can be converted to cash or is expected from customers,minus what it is scheduled to pay out.

A) Capital budget
B) Trade credit
C) Project budget
D) Working capital
E) Operating budget

Question 40

Doron is a manufacturer of plastic products.The company produces utensils and gift items.Which of the following would appear as accounts payable in the company's balance sheet?

A) revenue obtained by selling assets to a supplier
B) funds obtained through issuing corporate bonds
C) a default payment made on a long-term loan
D) funds obtained through issuing preference shares
E) a bill that one of the suppliers has sent for a purchase

Question 41

Capital structure is ________.

A) the original monetary value of an economic item
B) a statement of the financial position of a company
C) the summary of the financial balances of a business
D) a firm's mix of debt and equity financing
E) a combination of operational expenses and capital expenses

Question 42

Boston Ceramics is a manufacturer of semiconductors.The company produces such parts as ceramic machine components.The company wants to raise $15 million to launch operations in a new country.The company decides to fund the launch entirely by using debt financing.Which of the following observations,if true,would most strengthen this financing decision?

A) Research has revealed that the company has a high chance of succeeding in the new market.
B) The company is looking to obtain funding that does not have a specific maturity period.
C) The management feels that the new project is a very risky affair.
D) The management wants to establish discretionary costs for the new project.
E) Tax rates are high in the new market and the company wants to minimize taxable income.

Question 43

Roder Industries is a multinational production firm.Invo Bank is the firm's major financier in the United States.The bank offers short-term loans to Roder at a very low rate and the bank considers Roder to be its best customer.The interest rate the Invo bank charges on these short-term loans are called ________ interest rate.

A) risk-based
B) deferred
C) prime
D) federal
E) inflationary

Question 44

Which of the following is a major difference between debt financing and equity financing?

A) Equity financing has a specific maturity period, whereas debt financing usually has no specific maturity period.
B) Debt financing is not linked to organizational performance, unlike equity financing.
C) Equity holders have primary claims on assets unlike debt financiers.
D) Payments to equity holders reduce taxable income, whereas debt payments are not tax deductible.
E) Debt financing is used to cover long-term expenses, whereas equity financing is used for current expenses.

Question 45

Which of the following sources of short-term debt is characterized by revolving credit terms?

A) unsecured loan
B) secured loan
C) trade credit
D) credit card
E) commercial paper

Question 46

Financing would cost more if ________.

A) opportunity cost is low for the financier
B) investors lend less money
C) funding is for long-term
D) perceived risk is less
E) a company is financially solid

Question 47

Forter Consultants is a firm that provides cloud computing and remote storage services to firms in the United States.The company plans to buy more servers to increase its operating and storing capacity.It also creates a budget for the purchase and it estimates the total cost to be about $3 million.The budget created for this transaction is an example of a(n)________ budget.

A) operating
B) project
C) master
D) launch
E) capital

Question 48

Duromart is an American multinational retailer corporation that runs chains of large discount department stores and warehouse stores.Which of the following actions of Duromart is an example of availing short-term credit?

A) The company issues bonds with a face value of $10 to raise money.
B) The company issues debentures that offer 8 percent interest.
C) The company pledges its assets to obtain a mortgage loan.
D) The company opens a trade credit account with a major bank.
E) The company leases a plot of land that it owns to raise money.

Question 49

________ is the average rate of interest a firm pays on its combination of debt and equity.

A) Economic surplus
B) Marginal cost
C) Working capital
D) Cost of capital
E) Economic deficit

Question 50

Albert is the financial manager of a manufacturing firm.Albert has been an integral part of the firm ever since it started business in 2006.Albert's job has transformed over the years and every year he is responsible for creating a budget to identify all sources of raising funds and coordinates the spending of those funds throughout the company.This budget is an example of a(n)________ budget.

A) start-up
B) capital
C) launch
D) project
E) operating

Question 51

4Learning is a firm that sells learning solutions to customers.The company identifies the training needs of organizations and designs flash-based online training-programs for them.The company has recently received an order to create product training platforms for an electronic manufacturer.The company creates a budget specifically for this order to determine the pricing of the project.This budget is an example of a ________ budget.

A) operating
B) capital
C) project
D) master
E) start-up

Question 52

The ________ outlines expenditures for real estate,new facilities,major equipment,and other such investments.

A) operating budget
B) project budget
C) master budget
D) capital budget
E) start-up budget

Question 53

________ refers to short-term promissory notes,or contractual agreements,to repay a borrowed amount by a specified time with a specified interest rate.

A) Corporate bond
B) Factoring
C) Trade credit
D) Lease agreement
E) Commercial paper

Question 54

Prime interest rate is the ________.

A) lowest rate of interest that banks charge for short-term loans
B) average rate of interest charged by banks on their customers
C) interest rate that the Federal Reserve charges on loans
D) interest that the Federal Reserve pays for deposits
E) interest rate banks charge to their least creditworthy customers

Question 55

________ is the technique of increasing the rate of return on an investment by financing it with borrowed funds.

A) Returns projection
B) Budgeting
C) Leverage
D) Forecasting
E) Financial projection

Question 56

Managers use a(n)________ to identify the costs needed to accomplish a particular project.

A) operating budget
B) project budget
C) master budget
D) capital budget
E) start-up budget

Question 57

A company can use a(n)________ to identify all sources of revenue and coordinate the spending of those funds throughout the coming year.

A) launch budget
B) start-up budget
C) capital budget
D) project budget
E) operating budget

Question 58

Short-term financing is financing that will typically be repaid within ________.

A) one year
B) two years
C) three years
D) five years
E) ten years

Question 59

Short-term financing is used to cover ________ of a business.

A) current expenses
B) start-up costs
C) launch costs
D) fixed costs
E) capital expenses

Question 60

Equity financing refers to arranging funding by ________.

A) borrowing money from institutions
B) selling corporate bonds
C) selling ownership shares
D) issuing commercial papers
E) borrowing money from individuals

Question 61

DS Bank is a bank specialized in buying shares of ownership from firms that want to sell it to investors.The bank sells the shares to investors on the company's behalf.DS Bank is a(n)________.

A) financial renovator
B) controller
C) treasurer
D) underwriter
E) non-banking firm

Question 62

Incobar Steel is a large manufacturer of steel.The company decides to issue bonds to raise money to expand its operations.The final maturity term of the bonds is three years,but a portion of the outstanding bonds matures once in every six months.The bonds are backed only by the corporation's promise to pay.The bonds that Incobar Steel is issuing are best referred to as ________ bonds.

A) mortgage
B) callable
C) term
D) secured
E) serial

Question 63

With most bond issues,a corporation retains the right to pay off the bonds before maturity.Such bonds are called ________.

A) secured bonds
B) fixed bonds
C) debentures
D) callable bonds
E) convertible bonds

Question 64

A specialized type of bank that buys the shares from the company preparing an IPO and sells them to investors is known as a(n)________.

A) financial adviser
B) underwriter
C) controller
D) treasurer
E) financial renovator

Question 65

RS Bank provides short-term loans to small businesses.Many of the bank's customers take months to pay their bills.The bank often buys the companies' accounts receivable and pays them in return.This is an example of ________.

A) an unsecured loan
B) trade credit
C) a secured loan
D) factoring
E) a commercial paper

Question 66

Frost Bank lends $500,000 to Arbex Manufacturer.Arbex has agreed to pay this amount back in fifty equal installments over a period of ten years.This is an example of a ________.

A) lease agreement
B) trade credit
C) corporate bond
D) long-term loan
E) commercial paper

Question 67

________ is an arrangement in which a financial institution makes money available for use at any time after the loan has been approved.

A) Leasing agreement
B) Credit card
C) Secured loan
D) Line of credit
E) Commercial paper

Question 68

________ can be exchanged at the investor's option for a certain number of shares of the corporation's common stock.

A) Collateralized bonds
B) Protected bonds
C) Bills of exchange
D) Debentures
E) Convertible bonds

Question 69

The term compensating balance refers to the portion of an unsecured loan that ________.

A) is kept on deposit at a lending institution
B) has already been paid by the borrower
C) has not been paid by the borrower
D) is charged by the lender as interest
E) is not supported by any collateral securities

Question 70

________ are unsecured bonds,backed only by the corporation's promise to pay.

A) Convertible bonds
B) Protected bonds
C) Bills of exchange
D) Debentures
E) Non-convertible bonds

Question 71

________ is an agreement to use an asset in exchange for regular payment.

A) Credit card
B) Lease
C) Mortgage
D) Trade credit
E) Commercial paper

Question 72

Term bonds are bonds that ________.

A) mature all at the same time
B) can be paid off when needed
C) mature four times a year
D) mature at various times
E) are backed by company-owned property

Question 73

A company sells its accounts receivable to an intermediary.The intermediary collects the receivables from the customer.This is an example of ________.

A) an unsecured loan
B) factoring
C) trade credit
D) a secured loan
E) a commercial paper

Question 74

Which of the following is a major advantage of raising funds through selling shares of ownership?

A) Selling shares to the public makes the company's operations less complicated.
B) It does not change the way a company is managed.
C) It consumes less time than other forms of financing.
D) It has tremendous potential to fuel organizational growth.
E) Owners do not risk their position in the firm when selling shares.

Question 75

Gordon Glass is a large manufacturer of glass products.The company's product range includes glass vessels,car glasses,mirrors and so forth.In order to raise money to open a new plant in Alaska,the company issues corporate bonds.The bonds are unsecured,but include the corporation's promise to pay an interest of 12 percent.The tenure of the bond is five years and neither party can change the maturity date.These bonds are examples of ________.

A) redeemable bonds
B) callable bonds
C) debentures
D) mortgaged bonds
E) collateralized bonds

Question 76

Rex Associates has a poor credit rating and is finding it difficult to obtain loans.In order to fund a new project,the company decides to let out one of its buildings to a bank.The company obtains funds in return from the bank.This is an example of ________.

A) unsecured lending
B) factoring
C) leasing
D) long-term lending
E) short-term lending

Question 77

________ is an arrangement in which a financial institution makes money available for use at any time after the loan has been approved.

A) Corporate bond
B) Factoring
C) Line of credit
D) Lease agreement
E) Commercial paper

Question 78

Before a company can sell shares to the public in the United States,it must ________.

A) generate a profit of $1 billion
B) have a turnover of $1 billion
C) register with the SEC
D) have fifty or more shareholders
E) have a hundred or more shareholders

Question 79

Which of the following is a source of long-term debt financing?

A) corporate bond
B) trade credit
C) credit card
D) factoring
E) commercial paper

Question 80

Which of the following is a disadvantage of long-term loans?

A) They cannot provide substantial sums of money to businesses.
B) They require diluting ownership in organizations.
C) They are available to firms with a weak credit rating.
D) Such loans can restrict the way an organization uses its assets.
E) Not all companies can qualify for loans and acceptable terms.