Deck 17: Financial Management

Question 1

Exposure of firms to high risks is often a result of decisions that involve the highest potential returns.

Answer 1

True

Question 2

Determining when a firm will need additional funds is one of the questions that needs answering when preparing a financial plan.

Answer 2

True

Question 3

In many companies, a CEO is promoted to the position of CFO.

Answer 3

False

Question 4

Financial plans that focus on projections no more than a year or two in the future are known as strategic plan.

Question 5

Chemical manufacturer DuPont has approximately $0.68 in assets for every dollar in sales. According to asset intensity, for every $100 increase in sales, the firm would need about $68 of additional assets.

Question 6

Most firms invest their excess cash in marketable securities which is defined as high-risk securities that either have short-term maturities or can be easily sold in the secondary market.

Question 7

Financial managers are responsible for increasing profits to shareholders.

Question 8

The exercise of employee stock options is a source of equity capital for a business.

Question 9

Managing assets for an international company reduces challenges faced by a financial manager.

Question 10

The treasurer is the chief financial officer of most firms.

Question 11

Debt capital is always preferable to equity capital.

Question 12

The major purpose of cash is to pay day-to-day expenses.

Question 13

Upgrading assets by substituting new assets for older ones is an example of an investment decision.

Question 14

Interest rates on short-term investments move up and down frequently.

Question 15

In preparing a financial plan, the CFO first estimates expenses such as purchases, employee compensation, and taxes. Then a forecast of sales or revenue is done for the given time period.

Question 16

In most firms the controller is the chief accounting manager.

Question 17

A treasurer is usually responsible for preparing financial forecasts and analyzing major investment decisions related to new products, new production facilities, and acquisitions.

Question 18

Risk is defined as the uncertainty of a profit or a loss.

Question 19

Investments that promise the highest returns tend to involve the most risk.

Question 20

Virtually all financial decisions involve a trade-off between risk and return.

Question 21

Whenever a company borrows money, it creates leverage.

Question 22

All short-term bank loans are secured, meaning that the borrower pledges specific assets as collateral.

Question 23

Venture capitalists are important sources of funding, especially for new companies.

Question 24

Hedge funds are private investment companies open only to qualified large investors.

Question 25

Trade credit is a major source of short-term financing.

Question 26

When a supplier agrees to receive payment at a later date for goods and services sold to a firm, trade credit has been extended by the supplier.

Question 27

If a firm has numerous investment opportunities and wishes to finance some of them with equity funding, it will likely pay large dividends to shareholders.

Question 28

Commercial paper is the least desirable financing option.

Question 29

A firm's investment opportunity is a major factor when deciding its dividend policy.

Question 30

Short-term sources of funds are loans that are repaid within one year.

Question 31

Bond sales tend to be higher when interest rates are lower.

Question 32

Firms often rely on short-term sources of funds to pay for large, permanent assets, such as machinery and buildings.

Question 33

Private placements are subject to fewer government regulations because registration with Canadian Securities Administration is NOT required for selling securities privately.

Question 34

Short-term funds are generally more expensive than long-term funds and generally expose the firm to more risk.

Question 35

Trade credit is relatively easy to obtain and costs nothing unless a supplier offers a cash discount.

Question 36

Increasing leverage decreases management's flexibility in future financing decisions.

Question 37

Unlike private equity funds, which tend to focus on small, startup companies, venture capital funds invest in all types of businesses, including mature ones.

Question 38

Corporate debt securities are the most common type of security sold privately.

Question 39

Public sales can vary substantially from year to year depending on the conditions in the financial markets.

Question 40

Leverage increases the potential return to a firm's shareholders, but also reduces the risk of their investment because shareholders have contributed less capital.

Question 41

All of the following are considered to be marketable securities EXCEPT ______.

A) treasury bills
B) commercial paper
C) repurchase agreements
D) bonds

Question 42

The financial manager for a typical corporation is responsible for ______.

A) designing the accounting system
B) determining the most appropriate sources and uses of funds
C) gathering, recording, and reporting financial information
D) preparing operating budgets for various departments

Question 43

The senior financial manager has the title of ______.

A) chief financial officer
B) chief operations officer
C) treasurer
D) controller

Question 44

A financial plan is a document that ______.

A) specifies the timing of inflows and outflows of cash
B) specifies the funds a firm needs for a period of time
C) specifies the most appropriate sources and uses of a firm's funds
D) specifies all of the above

Question 45

Which of the following individuals has the direct responsibility for shareholder relations?

A) controller
B) chief financial officer
C) chief executive officer
D) treasurer

Question 46

Jasmine works in the financial division of her company and is responsible for preparing monetary forecasts and analyzing major investment decisions. What is Jasmine's title?

A) Treasurer
B) CFO
C) Vice President for Financial Management
D) Controller

Question 47

There are two types of divestitures: selloffs and spinoffs. For selloffs, a new firm is created from the assets divested.

Question 48

Which of the following is the best definition of financial risk?

A) Risk is the possibility that an investment will lose money.
B) Risk is the possibility that an investment will earn a negative return.
C) Risk is the possibility that an investment's actual return will be less than its expected return.
D) Risk is the uncertainty regarding the gain or loss from an investment.

Question 49

Government-owned investment companies invest in a variety of financial and real assets, such as real estate.

Question 50

A ______ is an executive who develops and carries out a firm's financial plan and decides on the most appropriate sources and uses of funds.

A) Controller
B) Chief Financial Officer
C) Vice President of Financial Planning
D) Treasurer

Question 51

A(n) ______ is a document that specifies the funds a firm will need for a period of time, the timing of inflows and outflows, and the most appropriate sources and uses of funds.

A) asset management plan
B) budget
C) strategic plan
D) financial plan

Question 52

The process that periodically checks actual revenues and expenses against forecast values is ______.

A) asset management
B) budgeting
C) financial control
D) financial planning

Question 53

A company's financial plan should answer all of the following questions EXCEPT ______.

A) what is the contingency plan in case of bankruptcy?
B) what funds will the firm require during the appropriate period of operations?
C) how will it obtain the necessary money?
D) when will it need more cash?

Question 54

Acquisitions are the opposite of mergers, in which companies sell assets such as subsidiaries, product lines, or production facilities.

Question 55

In the typical firm, the ______ is the chief accounting manager.

A) chief financial officer
B) treasurer
C) controller
D) chief executive officer

Question 56

There are two types of divestitures: selloffs and spinoffs. For spinoffs, assets are sold by one firm to another firm.

Question 57

Financial managers try to maximize the wealth of their firm's shareholders by ______.

A) increasing revenue
B) decreasing the uncertainty of gain or loss
C) striking a balance between risk and return
D) increasing the uncertainty of gain or loss

Question 58

The CFO of XYZ Company uses forecast of sales and long-term projection of expenses to determine the expected level of ______ for future periods.

A) profits
B) funds
C) purchases
D) taxes

Question 59

When the buyer makes what is known as a tender offer for the target's shares, it specifies a price and the form of payment.

Question 60

The gain or loss that results from an investment over a specified period of time is known as ______.

A) risk
B) return
C) uncertainty
D) expected value

Question 61

Kaitlyn's company needs to obtain funds in order to keep the business going; however, she does not want stockholders influencing the direction of her company. What type of financing should Kaitlyn acquire?

A) equity capital
B) combination of debt and equity capital
C) angel investor
D) debt capital

Question 62

All of the following are sources of short-term funds EXCEPT ______.

A) trade credit
B) bank loans
C) commercial paper
D) bonds

Question 63

A company would most likely finance ______ using short-term sources.

A) inventory
B) buildings
C) another company
D) machinery

Question 64

Marketable securities are ______.

A) low-risk securities that either have short maturities or can be easily sold in secondary market
B) low-risk securities that either have short maturities or cannot be easily sold in secondary market
C) high-risk securities that have short maturities
D) high-risk securities that can be easily sold in secondary market

Question 65

All of the following actions result in equity capital EXCEPT ______.

A) issuing bonds
B) liquidating assets
C) issuing stock
D) reinvesting earnings

Question 66

Most private placements are ______.

A) Canadian government securities
B) corporate debt issues
C) corporate equity issues
D) municipal debt issues

Question 67

Debt capital consists of ______.

A) funds provided by the firm's owners when they reinvest their earnings
B) funds obtained through borrowing
C) funds provided by the firm's owners when they make additional contributions
D) funds provided by outside investors

Question 68

______ is NOT a source of short-term funding.

A) Trade credit
B) Short-term loans from financial institutions
C) Commercial paper
D) Bonds issued to investors

Question 69

Grace is the financial manager for Manitoba Fabrication and has decided to raise additional funds for the company by raising equity capital. She might do so by ______.

A) establishing a line of credit with a local bank
B) selling marketable securities
C) persuading existing owners to contribute additional funds
D) selling a bond

Question 70

Central Valley Pharmaceuticals needs to raise funds to buy new production equipment. The financial manager would probably suggest that his company raise debt capital by ______.

A) using accumulated earnings
B) selling stock
C) selling marketable securities
D) borrowing money from a bank

Question 71

______ would be the least likely to obtain a private placement.

A) Commercial banks
B) Pension fund managers
C) Small individual investors
D) Life insurance companies

Question 72

Through commercial papers, large amounts of money can be raised at ______. This makes commercial paper an attractive financing option.

A) interest rates that are usually lower than those charged by banks
B) interest rates that are usually higher than those charged by banks
C) interest rates that are usually the same as those charged by banks
D) zero interest rates

Question 73

When a firm receives goods or services from a supplier and agrees to pay for them at a later date, this arrangement is called ______.

A) a short-term loan
B) a repurchase agreement
C) trade credit
D) commercial credit

Question 74

Which of the following assets would a firm most likely finance using long-term sources?

A) inventory
B) accounts receivable
C) marketable securities
D) another company

Question 75

Leverage ______ the return to shareholders and ______ the risk of their investment.

A) lowers; lowers
B) lowers; increases
C) increases; lowers
D) increases; increases

Question 76

Target's Canadian operations failed because ______.

A) the company did not conduct any market research before entering the Canadian market
B) the company had too many employees in the Canadian stores
C) the company did not meet the profit levels expected/estimated before the operations began
D) the company Canadian president was not experienced enough

Question 77

Borrowing money ______.

A) creates leverage
B) increases financial flexibility
C) decreases risk to shareholders
D) decreases expected returns to shareholders due to interest payments

Question 78

Short-term assets are expected to be converted into cash within ______.

A) a week
B) six months
C) a month
D) a year

Question 79

Short-term funds consist of ______.

A) lower risk
B) long-term debt and equity
C) current liabilities
D) less expensive funds compared to long-term funds

Question 80

Mitch raises money from wealthy individuals and institutional investors for a variety of promising new companies. In exchange, he will become part owner of those businesses. Mitch is a(n) ______.

A) underwriter
B) venture capitalist
C) entrepreneur
D) angel investor