Deck 9: Finance: Acquiring Using Funds to Maximize Value

Question 1

The smaller the current ratio, the easier it is for a firm to pay its short­term debts.

Answer 1

False

Question 2

A commitment to meeting social responsibilities eventually results in a decrease in shareholder value.

Answer 2

False

Question 3

The debt­to­asset ratio compares a firm's total liabilities to its total assets and is a way of measuring the degree of financial leverage.

Answer 3

True

Question 4

The risk­return tradeoff suggests that sources and uses of funds that offer the potential for high rates of return tend to be less risky than sources and uses of funds that offer lower returns.

Question 5

The average collection period ratio is computed by dividing accounts payable by the total credit sales for the month.

Question 6

Firms can acquire the financial capital they need through newly­issued stocks or bonds.

Question 7

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

Question 8

Financial managers strategically plan the amount of risk they are willing to take with shareholders' investments to ensure an attractive rate of return. Financial managers refer to this decision as risk­return tradeoff.

Question 9

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 10

Financial managers should focus solely on meeting the financial needs of their firms in the short run, leaving the long­term financial issues to the top management.

Question 11

Historically, the most widely accepted goal of financial management has been to maximize the value of the firm to its owners.

Question 12

Financial capital refers to the funds a firm uses to acquire its assets and fund its operations.

Question 13

Alex needs to acquire financial capital to purchase a printing press for his business. Alex can either acquire the financial capital for the press by borrowing money from a bank or by purchasing the press on credit from his supplier.

Question 14

Financial managers emphasize the goal of maximizing the market price of stock because they have a legal and ethical obligation to make decisions consistent with the financial interests of their firm's owners.

Question 15

Companies with high inventory turns, which replenish inventory levels more frequently, have more cash tied up in inventory, which means that those funds cannot be used elsewhere.

Question 16

Financial ratio analysis involves computing ratios that compare values of key accounts listed on the firm's financial statements, mainly its balance sheet and income statement.

Question 17

Finance is the area of business responsible for finding the best sources of funds and the best ways to use them.

Question 18

The traditional goal of financial management has been to maximize the value of the firm to its owners.

Question 19

When a firm provides its employees with a good work environment, those employees are likely to have better morale and greater loyalty, resulting in higher productivity and lower employee turnover.

Question 20

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

Question 21

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

Question 22

Return­on­equity is a profitability ratio that compares the amount of profit to some measure of resources invested.

Question 23

Since the use of leverage can benefit a firm when times are good, a high degree of leverage is typically considered optimal by firms.

Question 24

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

Question 25

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

Question 26

Trade credit is a credit granted by sellers by providing firms with materials, parts, or finished goods without requiring payment until some period after delivery.

Question 27

The debt­to­asset ratio is calculated by dividing a firm's total liabilities by its total assets.

Question 28

A cash budget typically covers a five­year period and forecasts the types of assets a firm will need to implement its future plans.

Question 29

Jane Ally 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 30

Thomas is ready to launch his catering business, but is in need of start­up financing. The best funding source for Thomas's business would be a bank or other established lenders.

Question 31

The budgeted balance sheet helps financial managers determine the amount of additional financing the firm must arrange to acquire assets that it will need to implement its future plans.

Question 32

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

Question 33

The budgeted income statement uses information from the sales budget and various cost budgets to develop a forecast of net income for the planning period.

Question 34

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

Question 35

Pro forma financial statements provide a framework for analyzing the impact of the firm's plans on the financing needs of the company.

Question 36

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

Question 37

Return­on­equity is a profitability ratio that is computed by dividing net income by total owner's equity.

Question 38

Companies with rapidly growing sales do not experience cash flow problems.

Question 39

Higher the debt ratio, the greater the firm's reliance on debt.

Question 40

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 long­term financing needs.

Question 41

Covenants are terms included in long­term loan agreements that are intended to protect borrowers from unfair restrictions imposed by lenders.

Question 42

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

Question 43

The value in a firm's cash account is always the same as the amount listed as the firm's retained earnings.

Question 44

Spontaneous financing is granted when a firm places its orders without the need for special arrangements.

Question 45

Retained earnings are the profits a firm reinvests and are often a major source of long­term funds.

Question 46

Commercial paper is a short­term, usually unsecured promissory note issued by firms with strong credit ratings.

Question 47

Lentz­Tucker Inc. reported a net income of $3 million but paid no dividends to its shareholders. The shareholders should sue the company for failure to provide a return on their equity investment.

Question 48

Historically, commercial paper issued by corporations has been unsecured­ meaning it is not backed by a pledge of collateral.

Question 49

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 based on the unused funds.

Question 50

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

Question 51

A disadvantage of debt financing is that it requires the firm to make fixed payments.

Question 52

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 53

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 financial incentive to pay this bill earlier than its due date.

Question 54

In a revolving credit agreement, the commitment fee on funds not borrowed is lower than the interest on the borrowed funds.

Question 55

One advantage of using factors as a source of short­term financing is that the firm is able to save money by eliminating its own collection department.

Question 56

Interest payments on a firm's debt are a tax­deductible expense.

Question 57

In the context of the sources of financing, a factor is a company that provides long­term financing to firms by purchasing the firm's bonds and other long­ term securities at a discount.

Question 58

A corporation can raise additional equity financing by taking out long­term loans from a bank.

Question 59

Cathy purchased several corporate bonds from a large corporation five years ago. She decides to sell those bonds to raise funds to start a business. Since the bonds have a maturity date that is 10 years from the date of purchase, Cathy will not be able to sell her bonds to other investors.

Question 60

A line of credit is a financial arrangement between a firm and a bank in which the bank pre­approves credit up to a specified limit, provided that the firm maintains an acceptable credit rating.

Question 61

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

Question 62

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 63

Money market mutual funds are a way for small investors to get into the market for securities.

Question 64

Leverage increases the return on the stockholder's investments when times are good, but it also reduces the financial return to stockholders when times are bad.

Question 65

Long­term 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 66

Accounts receivable represents what customers who buy on credit owe the firm.

Question 67

Inventories include stocks of finished goods, work­in­process, parts, and materials that firms hold as part of doing business.

Question 68

Omni Shades and Raindew are two very similar businesses in all aspects except that Omni Shades relies mainly on equity financing, while Raindew relies heavily on debt financing. This year both firms have enjoyed strong growth in net income. This is likely to result in a higher return on equity for Omni Shades than for Raindew.

Question 69

Money market mutual funds often include large holdings of commercial paper and T­bills.

Question 70

Violet Shades Corporation is considering financing some fixed assets through additional long­term debt. One disadvantage of this approach is that it requires the firm to make fixed payments that could create cash flow problems if the firm's earnings are lower than expected.

Question 71

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

Question 72

The Financial Stability Oversight Council was established by the Dodd­Frank Act to monitor financial markets and reduce the likelihood of future financial meltdowns.

Question 73

Deleveraging is a strategy that involves replacing much of the debt in a firm's capital structure with more equity.

Question 74

Treasury bills and commercial paper are both considered to be cash equivalents and are normally included in the cash holdings on a firm's balance sheet.

Question 75

A disadvantage of debt financing is that creditors often impose covenants on the borrower.

Question 76

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 may also result in loss of sales.

Question 77

While keeping inventories as low as possible tends to reduce cost and improve efficiency, it also leaves a firm vulnerable to supply disruptions.

Question 78

U.S. Treasury Bills are safe and highly liquid assets issued by the U.S. federal government.

Question 79

Equity financing yields the same tax benefits for a company that debt financing yields.

Question 80

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