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Intro to Business Chapter 16

Financial management
All the activities concerned with obtaining money and using it effectively
Financial management must inshore that…
#1 financing priorities are established in line with organizational goals and objectives’s
#2 spending is planned and controlled
#3 sufficient financing is available when it is needed, both now and in the future
#4 a firms credit customers pay their bills on time and the number of past due accounts is reduced
#5 bills are paid promptly to protect the firms credit rating and it’s ability to borrow money
#6 the funds required for paying the firm’s taxes are available when needed to meet tax deadlines
#7 excess cash is invested in certificates of deposit, government securities, or conservative, marketable securities
Chief financial officer (CFO)
A high-level corporate executive who manages a firm’s finances and reports directly to the company’s chief executive officer or president
Short-term financing
Money that will be used for one year or less
Cash flow
The movement of money into and out of an organization
Short-term financing these
#1 cash-flow problems
#2 speculative production
#3 current inventory
#4 monthly expenses
#5 short-term promotional needs
#6 unexpected emergencies
Long-term financing needs
#1 business-start-up costs
#2 mergers and acquisition’s
#3 new product development
#4 long-term marketing activities
#5 replacement of equipment
#6 expansion of facilities
Speculative production
The time lag between the actual production of goods and when the goods are sold
Long-term financing
Money that will be used for longer than one year
D
Which of the following is NOT a type of bond;
A. Debenture bond
B. Mortgage Bond
C. Convertible bond
D. Bond indenture
A
The three ways a corporation can gain by issuing convertible bonds include all but which of the following;
A. Convertible bonds stimulate the economy
B. Convertibles usually carry a lower interest-rate than convertible bonds
C. The conversion feature attract investors who are interested in the speculative game that conversion to common stock may provide
D. If the bondholder converts to common stock, the corporation no longer has to redeem the bond at maturity
D
The risk-return ratio is based on the principle that;
A. A risk is only as good as the economic forecasting available
B. Risky decisions result in risky financial planning
C. Low risk decisions should generate higher financial returns
D. High-risk decisions should generate higher financial returns
E. High risk decisions should generate lower financial returns
B
To ensure that sufficient funds are available when needed in order to redeem bonds, the firm can issue bonds that mature on different dates. Which type of bonds would be the best to issue?
A. Debenture
B. Serial
C. Registered
D. Convertible
E. Corporate
E
Equity capital is obtained from
A. Insurance companies
B. Credit unions
C. Bondholders
D. Banks
E. Stockholders
D
The interest rates and repayment terms for term loans are based on which factor?
A. Borrowing firms credit rating
B. Reasons for borrowing
C. Available working capital
D. All of these factors are considered
E. Value of the collateral
B
The steps in effective financial planning are, in order,
A. Identifying financial resources, budgeting, and establishing goals
B. Establishing objectives, budgeting, and identifying sources of funds
C. Establishing goals, setting objectives, and working the plan
D. Established objectives, identifying sources, and budgeting
E. Developing plans, monitoring plans, and evaluating the results
Risk-return ratio
A ratio based on the principle that a high-risk decision should generate higher financial returns for a business and more conservative decisions often generate lower returns
Financial plan
A plan for obtaining and using the money needed to implement an organizations goals and objectives
Budget
A financial statement that projects income, expenditures, or both over a specified for future period
Cash budget
If financial statement that estimates cash receipts and cash expenditures over a specified period
Zero-based budgeting
A budgeting approach in which every expense in every budget must be justified
Capital budget
A financial statement that estimates a firms expenditures for major assets and it’s long-term financing needs
Equity capital
Money received from the owners or from the sale of shares of ownership in a business
Debt capital
Borrowed money obtained through loans of various types
Certificate of deposit (CD)
A document stating that the bank will pay the depositor a guaranteed interest rate on money left on deposit for a specified period of time
Check
A written order for a bank or other financial institution to pay a stated dollar amount to the business or person indicated on the face of the check
Line of credit
A loan that is approved before the money is actually needed
Revolving credit agreement
Guaranteed line of credit
Collateral
Real estate or property pledged as security for a loan
Debit card
A card that electronically subtract the amount of the customers purchase from his or her bank account at the moment the purchase is made
Electronic funds transfer (EFT) system
A means of performing financial transactions through a computer terminal
Letter of credit
A legal document issued by a bank or other financial institution guaranteeing to pay a seller a stated amount for a specified period of time
Bankers acceptance
A written order for a bank to pay a third-party a stated amount of money on a specific state
B
Cash flow can be defined as the amount of accounts payable and accounts receivable on a firm
A. True
B. False
B
Financial experts believe that it will be easier for business firms to raise capital in the future
A. True
B. Falsr
A
One important aspect of a goal is that it must be reasonable and realistic
A. True
B. False
B
A budget projects future expenditures, it does not project income
A. True
B. False
B
A cash budget always estimates cash receipts and cash expenditures over a one year.
A. True
B. False
B
For a soul proprietorship, equity capital comes from the sale of shares of ownership in the company
A. True
B. False
B
Profits not distributed to stockholders is called financial leverage
A. True
B. False
B
A trustee is an individual or independent firm that acts as the stock owners representative
A. True
B. False
A
The maturity of a bond is the date when the corporation is to repay the borrowed money
A. True
B. False
Unsecured financing
Financing that is not backed by collateral
Trade credit
A type of short-term financing extended by a seller who does not require immediate payment after delivery of merchandise
Promissory note
A written pledge by a borrower to pay a certain sum of money to a creditor at a specified future date
Prime interest rates
The lowest rate charged by a bank for a short-term loan
Commercial paper
A short-term promissory note issued by a large corporation
Factor
A firm that specializes in buying other firms accounts receivable
Initial public offering (IPO)
Occurs when a corporation sells common stock to the general public for the first time
Primary market
A market in which an investor purchases financial securities (via an investment bank) directly from the issuer of those securities
(Think of this as brand new shares of stock)
Investment banking firm
An organization that assists corporations in raising funds, usually by helping to sell new issues of stocks, bonds or other financial securities
Secondary market
A market for existing financial securities that are traded between investors
(Think of this as the initial buyer of stock sells to another person)
Securities exchange
A market place where member brokers meet to buy and sell securities
Over-the-counter (OTC) market
A network of dealers who buy and sell the stocks of corporations that are not listed on the securities exchange the crash site
Common stock
A stock whose owners may vote on corporate matters but his claims on profits and assets are subordinate to the claims of others (think of this as they are the last in line to get any money if company goes under)
Preferred stock
Stock whose owners usually do not have voting rights but whose claims on dividends and assets are paid before those of common-stock owners
Retained earnings
The portion of a corporations profits not distributed to stockholders are you
Private placement
Occurs when stock and other corporate securities are sold directly to insurance companies, pension funds, or large institutional investors
A
Debt capital is borrowed money
A. True
B. False
B
Which of the following is not usually a short-term financing need?
A. Inventory needs
B. New product development
C. Speculative production
D. Cash-flow problems
E. Unexpected emergencies
B
A goal is an end result that an organization expects to achieve over a long-term, possibly up to 20-year.
A. True
B. False
B
A CFO position in the company is usually a mid-management status
A. True
B. False
A
Short-term debt financing is usually easier to obtain then long-term financing
A. True
B. False
B
Zero-based budgeting requires that only new expenses be justified
A. True
B. False
B
Common stock and preferred stock or types of debt financing
A. True
B. False
B
During a recent economic crisis, many corporations were able to borrow more money than usual
A. True
B. False
B
An IPO can only happen two times for the same company
A. True
B. False
A
The corporation can acquire equity financing through the sale of stock or the use of profits not distributed to owners
A. True
B. False
A
For businesses, recent new regulations could increase the time and cost of obtaining both short-and long-term financing
A. True
B. False
Financial leverage
The use of borrowed funds to increase the return on owners equity
Term-loan agreement
A promissory note that requires a borrower to repay a loan in monthly, quarterly, semi annual, or annual installments
Corporate bond
A corporations written pledge that it will repay a specified amount of money with interest
Maturity date
The date on which a corporation is to repay borrowed money
Registered bond
A bond registered in the owners name by the issuing company
Debenture bond
A bond back only by the reputation of the issuing corporation
Mortgage bond
A corporate bond secured by various assets of the issuing firm
Convertible bond
A bond that can be exchanged, at the owners option, for a specified number of shares of the corporation’s common stock
Bond indenture
A legal document that details all the conditions relating to a bond issue
Serial bonds
Bonds of a single issue that mature on different dates
Sinking fund
A sum of money to which deposits are made each year for the purpose of redeeming a bond issue
Trustee
An individual or independent firm that acts as a bond owners representatives
A
Long-term financing is generally used to open new businesses
A. True
B. False
B
A budget is a historical record of the previous years financial activities
A. True
B. False
B
When you use a debit card to make a purchase, a financial institution is extending credit to you and expect to be paid in the future
A. True
B. False
B
With a banker’s acceptance, certain conditions, such as delivery of the merchandise, may be specified before payment is made
A. true
B. False
A
Most lenders do not require collateral for short-term financing
A. True
B. False
A
A revolving credit agreement is it guaranteed line of credit
A. True
B. False
A
Factoring of accounts receivable typically is the highest cost method of short-term financing
A. True
B. False
A
Normally, the usual repayment period For a long-term loan is 3 to 7 years
A. True
B. False
B
The usual face value for most corporate bonds is $5000
A. True
B. False
B
The capital budget estimates of firms expenditures for labor costs and other monthly expenses
A. True
B. False
A
A written order for a bank or other financial institution to pay is stated dollar amount to a specified business or person is call day
A. Check
B. Deposit
C. Notes receivable
D. Receipt
E. Debt memorandum
B
Judy owner of Judy’s fashions received a $12,000 tax refund. She deposited the money in Chase bank. The terms of the agreement are that she must leave the money on deposit for three years in the bank will pay her 1% interest her account is a
A. Line of credit
B. Certificate of deposit
C. Checking account
D. Commercial paper agreement
E. Savings account
E
Any invoice in the amount of $200 carries cash terms of “2/10, net 30”. If the buyer takes advantage of the discount terms, how much will the buyer pay?
A. $100
B. $120
C. $140
D. $160
A. $196
A
When a firm sells its accounts receivable to raise short – term cash, it is engaged in a strategy called
A. Factoring
B. Financial planning
C. Equity financing
D. Debt financing
E. Drafting
D
Retained earnings, as a form of equity financing, are
A. Gross earnings
B. Profits before taxes
C. Profits after taxes
D. Undistributed profits
A. Total owners equity
E
Since prices are extremely low, and pipeline supply company wants to purchase a special line of pipes from a company going out of business. Pipeline, however will need to borrow money to make this deal. Which assets will pipeline most commonly pledged as collateral for the short-term loan?
A. Delivery equipment
B. Notes payable
C. Manufacturing equipment
D. Owners equity
E. Inventory
B
The most basic form of corporate ownership that has voting rights is
A. Preferred stock
B. Common stock
C. Retained stock
D. Deferred value stock
E. Treasury stock
C
A short-term promissory note issued by large corporations is known as
A. Debenture agreement
B. Equity agreement
C. Commercial paper
D. Draft agreement
E. Loan commitment
E
Each of the following causes a cash flow problem except
A. Embezzlement of company funds
B. An unexpected slow selling season
C. A large number of credit sales
D. Slow-paying customers
E. Customers who pay on time
D
The primary sources of funds available to a business include all of the following except
A. Debt capital
B. Equity capital
C. Sales revenue
D. Government grants
D. Sale of assets

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