Chapter 10 Business 101- Financial management

corporate bonds

A form of debt in which the borrowing firm agrees to pay the purchaser of the bond (i.e., the lender) a specified amount of money according to some specified schedule of payments (or a single payment) in the future.

secured loans

A loan in which the borrower pledges some asset (e.g. a car or property) as collateral for the loan, which then becomes a secured debt owed to the creditor who gives the loan.

unsecured loans

A loan that is issued and supported only by the borrower's creditworthiness, rather than by any type of collateral.

budgets

A roadmap to guide the activities of the firm.

interest

An amount of money, usually a percentage of the principle amount borrowed, that is paid to the lender as compensation for providing the funds.

Which of the following statements best describes the shareholder wealth maximization approach to financial management decisions? Financial managers should always make decisions that: ocus on maximizing the short-term profitability of the firm Are in the best interests of the shareholders and/or owners of the firm Favor riskier projects because they offer the possibility of higher returns Focus on minimizing production costs

Are in the best interests of the shareholders and/or owners of the firm

control

Compare how the firm is performing relative to its plan

master budget

Creates a unifying financial plan over a given time horizon

Andy Martinez is the CFO of Horizon Construction Company, He is weighing the advantages and disadvantages of raising funds via debt or equity. Which of the following is a true statement? Debt will need to be paid back, but equity investments do not need to be repaid. Retained earnings cannot be considered a source of additional funds. Dividend payments associated with equity financing are tax deductible. Additional debt can dilute existing investors' ownership in the company.

Debt will need to be paid back, but equity investments do not need to be repaid.

budget

Demonstrate how the firm plans to allocate its financial assets in order to achieve its goals and objectives

The following statements are consistent with the risk-return trade-off concept in finance:

Financial decision-makers will require higher rates of return on more risky investments. Individuals prefer more certain financial earnings rather than less certain outcomes, all other things held constant. Lenders will accept a lower rate of return when making low-risk loans.

cash flow not profits

Financial managers recognize that "cash pays the bills, not profits." While a given transaction may generate positive profits, the timing of cash inflows and outflows may be such that the bills need to be paid before the sales revenue has been collected from customers.

Which of the following would NOT be a use of working capital for Valley Lawnmower Parts, inc.? Financing bi-monthly payroll obligations Financing a purchase of lawnmower parts for their inventory Providing trade credit to their customers Financing construction of a new warehouse and sales center

Financing construction of a new warehouse and sales center

capital budget

Focused on long-term assets and high-dollar expenditures

operating budget

Focused on relatively short-term sales forecasts and associated expenses

cash flow budget

Focused on the plan to cover any shortfalls in the cash accounts or identify times of surplus in those accounts

The three sequential steps of the financial planning process are (in order):

Forecast, Budget, Control

venture capital

Funds from wealthy investors in exchange for some percentage of ownership in the company.

letters of credit

Guarantees that banks issue on behalf of the customer wherein if the buyer doesn't pay on time, the bank will pay and then collect from the buyer.

forecast

Identify the firm's short and long-term cashflow needs

collateral

If a borrower does not repay a secured loans, the collateral may be seized and sold by the lender to pay off the debt.

Risk-return trade-off

Individuals prefer more certain financial earnings than less certain outcomes. Therefore, investors and lenders usually demand higher earnings or a higher interest rate to be compensated for incurring additional risk.

time value of money

Individuals usually prefer to have good things sooner and prefer to put off bad things until later.

Which of the following are examples of secured loans? No assets pledged as collateral Most credit card loans Granted only if lender is very confident that the borrower will be able to repay Most car loans Provides a back-up means of payment for lender Assets pledged as collateral

Most car loans Provides a back-up means of payment for lender Assets pledged as collateral

Which of the following statements are applicable to debt financing? Dividend payments are not tax deductible Ownership control is not given up Do not have to repay the funds if the firm is not profitable Ownership stake is diluted as new funds are acquired Funds must be repaid, even if the firm is not profitable Interest payments are tax deductible

Ownership control is not given up Funds must be repaid, even if the firm is not profitable Interest payments are tax deductible

In order to improve short-term cash flow in their firm, the CFO of David's Dustcover Depot would want to do which of the following (select all that apply): Collect accounts receivable later Pay accounts payable later Pay accounts receivable sooner Pay off long-term debt early Collect accounts receivable sooner

Pay accounts payable later Collect accounts receivable sooner

Which of the following would NOT be a strategy for improving short-term cash flow in a firm? Paying expenses as soon as invoices arrive in the mail Finding ways to save money on the materials your firm uses to produce its product Encouraging customers to pay on time or early Delaying the payment of the firm's bills as long as possible

Paying expenses as soon as invoices arrive in the mail

stock

Provides the investor an ownership stake in the company.

Which of the following are forms of equity financing? Factoring Commercial paper Retained earnings Corporate bonds Venture capital

Retained earnings Venture capital

factoring

Selling their accounts receivables to a specialized lender (at a discount) that is then responsible for collecting on those accounts.

commercial paper

Short-term, unsecured promissory notes that are issued in demonstrations in excess of $100,000.

Which of the following statements are TRUE for a CFO or CEO adhering to the shareholder wealth maximization approach to financial decision making? The financial manager must make the most efficient use of the firm's resources. The firm does not need to be concerned with its environmental impact. Financial decisions should be focused primarily on increasing short-term profits. The firm needs to be concerned with the safety of its products.

The financial manager must make the most efficient use of the firm's resources The firm needs to be concerned with the safety of its products.

principal

The initial amount they borrowed, and some amount of interest. Obligated back

dividends

The owners of stock can also earn a return if the firm decides (at their option) to disburse earnings.

Diversification

The probability of one thing going wrong on any one day is higher than the probability of everything going wrong on that day.

retained earnings

The profits that are owed to the owners of the company, but instead of returning the profits directly to the owners, it is reinvested into the company for projects such as building a new store or expanding warehouse capabilities.

valuation of assets

The value of an asset in an organization is its ability to generate positive cash flow over time.

Shareholder wealth maximization (SWM)

Understand that investors purchase a stock to see its value increase as much as possible.

not sure

acquisition of a firm's assets is funded by either liabilities (debt) payable to non-owners of the firm or by the equity of the firm's owners.

once firms have identified their potential short and long term financial needs they prepare

budgets

Haley Martin was preparing a budget related to expected purchases of long-term assets (such as manufacturing equipment and warehouse facilities) for her employer. She was most likely working on a ______ budget.

capital

Sources of equity financing include all of the following EXCEPT: Issuing new shares of stock Venture capital Retained earnings Commercial paper

commercial paper

financial managers also establish and administer ____ to compare how the firms is performing relative to the budget plan

controls

the financial management function in business is often referred to as

corporate finance

primary sources of funds include ___ and ___

debt and equity

successful financial managers not only avoid cash flow crisis, but also

ensure that they manage the timing and use of their working capita in the most efficient manner

Which of the following is NOT one of the three steps of the financial planning process? Evaluation Budget Forecast Control

evaluation

financial professionals typically find themselves employed in one of three broad areas of the field:

financial management, financial institutions, or the investments and securities markets

three steps of the planning process

forecast, budget, control

Ceteris paribus, individuals expect that more risky or uncertain investment opportunities are associated with _____ rates of return.

high

the planning process illustrates

how integrates all of the functional areas of a business enterprise are and in particular how involved the CFO is in the overall strategic decisions made by the firm

If lenders require borrowers to pledge assets as collateral as part of a loan agreement, they are offering a ______ loan.

secured

CFO

senior position within the organizational structure that usually reports directly to the CEO. The responsibilities of financial management fall to the CFO

firms need funds to support both their ______ operating needs and ____ capital needs

short term and long term

trade credit is a primary source of _____ financial capital

short-term

the budget reflects

the financial manager's solutions to any predicted cash flow shortfalls that were identified during the forecasting process

working capital

the funds that firms use to meet their day to day operational cash flows and needs

why are the management of financial resources so central to the success or failure of firms?

trade-offs are everywhere

trade credit

when a seller allows the purchaser to pay for the product at some point in the near future yet take delivery of the product or service immediately

Funds used by a firm to conduct day-to-day operational cash flow needs are known as:

working capital