Chapter 16: Financial Management and Securities Markets
The FDIC insures personal bank accounts up to a maximum of
$250,000
What are the two Common Sources for Long-Term Funds
- Attracting new owners (equity financing) - Long-term liabilities (debt financing)
Which four are considered nonbank financial institutions?
- Brokerage firms - Insurance companies - Pension funds - Finance companies
What are three characteristics of a certificate of deposit?
- Covers periods such as six months, one year, or seven years - Substantial penalty for premature withdrawal - Type of savings account
Managing Current Assets: Optimizing inventory
- Financial managers coordinate inventory purchases to manage cash flows - Optimal inventory levels determined mainly by method of production - Excess inventory ties up money unnecessarily vs. inventory shortages could drive customers to competitor
Managing Current Assets: Managing accounts receivable
- Important because many businesses make majority of sales on credit - Discounts for early payment come at cost of lowered profits - Credit ratings provided by credit bureaus, credit-rating agencies, and industry trade groups
What are three important functions of money?
- Measure of value - Medium of exchange - Store of value
What are three characteristics of credit unions?
- Members are allowed to vote for directors. - They are considered financial institutions. - Members are allowed to share in the credit union's profits.
What are three descriptors of "the Fed"?
- Organized into 12 regions - Regulates the U.S. financial industry - Established in 1913
Which two statements are true about commercial banks?
- Their main source of funds comes from checking and savings accounts - They are the largest of all financial institutions
what is included when monitoring the working capital accounts?
- accounts receivable - cash reserves - inventory - accounts payable
What is focused when: develope and implement a financial plan?
- amount of funds - sources of funds - uses of funds
what is focused when: manage cash reserves?
- cash coming in - cash going out - investment options
what is included in external sources?
- credit cards - trade credit - secured loans - unsecured loans - commercial paper - factoring - leases - corporate bonds - equity
what are the six Qualitative Assessment of Capital Budgeting Risk?
- introduce a new product in foreign markets (risk depends on stability of country) - expand into a new market - introduce a new product in a familiar area - add to a product line - buy new equipment for an established market - repair old machinery
what are the five ways of investing idle cash?
- marketable securities - treasury bills (T-bills) - commercial certificates of deposit (CDs) - commercial paper - eurodollar market
what is focused when: monitor cash flow?
- receivables and payables - inventory - cash
what is included in internal sources?
- revenue from sales - investment income - revenue from selling assets
What are the three major sections of understanding financial management?
1. develop and implement a financial plan 2. monitor cash flow 3. manage cash reserves
_____ is likely the most important characteristic of money. If businesses do not take money as payment, consumers will have to find another means of paying for purchases.
Acceptability
Securities trade in the secondary market by _____.
Brokers
If Joe, the owner of Joe's Flowers, has a large stash of cash, he might choose to store the money in a(n) _____ for six months, one year, or even seven years and receive a predetermined rate of interest.
CD
Which banking institution is the largest and oldest of all financial institutions and relies mainly on checking and savings accounts as its major source of funds?
Commercial bank
Extending credit
Credit ratings provided by credit bureaus, credit-rating agencies, and industry trade groups
Banks are able to accomplish "paperless" transactions through the use of
EFTs
What is considered to be one of the most important facets of financial management?
Ensuring that there are sufficient (but not excessive) funds on hand to meet the company's obligations
The _____ was established in 1933 and insures individual bank accounts for Americans.
FDIC
Which nonbank financial service is most closely associated with the use of premiums?
Insurance companies
Floating-rate bonds
Interest rates change with current interest rates
Marketable securities
Investment in U.S. Treasury bills, certificates of deposit, commercial paper, or eurodollar deposits
working capital management
Managing short-term assets and liabilities
Eurodollar market
Market for trading U.S. dollars in foreign countries
Which tool, used by the Federal Reserve Board to control the money supply, is the most common and is performed almost daily?
Open market operations
Pricing Long-Term Money
Returns from any project must cover operating costs and cost of capital used to finance the project.
Who owns and controls a credit union?
The credit union's depositors
accounts receivable
The total amount of money owed to a business, but not ye received
What is the primary purpose of money in a society?
To enable a person or organization to transform a desire into an action
Open market operations consist of the buying and selling of ______.
U.S. Treasury bills
financial plan
a document that outlines the funds a firm will need for a certain period of time, along with the sources and intended uses of those funds.
factor
a finance company to which businesses sell their accounts receivable—usually for a percentage of the total face value
The fee that an insurance company charges for coverage is known as _____.
a premium
Serial bonds
a sequence of small bond issues of progressively longer maturity
Junk bonds
a special type of high interest rate bond that carries higher inherent risks.
If people do not trust the value of a nation's money, companies will not use it as payment for goods and services. This describes the _____ characteristic of money.
acceptability
working capital accounts
accounts receivable, accounts payable, inventory, and cash
An EFT would be accomplished by using
an ATM
lockbox
an address, usually a commercial bank, at which a company receives payments in order to speed collections from customers.
line of credit
an arrangement by which a bank agrees to lend a specified amount of money to the organization upon request.
Current ___ are short-term resources such as cash, investments, accounts receivable, and inventory. (Enter one word in the blank)
assets
Secured bonds
bonds that are backed by specific collateral that must be forfeited in the event that the issuing firm defaults.
transaction balances
cash kept on hand by a firm to pay normal daily expenses, such as employee wages and bills for supplies and utilities.
cash reserves
cash or cash equivalents - readily available under a company's control (can be converted into cash quickly)
Commercial certificates of deposit (CDs)
certificates of deposit issued by commercial banks and brokerage companies, available in minimum amounts of $100,000, which may be traded prior to maturity
In a credit union, a share draft account is the name given to a _____.
checking account
Trade credit
credit extended by suppliers for the purchase of their goods and services.
trade credit
credit extended by suppliers for the purchase of their goods and services.
Unsecured bonds
debentures or bonds that are not backed by collateral.
bonds
debt instruments that larger companies sell to raise long-term funds.
Long-term liabilities
debts that will be repaid over a number of years, such as long-term bank loans and bond issues.
A checking account is also called a(n) _____.
demand deposit
The reserve requirement is the percentage of ______.
deposits that must be kept in reserve by banking institutions
Nonbanks are financial organizations that _____.
do not accept deposits.
Retained earnings
earnings after expenses and taxes that are reinvested in the assets of the firm and belong to the owners in the form of equity.
inventory
economic value that can be converted to cash
strategic plan:
establishes goals, objectives, priorities
The study of money: how it's managed by individuals, companies, and governments is known as ___
finance
Financial management involves:
finding suitable sources of funds and deciding on the most appropriate uses for those funds.
A demand deposit (also known as a checking account) is referred to as such because ______.
funds may be withdrawn by its owner without advance notice
liquidity crisis
having insufficient cash to meet their short-term needs
operating budget:
identifies cash requirements and spending for current time period
start-up budget:
identifies finds and spending needed to launch the company
financial plan:
identifies he amounts and types of capital needed to accomplish hose goals and objectives
budgets:
identify where and when money will be spent
What are the two sources of funds?
internal and external sources
secured loans
loans backed by collateral the bank can claim if the borrowers do not replay them.
Unsecured loans
loans backed only by the borrowers' good reputation and previous credit rating.
Nonbank Liabilities
loans from other financial institutions taxes/ wages
capital lease
long-term contract and shows up on balance sheet as asset and liability
The Fed controls the amount of money available in the U.S. economy through _____.
monetary policy
Anything that can be used for payment of goods and services is defined as ______.
money
accounts payable
money owed by a company to its creditors.
Accounts receivable
money owed to the firm by its customers, while accounts payable are bills that the company owes to its suppliers, lenders, and other parties.
___ funds pool the dollars of individual investors and invests them into a large number of well-diversified securities.
mutual
Which type of investment tool should Carrie use if she wants to pool her small investment of $1,000 with other people who also have a small investment?
mutual fund
project budgets:
plan funding and spending for specific projects
capital budgets:
plan funding for major capital investments
Long-term (fixed) assets
production facilities (plants), offices, and equipment, heavy machinery, furniture, automobiles—all of which are expected to last for many years.
Economic Order Quantity (EOQ)
quantity of materials that results in the lowest ordering and storage costs.
Operating lease
short-term cancelable lease and does not show up on balance sheet
Treasury bills (T-bills)
short-term debt obligations the U.S. government sells to raise money - considered risk-free
The organization in charge of regulating the banking and financial industry in the United States is ______.
the Federal Reserve Board
prime rate
the interest rate that commercial banks charge their best customers (usually large corporations) for short-term loans.
Capital budgeting
the process of analyzing the needs of the business and selecting the assets that will maximize its value.
Finance is defined as ______.
the study of how money is managed by individuals, companies, and governments
What is an example of a P2P electronic payment tool?
venmo
The management of short-term assets and liabilities, which are continually flowing through an organization is referred to as ______ management.
working capital
commercial paper
written promise from one company to another to pay a specific amount of money.