Chapter 18

Capital structure is ___________.

A firm's mix of debt and equity financing

__________ can be exchanged at the investor's option for a certain number of shares of the corporation's common stock.

Convertible bonds

Which of the following is a source of long-term debt financing?

Corporate bond

Which of the following is a source of long-term debt financing?

Corporate bonds.

Private equity refers to ________.

Ownership assets that aren't publicly traded

Doron is a manufacturer of plastic products. The company produces utensils and gift items. Which of the following would appear as accounts payable in the company's balance sheet.

A bill that one of the suppliers has sent for a purchase.

Which of the following sources of short-term debt is characterized by revolving credit terms?

Credit card

Short-term financing is used to cover _______ of a business.

Current expenses

Short-term financing is used to cover ________ of a business.

Current expenses

Shareholders of a firm have prior claims on the firm's assets

False

Which of the following is a major advantage of raising funds through selling shares of ownership?

It has tremendous potential to fuel organizational growth.

_____ is the technique of increasing the rate of return on an investment by financing it with borrowed funds.

Leverage

Prime interest rate is the ________.

Lowest rate of interest that banks charge for short-term loans.

Short-term financing is financing that will typically be repaid within __________.

One year

__________ budget identifies all sources of revenue and coordinates the spending of those funds throughout the coming year. It is also known as the master budget.

Operating

Private equity refers to __________.

Ownership assets that aren't publicly traded.

__________ budget identifies the money a new company will need to spend to launch operations.

Start- up

Burn rate is a major concern when preparing a(n) _________ budget.

Start-up

Boston Ceramics is a manufacturer of semiconductors. The company produces such parts as ceramic machine components. The company wants to raise $ 15 million to launch operations in a new country. The company decides to fund the launch entirely by using debt financing. Which of the following observations, if true, would most strengthen this financing decision?

Tax rates are high in the new market and the company wants to minimize taxable income.

Cost of capital is the average rate of interest a firm pays on its combination of debt and equity.

True

Equity financing refers to arranging funding by selling ownership shares in the company.

True

Lease is an agreement to use an asset in exchange for a regular payment.

True

_________ is a specialized type of bank that buys the shares from the company preparing an IPO and sells them to investors.

Underwriter

__________ are unsecured bonds, backed only by the corporation's promise to pay.

Debentures

___________ is an agreement in which a financial institution makes money available for use at any time after the loan has been approved.

Line of credit

Frost Bank lends $500,000 to Arbex Manufacturer. Arbex agreed to pay this amount back in fifty equal installments over a period of ten years. This is an example of a __________.

Long-term loan

Term bonds are bonds that ________.

Mature all at the same time

Which of the following is a disadvantage of long-term loans?

Not all companies can qualify for loans and acceptable terms.

_________ budget identifies the costs needed to accomplish a particular assignment.

Project

When using ________, a company starts the year with a budget based on revenue and cost assumptions made at that point but then reviews economic performance every month or every quarter to see whether the budget needs to be modified as the year progresses.

Rolling forecasts

Which of the following is an internal source for obtaining funds for business?

Selling assets to obtain revenue

Equity financing refers to arranging funding by _________.

Selling shares of ownership

Equity financing refers to arranging funding by _________.

Selling shares ownership

A _______ is a planning and control tool that reflects expected revenues, operating expenses, and cash receipts and outlays.

Budget

Refers to the rate at which the company is using up the funds from its initial investors.

Burn rate

Hedging refers to forming contracts that allow a company to ___________.

Buy supplies in the future at designated prices

Hedging refers to forming contracts that allow a company to ________.

Buy supplies in the future at designated prices.

With most bond issues, a corporation retains the right to pay off the bonds before maturity. Such bonds are called ___________.

Callable. (or redeemable bonds)

Forter Consultants is a firm that provides cloud computing and remote storage services to firms in the US. The company plans to buy more servers to increase its operating and storing capacity. It also creates a budget for the purchase and it estimates the total cost to be about $3 million. The budget created for this transaction is an example of a(n) _______ budget.

Capital. Outlines expenditures for real estate, new facilities, major equipment and other capital investments.

Refers to short-term promissory notes, or contractual agreements, to repay a borrowed amount by a specified time with a specified interest rate.

Commercial paper

USS Agro is a firm that markets agricultural products. The firm procures supplies from agricultural cooperatives across the world. The firm forms agreements with the cooperatives to provide supplies at a fixed price in the future to protect them against changing prices. This is an example of _________.

Hedging

Preparing a public offering involves _______.

Hiring a public accounting firm to serve as auditor

Which of the following is a component of a firm's working capital account?

Inventory

Which of the following is the best example of an external source for obtaining funds for business?

Issuing corporate bonds.

Which of the following statements is true of a company's inventory?

It has the potential to be converted to cash.

Roder Industries is a multinational production firm. Invo Bank is the firm's major financier in the United States. The bank offers short-term loans to Roder at a very low rate and the bank considers Roder to be its best customer. The interest rate the Invo bank charges on these short-term loans are called ________ interest rates.

Prime

4Learning is a firm that sells learning solutions to customers. The company identifies the training needs of organization and designs flash-based online training programs for them. The company has recently received an order to create product training platforms for an electronic manufacturer. The company creates a budgets specifically for this order to determine the pricing of the project. This budget is an example of a _________ budget.

Project

Duromart is an American multinational retailer corporation that runs chains of large discount department stores and warehouse stores. Which of the following actions of Duromart is an example of availing short-term credit?

The company opens a trade credit account with a major bank.

Accounts receivable refers to _______.

The money owed to a firm by its customers

A financial plan outlines the funds needed for a certain period of time.

True

Accounts receivable refers to the money owed to a firm by its customers.

True

A company keeps $150,000 cash revenue to meet day-to-day expenses. The cash reserve is centralized and various branches can access money from the reserve to meet every-day expenses. This cash reserve is part of the company's _________ account.

Working capital

_________ accounts represent a firm's cash on band as well as economic value that can be converted to cash or is expected from customers, minus what it is scheduled to pay out.

Working captial

Gordon Glass is a large manufacturer of glass products. The company's product range includes glass vessels, car glasses, mirrors and so forth. In order to raise money to open a new plant in Alaska, the company issues corporate bonds. The bonds are unsecured, but include the corporation's promise to pay an interest of 12 percent. The tenure of the bond is five years and neither party can change the maturity date. These bonds are examples of _________.

Debentures. Unsecured bonds, backed only by the corporation's promise to pay.

Which of the following is a major difference between debt financing and equity financing?

Debt financing is not linked to organizational performance, unlike equity financing.

The purpose of issuing prospectus during a public stock offering is to __________.

Disclose information to the SEC

A company sells its accounts receivable to an intermediary. The intermediary collects the receivables from the customer. This is an example of _______.

Factoring

RS Bank provides short-term loans to small businesses. Many of the bank's customers take months to pay their bills. The bank often buys the companies' accounts receivable and pays them in return. This is an example of _____.

Factoring. Obtaining funding by selling accounts receivable.

A company sells its accounts receivable to an intermediary. The intermediary collects the receivables from the customer. This is an example of _______________.

Factoring. Obtaining funding by selling accounts receivable. An alternative to short-term debt financing.

An operational budget outlines expenditure for real estate, new facilities and major equipments.

False

An operational budget outlines expenditures for real estate, new facilities, and major equipment.

False

Commercial paper is an arrangement in which a financial institution makes money available for use at any time after the loan has been approved.

False

Debentures are backed by specific assets that will be given to bondholders if the borrowed amount is not repaid.

False

Financial decisions with high perceived risk will have low potential for rewards.

False

Hedging refers to selling a product at a higher rate than what was determined.

False

Highly leveraged companies will have adequate funds to spend on advertising, staffing, and product development.

False

Revenue obtained through selling assets is an example of an external source of income.

False

Revenue obtained through selling assets is an example of external source of income.

False

Rolling forecasts are not based on revenue budgets and cost assumptions.

False

Shareholders of a firm have prior claims on the firm's assets.

False

Incobar Steel is a large manufacturer of steel. The company decides to issue bonds to raise money to expand its operations. The final maturity term of the bonds is three years, but a portion of the outstanding bonds matures once in every six months. The bonds are backed only by the corporation's promise to pay. The bonds that Incobar Steel is issuing are best referred to as ________ bonds.

Serial

Budget reflects expected revenues, cash receipts, and outlays.

True

Leverage is the technique of increasing the rate of return on an investment by financing it with borrowed funds.

True

Secured loans are backed up with assets that the lender can claim in case of default.

True

Venture capital is an example of private equity.

True