Unit 3 Test

the three steps of financial planning

1) Establish organizational goals and objectives 2) Budget the money needed to accomplish the goals and objectives 3) Identify the sources of funds

advantages of a promissory note

1. A promissory note is legally binding and an enforceable contract. 2. A promissory note is a negotiable instrument.

common stockholders can vote on:

1. Amendments to the corporate charter or corporate by-laws 2. Sale of certain assets 3. Mergers and acquisitions 4. New issues of preferred stock or bonds 5. Changes in the amount of common stock issued

how to make a profit from a short transaction

1. Arrange to borrow a certain number of shares of a particular stock from a brokerage firm. 2. Sell the borrowed stock immediately, assuming that the price of the stock will drop in a reasonably short time. 3. After the price drops, buy the same number of shares that were sold in step 2. 4. Give the newly purchased stock to the brokerage firm in return for the stock borrowed in step 1.

traditional investments

1. Bank accounts 2. Corporate and government bonds

aspects of business that may require legal help

1. Choosing either the sole proprietorship, partnership, corporate, or some special form of ownership 2. Constructing a partnership agreement 3. Incorporating a business 4. Registering a corporation's stock 5. Obtaining a trademark, patent, or copyright 6. Filing for licenses or permits at the local, state, and federal levels 7. Purchasing an existing business or real estate 8. Creating valid contracts 9. Hiring employees and independent contractors 10. Extending credit and collecting debts

more speculative investments

1. Common stock 2. Preferred stock 3. Mutual funds 4. Real estate

five warning signs of credit card usage

1. Don't fall behind on payments. 2. Do not use your credit cards to pay for many small purchases during the month. 3. Do not use the cash advance provision that accompanies most credit cards. 4. Think about the number of cards you really need. 5. Get help if you think you are in trouble.

investment process

1. Evaluate potential investments. 2. Monitor the value of your investments. 3. Keep accurate and current records.

proper financial management ensures that:

1. Financing priorities are established in line with organizational goals and objectives. 2. Spending is planned and controlled. 3. Sufficient financing is available when it is needed, both now and in the future. 4. A firm's credit customers pay their bills on time, and the number of past due accounts is reduced. 5. Bills are paid promptly to protect the firm's credit rating and its 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 (CDs), government securities, or conservative, marketable securities.

Why is short-term debt financing easier to obtain?

1. For the lender, the shorter repayment period means less risk of non-payment. 2. The dollar amounts of short-term loans are usually smaller than those of long-term loans. 3. A close working relationship normally exists between the short-term borrower and the lender.

managers and employees in the finance area must:

1. Have a strong background in accounting or mathematics. 2. Know how to use a computer to analyze data. 3. Be an expert at both written and oral communication.

criteria for an S-corporation

1. No more than 100 stockholders are allowed. 2. Stockholders must be individuals, estates, or certain trusts. 3. There can be only one class of outstanding stock. 4. The firm must be a domestic corporation eligible to file for S-corporation status. 5. There can be no partnerships, corporations, or nonresident-alien stockholders. 6. All stockholders must agree to the decision to form an S-corporation.

how to accumulate money to fund an investment program

1. Pay yourself first. 2. Take advantage of employer-sponsored retirement programs. 3. Participate in an elective savings program. 4. Make a special savings effort one or two months each year. 5. Take advantage of gifts, inheritances, and windfalls.

the most speculative investments

1. Short transactions 2. Margin transactions 3. Stock options 4. Derivatives 5. Commodities 6. Precious metals 7. Gemstones 8. Coins 9. Antiques 10. Collectibles

where to incorporate is based on:

1. The cost of incorporating in one state compared with the cost in another state and 2. The advantages and disadvantages of each state's corporate laws and tax structure.

three types of mutual funds

1. open-end funds, 2. closed-end funds, and 3. exchange-traded funds (ETFs).

long-term financing needs

Business start-up costs Mergers and acquisitions New product development Long-term marketing activities Replacement of equipment Expansion of facilities

short-term financing needs

Cash-flow problems Speculative production Current inventory needs Monthly expenses Short-term promotional needs Unexpected emergencies

secured loan (cost, repayment period, availability to businesses, characteristics)

Cost: High Repayment Period: 1 year or less Availability: firms with questionable credit ratings Characteristics: Inventory or accounts receivable often used as collateral

factoring (cost, repayment period, availability to businesses, characteristics)

Cost: High Repayment Period: None Availability: Firms that have large numbers of credit customers Characteristics: Accounts receivable sold to a factor

unsecured bank loan (cost, repayment period, availability to businesses, characteristics)

Cost: Moderate Repayment Period: 1 year or less Availability: all businesses Characteristics: promissory note is required and compensating balance may be required

commercial paper (cost, repayment period, availability to businesses, characteristics)

Cost: Moderate Repayment Period: 270 days or less Availability: large corporations with high credit ratings Characteristics: available only to large firms

trade credit (cost, repayment period, availability to businesses, characteristics)

Cost: low (if any) Repayment Period: 30-60 days Availability: to all businesses with good credit Characteristics: usually no finance charge

promissory note issued to suppliers (cost, repayment period, availability to businesses, characteristics)

Cost: moderate Repayment Period: 1 year or less Availability: all businesses Characteristics: usually unsecured but requires legal document

disadvantages of corporations

Difficulty and expense of formation Government regulation and increased paperwork Conflict within the corporation Double taxation Lack of secrecy

advantages of partnerships

Ease of start-up Availability of capital and credit Personal interest Combined business skills and knowledge Retention of profits No special taxes

advantages of sole proprietorships

Ease of start-up and closure Pride of ownership Retention of all profits No special taxes Flexibility of being your own boss

advantages of corporations

Limited liability Ease of raising capital Ease of transfer of ownership Perpetual life Specialized management

treasury notes (maturity, interest, characteristics)

Maturity: 2, 3, 5, 7, or 10 years Interest: Interest is paid every six months until maturity. Characteristics: Interest is slightly higher than T-bills because of the longer maturity.

treasury bonds (maturity, interest, characteristics)

Maturity: 30-year Interest: Interest is paid every six months until maturity. Notes: Interest rate is slightly higher than T-bills and Treasury notes because of the longer maturity.

treasury bill (maturity, interest, characteristics)

Maturity: 4, 13, 26, or 52 weeks Interest: T-bills are sold at a discount and the actual purchase price is less than $100.00. Characteristics: When T-bills mature, you receive the maturity value.

treasury inflation-protected securities (maturity, interest, characteristics)

Maturity: 5, 10, or 30 years At maturity, you are paid the adjusted principal or original principal, whichever is greater. Interest: Interest is paid every six months until maturity at a fixed rate applied to the adjusted principal. Characteristics: The principal of TIPS securities increases with inflation and decreases with deflation.

savings bonds (maturity, interest, characteristics)

Maturity: Pay interest for up to 30 years. Interest: Interest is added to bonds monthly and paid when you redeem savings bonds. Characteristics: Minimum purchase is $25. Note: If interest is used to pay qualified college expenses, it may be exempt from federal taxation.

preferred stock (repayment, cost/dividends interest, usage)

Repayment: None Cost/Dividends Interest: Dividends not required but must be paid before common stockholders receive any dividends Usage: Large corporations that have an established investor base of common stockholders

common stock (repayment, cost/dividends interest, usage)

Repayment: None Cost/Dividends Interest: High initial cost; low ongoing costs because dividends not required Usage: All corporations that sell stock to investors

corporate bond (repayment, cost/dividends interest, usage)

Repayment: Yes; 10-30 years Cost/Dividends Interest: Interest rates between 3 and 9 percent depending on the financial stability of the company issuing the bonds and economic conditions Usage: Large corporations that are financially healthy

long-term loan (repayment, cost/dividends interest, usage)

Repayment: Yes; 3-7 years Cost/Dividends Interest: Interest rates between 3.25 and 12 percent depending on economic conditions and the financial stability of the company requesting the loan Usage: All firms that can meet the lender's repayment and collateral requirements

sources of funds

Sales revenue Equity capital Debt capital Sale of assets

advantages of an LLC

Single taxation Limited liability Management flexibility

hierarchy of corporate structure

Stockholders ELECT- board of directors APPOINTS- officers HIRE- employees

factors that affect the interest rate a corporation must pay

The corporation's ability to pay interest each year until maturity. The corporation's ability to repay the bond at maturity.

what do the articles of incorporation state?

The firm's name and address The incorporators' names and addresses The purpose of the corporation The maximum amount of stock and types of stock to be issued The rights and privileges of stockholders The length of time the corporation is to exist

rights of a corporation

The right to start and operate a business The right to buy or sell property The right to borrow money The right to sue or be sued The right to enter into binding contracts

factors that determine asset allocation

The time your investments have to work for you Your age Your investment objectives Your ability to tolerate risk How much you can save and invest each year The dollar value of your current investments The economic outlook for the economy

disadvantages of sole proprietorships

Unlimited liability Lack of continuity Lack of money Limited management skills Difficulty in hiring employees

disadvantages of partnerships

Unlimited liability Management disagreements Lack of continuity Frozen investment

What does a partnership agreement state?

Who will make the final decisions What each partner's duties will be The investment each partner will make How much profit or loss each partner receives or is responsible for What happens if a partner wants to dissolve the partnership or dies

contingent deferred sales fee

a back end fee that may disappear altogether after a specific period

debenture bond

a bond backed only by the reputation of the issuing corporation

registered bond

a bond registered in the owner's name by the issuing company

zero-base budgeting

a budgeting approach in which every expense in every budget must be justified

limited partnership

a business co-owned by one or more general partners who manage the business and limited partners who invest money in it

general partnership

a business co-owned by two or more general partners who are liable for everything the business does

sole proprietorship

a business that is owned (and usually operated) by one person

articles of incorporation

a contract between a corporation and the state in which the state recognizes the formation of the artificial person that is the corporation

convertible bond

a corporate bond secured by various assets of the issuing firm

alien corporation

a corporation chartered by a foreign government and conducting business in the United States

foreign corporation

a corporation in any state in which it does business except the one in which it is incorporated

domestic corporation

a corporation in the state in which it is incorporated

not-for-profit corporation

a corporation organized to provide a social, educational, religious, or other service rather than to earn a profit

S-corporation

a corporation that is taxed as though it were a partnership

open corporation

a corporation whose stock can be bought and sold by any individual

closed corporation

a corporation whose stock is owned by relatively few people and is not sold to the general public

corporate bond

a corporation's written pledge that it will repay a specified amount of money with interest

prospectus

a detailed, written description of a new security, the issuing corporation, and the corporation's top management

Dividend

a distribution of earnings to the stockholders of a corporation

stock dividend

a dividend in the form of additional stock

limited liability

a feature of corporate ownership that limits each owner's financial liability to the amount of money that he or she has paid for the corporation's stock

capital budget

a financial statement that estimates a firm's expenditures for major assets and its long-term financing needs

cash budget

a financial statement that estimates cash receipts and cash expenditures over a specified period

Budget

a financial statement that projects income, expenditures, or both over a specified future period

Factor

a firm that specializes in buying other firms' accounts receivable

limited-liability company

a form of business ownership that combines the benefits of a corporation and a partnership while avoiding some of the restrictions and disadvantages of those forms of ownership

exchange-traded fund (ETF)

a fund that generally invests in the stocks or other securities contained in a specific stock or securities index

family of funds

a group of mutual funds managed by one investment company

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

unlimited liability

a legal concept that holds a business owner personally responsible for all the debts of the business

bond indenture

a legal document that details all the conditions relating to a bond issue

Proxy

a legal form listing issues to be decided at a stockholders' meeting and enabling stockholders to transfer their voting rights to some other individual or individuals

master limited partnership (MLP)

a limited partnership that has units of ownership that can be traded on security exchanges much like shares of ownership in a corporation (sometimes referred to as a publicly traded partnership, or PTP)

secondary market

a market for existing financial securities that are traded between investors

primary market

a market in which an investor purchases financial securities (via an investment bank) directly from the issuer of those securities

securities exchange

a marketplace where member brokers meet to buy and sell securities

horizantal merger

a merger between firms that make and sell similar products or services in similar markets

vertical merger

a merger between firms that operate at different but related levels in the production and marketing of a product

conglomerate merger

a merger that takes place between firms in completely different industries

compensating balance

a minimum average balance that a bank may require a borrower to leave on deposit in a non-interest-bearing account

load fund

a mutual fund for which you pay a commission every time you buy or sell shares

no-load fund

a mutual fund that has no commission fee

over-the-counter (OTC) market

a network of dealers who buy and sell the stocks of corporations that are not listed on a securities exchange

general partner

a person who assumes full or shared responsibility for operating a business

limited partner

a person who invests money in a business but has no management responsibility or liability for losses beyond the amount he or she invested in the partnership

Stockholders

a person who owns corporation's stock

financial plan

a plan for obtaining and using the money needed to implement an organization's goals and objectives

term-loan agreement

a promissory note that requires a borrower to repay a loan in monthly, quarterly, semiannual, or annual installments

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

limit order

a request that a security be bought or sold at a price that is equal to or better than some specified price

market order

a request that a security be purchased or sold at the current market price

blue-chip stock

a safe investment that generally attracts conservative investors

commercial paper

a short-term promissory note issued by a large corporation

hostile takeover

a situation in which the management and board of directors of a firm targeted for acquisition disapprove of the merger

personal budget

a specific plan for spending your income

sinking fund

a sum of money to which deposits are made each year for the purpose of redeeming a bond issue

Syndicate

a temporary association of individuals or firms organized to perform a specific task that requires a large amount of capital

trade credit

a type of short-term financing extended by a seller who does not require immediate payment after delivery of merchandise

Partnership

a voluntary association of two or more persons to act as co-owners of a business for profit

promissory note

a written pledge by a borrower to pay a certain sum of money to a creditor at a specified future date

William owns 100 shares of Textron convertible preferred stock. To what can this preferred stock be converted in most companies? a. Common stock b. Corporate bonds c. A different type of preferred stock d. Trade credit e. Retained earnings

a. Common stock

What does double taxation mean? a. Companies must pay taxes on their earnings, and then stockholders pay taxes on their dividends. b. Companies have to pay both sales taxes and income taxes. c. Suppliers tax their customers, and in turn these businesses tax the ultimate consumer. d. Companies must pay taxes on corporate income and then additional taxes on distributions to profit stockholders. e. Companies must pay taxes on their income, and then employees must pay taxes on their salaries and wages.

a. Companies must pay taxes on their earnings, and then stockholders pay taxes on their dividends.

Morgan is currently a manager of a small financial planning firm. He is seeking a new career with a large corporation in the banking industry. He recently applied for the financial manager opening at G & T Bank. He is concerned that the transition from his small firm to a large corporation will be difficult. To better prepare himself for this change, he has decided to enroll in a few business classes to strengthen his understanding of corporate finance. The business classes have proven to be a valuable tool for learning the critical skills needed to fully understand a financial plan, equity financing, and debt financing. Morgan now believes he has strengthened his competitive advantage in his quest for the job. Refer to Morgan's Transition. During his job interview, Morgan was asked to talk about money received from the owners or from the sale of shares of ownership in a business. Which of the following would best describe these funds? a. Equity capital b. Sales revenue c. Proceeds from the sale of assets d. Proceeds from a merger or acquisition e. Debt capita

a. Equity capital

Personal Accents, Inc., (PAI) is a publicly-held company that specializes in selling a variety of skin- and hair-care products. The company owns specialty stores that appeal to both men and women. Recently PAI has obtained financing through the sale of bonds which have been rated as AAA by Standard & Poor's. Charlotte is an investor who pays very close attention to high-risk investments because she she's interested in the huge profits that can be obtained from this type of investment. Charlotte usually prefers moderately risky investments so that she can obtain a profit; but in case something goes sour, she will not lose everything. Fearing the potential loss of money in high-risk investments, she has invested in PAI. She feels that the company is established and has maintained stable profits over the years. She is well aware of the different types of high-risk investments, but she chooses to invest more conservatively. Refer to Personal Accents, Inc. Which of the following was required of PAI when it first issued publicly-traded stock for the company? a. It had to provide a prospectus. b. It had to offer dividends. c. It had to offer the account executive's name to potential investors. d. It had to provide the company budget to potential investors. e. It had to offer a security index to the public.

a. It had to provide a prospectus.

A year ago, Kevin went to work for B&G, Inc. He has worked for the finance department ever since he started. He noticed that the corporation was only taxed as though it were a partnership. This was something that he found very odd when he first started working for the company, but he later realized it was a fairly common practice. He recognized that this was one of the advantages of this type of corporation. While the job was challenging, Kevin was not happy. He wanted to work for a company whose main goal was to provide service to the community, not to make a profit. However, Kevin felt that, considering his present financial situation, he had to continue working for B&G, Inc. A week later, Kevin discovered there was going to be a merger between B&G, Inc. and one of its major competitors. Kevin's boss informed him that he would be getting a promotion and a raise. While he was excited about making more money, he still was not happy. He knew then that he would not be working for the company for long. Refer to B&G, Inc. What type of organization is B&G, Inc.? a. S-corporation b. Cooperative c. Not-for-profit corporation d. Limited-liability company e. Sole proprietorship

a. S-corporation

Which of the following might be considered the most drastic step in securing funding, often a last resort for a corporation? a. Sale of assets b. Using sales revenue c. Debt capital funding d. Equity capital funding e. Short-term borrowing from a bank

a. Sale of assets

A year ago, Kevin went to work for B&G, Inc. He has worked for the finance department ever since he started. He noticed that the corporation was only taxed as though it were a partnership. This was something that he found very odd when he first started working for the company, but he later realized it was a fairly common practice. He recognized that this was one of the advantages of this type of corporation.While the job was challenging, Kevin was not happy. He wanted to work for a company whose main goal was to provide service to the community, not to make a profit. However, Kevin felt that, considering his present financial situation, he had to continue working for B&G, Inc. A week later, Kevin discovered there was going to be a merger between B&G, Inc. and one of its major competitors. Kevin's boss informed him that he would be getting a promotion and a raise. While he was excited about making more money, he still was not happy. He knew then that he would not be working for the company for long. Refer to B&G, Inc. B&G, Inc. was going through a ____ merger. a. horizontal b. conglomerate c. hostile d. leveraged e. vertical

a. horizontal

The Smithsonian Institution exists to preserve historical and cultural items of value and to share those items with the public; it does not exist to maximize the wealth of any shareholders. This entity is organized as a(n) a. not-for-profit corporation. b. cooperative. c. closed corporation. d. S-corporation. e. quasi-government corporation.

a. not-for-profit corporation.

The major reason why businesses change from sole proprietorships to other forms of ownership is to a. obtain help and eliminate the problem of too much to do in one day. b. offer advancement opportunities for employees. c. avoid unlimited liability. d. avoid lack of continuity. e. gain unlimited liability.

a. obtain help and eliminate the problem of too much to do in one day.

Anyone with the money can purchase shares of Coca-Cola's stock. This makes Coca-Cola a(n) ____ corporation. a. open b. closed c. alien d. domestic e. foreign

a. open

Sam McGines, CEO of McGines, Inc., decided that upon his retirement, he would elect his son Derrick to become the new CEO. Sam thought it would be a good idea to have Derrick shadow him at work to understand the roles and responsibilities of a CEO. Derrick shadowed his father for months in order to learn every aspect of the business. Sam knew that the best way for Derrick to learn was to actually perform some of the tasks he did on a daily basis, rather than simply describe them. The company generally focused on short-term financing, and Sam felt that it was important for Derrick to understand the different types of financing. Derrick learned about the type of bonds that the company usually offered to raise capital. These bonds allow the purchasers of the bond to keep them until maturity. Derrick also learned the process of obtaining bonds and the various types of long-term financing methods. Job shadowing was indeed a worthwhile experience for Derrick. Refer to McGines, Inc. If Derrick has learned and understood the business, he should know that today most corporate bonds are a. registered bonds. b. nonconvertible bonds. c. mortgage bonds. d. sinking fund bonds. e. convertible bonds.

a. registered bonds.

financial management

all the activities concerned with obtaining money and using it effectively

expense ratio

all the different management fees; 12b-1 fees, if any; and additional operating costs for a specific fund

accounts receivable

amounts owed to a firm by its customers

joint venture

an agreement between two or more groups to form a business entity in order to achieve a specific goal or to operate for a specific period of time

Corporation

an artificial person created by law with most of the legal rights of a real person, including the rights to start and operate a business, to buy or sell property, to borrow money, to sue or be sued, and to enter into binding contracts

Cooperative

an association of individuals or firms whose purpose is to perform some business function for its members

Dow Jones Industrial Average

an average of 30 leading U.S.corporations that reflect the U.S. stock market as a whole

security averages

an average of the current market prices of selected securities

Standard & Poor's 500 Stock Index

an index that contains 500 different stocks that reflect increases or decreases in value for the U.S. stock market as a whole

Trustee

an individual or an independent firm that acts as a bond owner's representative

financial planner

an individual who has had at least two years of training in investments, insurance, taxation, retirement planning, and estate planning and has passed a rigorous examination

account executive

an individual, sometimes called a stockbroker or registered representative, who buys and sells securities for clients

high-risk investment

an investment made in the uncertain hope of earning a relatively large profit in a short time

proxy fight

an offer to purchase the stock of a firm targeted for acquisition at a price just high enough to tempt stockholders to sell their shares

tender offer

an offer to purchase the stock of a firm targeted for acquisition at a price just high enough to tempt stockholders to sell their shares

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

Plan

an outline of the actions by which an organization intends to accomplish its goals and objectives

12-b1 fee (distribution fee)

annual fees charged by a mutual fund to pay for marketing and distribution costs

Sam McGines, CEO of McGines, Inc., decided that upon his retirement, he would elect his son Derrick to become the new CEO. Sam thought it would be a good idea to have Derrick shadow him at work to understand the roles and responsibilities of a CEO. Derrick shadowed his father for months in order to learn every aspect of the business. Sam knew that the best way for Derrick to learn was to actually perform some of the tasks he did on a daily basis, rather than simply describe them. The company generally focused on short-term financing, and Sam felt that it was important for Derrick to understand the different types of financing. Derrick learned about the type of bonds that the company usually offered to raise capital. These bonds allow the purchasers of the bond to keep them until maturity. Derrick also learned the process of obtaining bonds and the various types of long-term financing methods. Job shadowing was indeed a worthwhile experience for Derrick. Refer to McGines, Inc. At one point, Derrick was not sure about which type of bond was backed only by the reputation of the issuing corporation. Which of the following would you suggest? a. Convertible bond b. Debenture bond c. Registered bond d. Corporate bond e. Mortgage bond

b. Debenture bond

____ is (are) the earnings of a corporation that are distributed to the stockholders. a. Interest b. Dividends c. Discounts d. Retained earnings e. Premiums

b. Dividends

With regard to taxation of partnerships, which of the following statements is true? a. The partnership is taxed as a separate entity. b. Each partner is taxed in the same way as a sole proprietor. c. A partnership is exempt from taxes. d. Taxes are paid on a partnership's profits, after which each partner pays taxes on his or her share of the profits. e. Profits are taxed twice.

b. Each partner is taxed in the same way as a sole proprietor.

How many times can a corporation's stock be sold in the primary market? a. Unlimited b. Once c. A maximum of three times d. Once per year e. Twice

b. Once

Laura wants to start a business, but she is unsure of the legal form best for her. Short of cash, she has decided to take the form that is the least expensive and most flexible in terms of decision making and implementation. Which would you recommend? a. Partnership b. Sole proprietorship c. Joint venture d. Corporation e. Cooperative

b. Sole proprietorship

The order of difficulty and expense, from most to least, when forming a business organization is as follows: a. partnership, corporation, sole proprietorship. b. corporation, partnership, sole proprietorship. c. corporation, sole proprietorship, partnership. d. sole proprietorship, partnership, corporation. e. partnership, sole proprietorship, partnership.

b. corporation, partnership, sole proprietorship.

A distribution of earnings to the stockholders of a corporation is a(n) a. earnings per share. b. dividend. c. common payment. d. distributed payment. e. par distribution.

b. dividend.

Walmart is incorporated in Arkansas, the state of its origins and headquarters. Within Arkansas, Walmart is classified as a(n) ____ corporation. a. hometown b. domestic c. privately-held d. foreign e. alien

b. domestic

The steps in effective financial planning are a. identifying sources of financing, budgeting, and evaluating. b. establishing organizational goals, budgeting for financial needs, and identifying sources of financing. c. establishing organizational goals, identifying expenses, and budgeting. d. developing a plan of action, monitoring the plan, and evaluating. e. None of these answers are correct.

b. establishing organizational goals, budgeting for financial needs, and identifying sources of financing.

The primary sources of funds available to a business include all of the following except a. debt capital. b. government grants. c. sales revenue. d. sales of assets. e. equity capital.

b. government grants.

Recently there have been several mergers involving Big Four accounting firms. One such merger involved the firms of Arthur Young and Ernst & Whinney, who combined to form Ernst & Young. This is an example of a a. joint venture. b. horizontal merger. c. conglomerate merger. d. vertical merger. e. syndicate.

b. horizontal merger.

During 2011, Bedford Technology sold common stock for the first time to whoever wanted to buy it. This was the ____ for Bedford. a. preferred stock offering b. initial public offering c. stock dividend d. public stock sale e. par value

b. initial public offering

Personal Accents, Inc., (PAI) is a publicly-held company that specializes in selling a variety of skin- and hair-care products. The company owns specialty stores that appeal to both men and women. Recently PAI has obtained financing through the sale of bonds which have been rated as AAA by Standard & Poor's. Charlotte is an investor who pays very close attention to high-risk investments because she she's interested in the huge profits that can be obtained from this type of investment. Charlotte usually prefers moderately risky investments so that she can obtain a profit; but in case something goes sour, she will not lose everything. Fearing the potential loss of money in high-risk investments, she has invested in PAI. She feels that the company is established and has maintained stable profits over the years. She is well aware of the different types of high-risk investments, but she chooses to invest more conservatively. Refer to Personal Accents, Inc. If Charlotte wants to buy more PAI stock and puts in a request to purchase it at the current market price, this would be called a ____ order. a. limit b. market c. specific d. matched e. money

b. market

When incorporating, a business a. must incorporate in the state in which it does the most business. b. may incorporate in any state it chooses. c. must incorporate in the state in which its headquarters are located. d. must receive the secretary of state's permission to incorporate in any state other than the one in which its corporate headquarters will be located. e. must do None of these choices are correct.

b. may incorporate in any state it chooses.

A feature of corporate bonds is that they a. represent ownership in a firm. b. pay interest until maturity. c. have residual claims to assets after common stock. d. carry voting rights. e. pay dividends.

b. pay interest until maturity.

Burberry Mills sold stock to an insurance company to raise needed financing for expansion and new product development. This type of transaction is referred to as a(n) a. ownership transfer. b. private placement. c. small business assistance package. d. equity deal. e. debt placement.

b. private placement.

Venture capital firms invest in a. large, successful firms. b. small firms that have the potential to be very successful. c. neighborhood convenience stores. d. banks and financial firms. e. chain retail establishments.

b. small firms that have the potential to be very successful.

serial bonds

bonds of a single issue that mature on different dates

debt capital

borrowed money obtained through loans of various types

buying long

buying a stock with the expectation that it will increase in value and then can be sold at a profit

Morgan is currently a manager of a small financial planning firm. He is seeking a new career with a large corporation in the banking industry. He recently applied for the financial manager opening at G & T Bank. He is concerned that the transition from his small firm to a large corporation will be difficult. To better prepare himself for this change, he has decided to enroll in a few business classes to strengthen his understanding of corporate finance. The business classes have proven to be a valuable tool for learning the critical skills needed to fully understand a financial plan, equity financing, and debt financing. Morgan now believes he has strengthened his competitive advantage in his quest for the job. Refer to Morgan's Transition. When Morgan creates a financial plan, his first step should be which of the following? a. Determine how much money is needed to accomplish each goal. b. Identify available sources of financing. c. Establish a set of valid goals. d. Decide which goals to finance. e. Describe which type of financing to use.

c. Establish a set of valid goals.

Wade serves on Foot Locker's board of directors. How did Wade get this position? a. Through default as the largest stockholder, Wade got the position. b. He was assigned by the Federal Trade Commission. c. He was elected by the company's stockholders. d. He volunteered for the assignment. e. He was appointed by the chief executive officer.

c. He was elected by the company's stockholders.

Which of the following is not a characteristic of short-term financing? a. There is less risk of nonpayment to the lender. b. The amounts are usually smaller than amounts obtained through long-term sources. c. It must be repaid within three years. d. It is easier to obtain than long-term financing. e. There is a close working relationship between borrower and lender.

c. It must be repaid within three years.

Which of the following is not a disadvantage of the corporate form of ownership? a. Lack of secrecy b. Difficulty of formation c. Limited liability d. Expense of incorporation and selling stock e. Double taxation

c. Limited liability

The assets most commonly used as collateral for short-term financing include a. marketable securities and owners' equity. b. cash and accounts receivable. c. accounts receivable and inventory. d. accounts payable and notes payable. e. inventory and equipment. Hide Feedback

c. accounts receivable and inventory.

Ted's partnership agreement with two other men was a bit unsound. One of the problems the men were encountering was uneven productivity among the partners. The agreement required each partner to contribute to every aspect of the business to receive an equal portion of the profits. This agreement did not reflect the idea that a. each partner must agree to contracts entered into on behalf of all the others. b. limited partners are required to be active in day-to-day business operations. c. all partners need not be equal; that is, there are different types of partners. Some may be fully active in running the business, whereas others may have a more limited role. d. the Uniform Partnership Act requires every general partnership to have at least one limited partner. e. customers and creditors of a limited partnership need not be protected.

c. all partners need not be equal; that is, there are different types of partners. Some may be fully active in running the business, whereas others may have a more limited role.

Some equity capital generally is used to start a a. corporation only. b. partnership only. c. business regardless of its legal form. d. cooperative only. e. sole proprietorship only.

c. business regardless of its legal form.

Because of rising fuel costs, a group of farmers have organized a retail gasoline outlet so they can make more reasonable purchases. This type of business is referred to as a(n) a. syndicate. b. S-corporation. c. cooperative. d. joint venture. e. corporation.

c. cooperative.

Money obtained through various types of loans is called a. factor proceeds. b. cash flow. c. debt capital. d. equity capital. e. dividends.

c. debt capital.

All of the following are uses of long-term financing except a. beginning a new business. b. replacing obsolete equipment. c. eliminating immediate cash-flow problems. d. developing and marketing new products. e. executing mergers and expansions.

c. eliminating immediate cash-flow problems.

In regards to cash flow, a firm should ideally have a. to use short-term financing only two to three times a year. b. a constant need for short-term financing. c. enough money coming into the firm to cover the expenses in that period. d. most of its cash going to its customers. e. more cash flowing out than in since this represents growth.

c. enough money coming into the firm to cover the expenses in that period.

For a department store such as Macy's, the most likely need for short-term financing will be for a. extending credit policies. b. additional cash registers. c. inventory. d. new locations. e. employee wages.

c. inventory.

Of the following, only ___ would not be considered proper financial management during both good and bad times. a. investing excess cash in CDs, government securities, or conservative securities b. planning for sufficient financing when needed c. investing all excess cash in long-term securities d. paying bills promptly e. making sure that funds are available to meet tax deadlines

c. investing all excess cash in long-term securities

A business partnership that is owned and managed like a corporation but taxed like a partnership is called a(n) a. domestic partnership. b. limited-liability company. c. master limited partnership. d. limited partnership. e. alien partnership.

c. master limited partnership.

Sierra purchases a corporate bond from Mattel. On the bond it states that Sierra will receive her money back on February 15, 2022. This is the bond's ____ date. a. declaration b. conversion c. maturity d. redemption e. expiration

c. maturity

Common stock carries all the following rights except the right to a. share in profits. b. attend the annual stockholders' meeting. c. receive part of the profit before other classes of stock. d. receive information about the corporation. e. vote on changes to the corporate charter.

c. receive part of the profit before other classes of stock.

The ____ ratio is based on the principle that a high-risk investment should generate higher financial returns for a business and more conservative decisions often generate lesser returns. a. investment-to-equity b. return on owners' equity c. risk-return d. earnings e. quick return

c. risk-return

Unlimited liability means a. the business can borrow money for any type of purchase. b. there is no limit on the amount an owner can borrow. c. the owner is responsible for all business debts. d. stockholders can borrow money from the business. e. creditors will absorb any loss from nonpayment of debt.

c. the owner is responsible for all business debts.

Retained earnings are a. total owners' equity. b. all the earnings of the corporation. c. undistributed profits. d. profits before taxes. e. profits after taxes.

c. undistributed profits.

ongoing costs

costs that keep on recurring

net asset value (NAV)

current market value of a mutual fund's portfolio minus the mutual fund's liabilities divided by the number of outstanding shares

Which of the following states offers the lowest organizational costs for corporations? a. Michigan b. New York c. Alaska d. Delaware e. Georgia

d. Delaware

A year ago, Kevin went to work for B&G, Inc. He has worked for the finance department ever since he started. He noticed that the corporation was only taxed as though it were a partnership. This was something that he found very odd when he first started working for the company, but he later realized it was a fairly common practice. He recognized that this was one of the advantages of this type of corporation.While the job was challenging, Kevin was not happy. He wanted to work for a company whose main goal was to provide service to the community, not to make a profit. However, Kevin felt that, considering his present financial situation, he had to continue working for B&G, Inc. A week later, Kevin discovered there was going to be a merger between B&G, Inc. and one of its major competitors. Kevin's boss informed him that he would be getting a promotion and a raise. While he was excited about making more money, he still was not happy. He knew then that he would not be working for the company for long. Refer to B&G, Inc. What type of organization was Kevin considering switching to? a. S-corporation b. Closed corporation c. Sole proprietorship d. Not-for-profit corporation e. Limited-liability corporation

d. Not-for-profit corporation

Twenty-five young investors decided that they want to start a dating service; however, they do not want to be held personally liable for losses of the company. They want to avoid double taxation. Which type of business organization would best fit the needs of these individuals? a. Corporation b. Closed corporation c. Partnership d. S-corporation e. Limited cooperative

d. S-corporation

Personal Accents, Inc., (PAI) is a publicly-held company that specializes in selling a variety of skin- and hair-care products. The company owns specialty stores that appeal to both men and women. Recently PAI has obtained financing through the sale of bonds which have been rated as AAA by Standard & Poor's. Charlotte is an investor who pays very close attention to high-risk investments because she she's interested in the huge profits that can be obtained from this type of investment. Charlotte usually prefers moderately risky investments so that she can obtain a profit; but in case something goes sour, she will not lose everything. Fearing the potential loss of money in high-risk investments, she has invested in PAI. She feels that the company is established and has maintained stable profits over the years. She is well aware of the different types of high-risk investments, but she chooses to invest more conservatively. Refer to Personal Accents, Inc. Which of these would be considered a high-risk investment for Charlotte as a PAI investor? a. Buying mutual funds that hold PAI stock b. Selling mutual funds that hold PAI stock c. Buying PAI stocks d. Selling PAI stock short e. Buying PAI bonds Hide Feedback

d. Selling PAI stock short

Morgan is currently a manager of a small financial planning firm. He is seeking a new career with a large corporation in the banking industry. He recently applied for the financial manager opening at G & T Bank. He is concerned that the transition from his small firm to a large corporation will be difficult. To better prepare himself for this change, he has decided to enroll in a few business classes to strengthen his understanding of corporate finance. The business classes have proven to be a valuable tool for learning the critical skills needed to fully understand a financial plan, equity financing, and debt financing. Morgan now believes he has strengthened his competitive advantage in his quest for the job. Refer to Morgan's Transition. Having taken the classes, Morgan should describe cash flow as which of the following? a. The movement of money from one account to another b. Money that will be used for longer than one year c. Proceeds from any sales transactions only d. The movement of money into and out of an organization e. Money that will be used for one year or less

d. The movement of money into and out of an organization

For a corporation such as AT&T, what are the two primary advantages of equity financing? a. Interest payments are less than debt financing and principal does not have to be repaid. b. Investors pay top dollar for stock issues and the corporation has higher ongoing expenses. c. Ownership is spread among many individuals and no interest payments are required. d. There is no obligation to pay dividends or to repay the money obtained from the sale of stock. e. It never has to be paid back and flotation costs are low.

d. There is no obligation to pay dividends or to repay the money obtained from the sale of stock.

The amounts owed to a firm by its customers are called a. factors. b. revolving credit agreements. c. dividends. d. accounts receivable. e. commercial drafts.

d. accounts receivable.

Mercedes-Benz, which is chartered as a corporation in Germany but conducts much of its business in the United States, is known as a(n) ____ in the United States. a. S-corporation b. foreign corporation c. private corporation d. alien corporation e. domestic corporation

d. alien corporation

A merger between firms in completely unrelated industries is known as a a. joint venture. b. horizontal merger. c. vertical merger. d. conglomerate merger. e. cooperative.

d. conglomerate merger.

Debbie purchases a corporate bond from Safeway. She has the option of redeeming her bond for 55 shares of Safeway common stock at any time. This is a ____ bond. a. mortgage b. subordinated c. debenture d. convertible e. callable

d. convertible

Sam McGines, CEO of McGines, Inc., decided that upon his retirement, he would elect his son Derrick to become the new CEO. Sam thought it would be a good idea to have Derrick shadow him at work to understand the roles and responsibilities of a CEO. Derrick shadowed his father for months in order to learn every aspect of the business. Sam knew that the best way for Derrick to learn was to actually perform some of the tasks he did on a daily basis, rather than simply describe them. The company generally focused on short-term financing, and Sam felt that it was important for Derrick to understand the different types of financing. Derrick learned about the type of bonds that the company usually offered to raise capital. These bonds allow the purchasers of the bond to keep them until maturity. Derrick also learned the process of obtaining bonds and the various types of long-term financing methods. Job shadowing was indeed a worthwhile experience for Derrick. Refer to McGines, Inc. If a client asks, Derrick should be able to identify that ____ is the type of stock the owner may exchange for a specified number of shares of common stock. a. preferred stock b. common stock c. IPO d. convertible preferred stock e. convertible common stock

d. convertible preferred stock

The form of business organization that accounts for just over 80 percent of all sales revenues in the United States is the a. joint venture. b. sole proprietorship. c. partnership. d. corporation. e. syndicate.

d. corporation.

The person who assumes full co-ownership of a partnership, including unlimited liability, is a a. limited partner. b. sole proprietor. c. shareholder. d. general partner. e. stockholder.

d. general partner.

To gain access to one another's markets, several U.S. and Japanese automobile manufacturers (for example, Chrysler and Mitsubishi) are engaging in temporary alliances to manufacture and market certain models of cars. These types of partnerships are known as a. limited-liability companies. b. cooperatives. c. S-corporations. d. joint ventures. e. foreign corporations.

d. joint ventures.

The lowest rate of interest charged by a bank for a short-term loan is known as a. the compound interest rate. b. the discount rate. c. dividends. d. the prime interest rate. e. add-on interest.

d. the prime interest rate.

When a seller allows a buyer thirty to sixty days to pay for a purchase, the sales arrangement is called a. a promissory note. b. equity financing. c. a bank loan. d. trade credit. e. None of these answers are correct.

d. trade credit.

Each year Caliente, Inc., follows a budgeting process. The first step is always to look at the previous year's budget and see if anything needs to be updated. Caliente uses ____ budgeting. a. capital b. zero-base c. historical d. traditional e. cash

d. traditional

Personal Accents, Inc., (PAI) is a publicly-held company that specializes in selling a variety of skin- and hair-care products. The company owns specialty stores that appeal to both men and women. Recently PAI has obtained financing through the sale of bonds which have been rated as AAA by Standard & Poor's. Charlotte is an investor who pays very close attention to high-risk investments because she she's interested in the huge profits that can be obtained from this type of investment. Charlotte usually prefers moderately risky investments so that she can obtain a profit; but in case something goes sour, she will not lose everything. Fearing the potential loss of money in high-risk investments, she has invested in PAI. She feels that the company is established and has maintained stable profits over the years. She is well aware of the different types of high-risk investments, but she chooses to invest more conservatively. Refer to Personal Accents, Inc. Charlotte recently chose an account executive for her investment and financial needs. Which of the following best describes an account executive? a. An individual who gets free money for clients b. An individual who sells manufactured products for clients c. A financial ad executive d. A discount agent e. An individual who buys and sells securities for clients

e. An individual who buys and sells securities for clients

To raise capital, Candace Tyson and Martha Black plan to sell stock to between 108 and 200 investors. They also want to avoid double taxation. Which type of business ownership would you recommend? a. S-corporation b. Cooperative c. Limited partnership d. Regular corporation e. Limited-liability company

e. Limited-liability company

A year ago, Kevin went to work for B&G, Inc. He has worked for the finance department ever since he started. He noticed that the corporation was only taxed as though it were a partnership. This was something that he found very odd when he first started working for the company, but he later realized it was a fairly common practice. He recognized that this was one of the advantages of this type of corporation.While the job was challenging, Kevin was not happy. He wanted to work for a company whose main goal was to provide service to the community, not to make a profit. However, Kevin felt that, considering his present financial situation, he had to continue working for B&G, Inc. A week later, Kevin discovered there was going to be a merger between B&G, Inc. and one of its major competitors. Kevin's boss informed him that he would be getting a promotion and a raise. While he was excited about making more money, he still was not happy. He knew then that he would not be working for the company for long. Refer to B&G, Inc. Which of these features does not belong to this type of corporation? a. Personal asset protection b. Many Internal Revenue tax regulations c. No double taxation d. Limited liability e. Management flexibility

e. Management flexibility

Which of the following is an advantage of a sole proprietorship? a. There is a limit to the amount one person can borrow. b. The owner enjoys lack of continuity. c. The owner has unlimited liability. d. The business ceases to exist when the owner dies. e. Profits are taxed as individual income.

e. Profits are taxed as individual income.

Morgan is currently a manager of a small financial planning firm. He is seeking a new career with a large corporation in the banking industry. He recently applied for the financial manager opening at G & T Bank. He is concerned that the transition from his small firm to a large corporation will be difficult. To better prepare himself for this change, he has decided to enroll in a few business classes to strengthen his understanding of corporate finance. The business classes have proven to be a valuable tool for learning the critical skills needed to fully understand a financial plan, equity financing, and debt financing. Morgan now believes he has strengthened his competitive advantage in his quest for the job. Refer to Morgan's Transition. When Morgan has to counsel clients on short-term versus long-term financing needs, which of the following should he identify as a short-term financing need? a. Expansion of facilities b. Acquisitions and mergers c. Business start-up costs d. Replacement of equipment e. Speculative production

e. Speculative production

A statement that projects income and/or expenditures over a specified future period is called a a. resources plan. b. resource allocation statement. c. financial plan. d. cash flow plan. e. budget.

e. budget.

Bonds that are backed only by the reputation of the issuing corporation are known as a. bond indentures. b. registered bonds. c. mortgage bonds. d. serial bonds. e. debenture bonds.

e. debenture bonds.

The use of borrowed funds to increase the return on owner's equity is called a. management leverage. b. investment management. c. financial planning. d. return on leverage. e. financial leverage.

e. financial leverage.

In all states besides the one in which it is incorporated, a business is known as a(n) a. S-corporation. b. resident corporation. c. public corporation. d. domestic corporation. e. foreign corporation.

e. foreign corporation.

As a limited partner in a construction business, Joe a. contributes only his time and not his money. b. cannot lose his investment in the partnership. c. does not receive any portion of the profits. d. has input only on major company decisions. e. only risks his initial investment.

e. only risks his initial investment.

A voluntary association of two or more people acting as co-owners of a business is known as a a. corporation. b. syndicate. c. conglomerate. d. sole proprietorship. e. partnership.

e. partnership.

Sam McGines, CEO of McGines, Inc., decided that upon his retirement, he would elect his son Derrick to become the new CEO. Sam thought it would be a good idea to have Derrick shadow him at work to understand the roles and responsibilities of a CEO. Derrick shadowed his father for months in order to learn every aspect of the business. Sam knew that the best way for Derrick to learn was to actually perform some of the tasks he did on a daily basis, rather than simply describe them. The company generally focused on short-term financing, and Sam felt that it was important for Derrick to understand the different types of financing. Derrick learned about the type of bonds that the company usually offered to raise capital. These bonds allow the purchasers of the bond to keep them until maturity. Derrick also learned the process of obtaining bonds and the various types of long-term financing methods. Job shadowing was indeed a worthwhile experience for Derrick. Refer to McGines, Inc. From his work experience, Derrick should have learned that ____ has a repayment period of thirty to sixty days. a. factoring b. a secured loan c. a promissory note d. commercial paper e. trade credit

e. trade credit

traditional approach to budgeting

each new budget is based on the dollar amounts contained in the budget for the preceding year

Acquisition

essentially the same thing as a merger, but usually is used in reference to a large corporation's purchases of other corporations

unsecured financing

financing that is not backed by collateral; unsecured short-term financing offers several options

bond funds

invest in corporate, government, or municipal bonds that provide investors with interest income

stock funds

invest in stocks issued by small, medium-size, and large corporations that provide investors with income, growth, or a combination of income and growth

Growth

investments will increase in value

short- term financing

is money that will be used for one year or less

open-end fund

issues and sells new shares to any investor who requests them

personal income statement

lists your income and your expenses for a specific period of time—usually a month

venture capital

money invested in small (and sometimes struggling) firms that have the potential to become very successful

equity capital

money received from the owners or from the sale of shares of ownership in a business

long-term financing

money that will be used for longer than one year

initial public offering (IPO)

occurs when a corporation sells common stock to the general public for the first time

private placement

occurs when stock and other corporate securities are sold directly to insurance companies, pension funds, or large institutional investors

clean up

pay off completely

mutual fund

pools the money of many investors—its shareholders—to invest in a variety of different securities

Collateral

real estate or property pledged as security for a loan

articles of partnership (partnership agreement)

refers to an agreement listing and explaining the terms of the partnership

full disclosure

requirement that investors should have access to all important facts about stocks, bonds, and other securities so that they can make informed decisions

closed-end fund

sells shares in the fund to investors only when the fund is originally organized

municipal bond

sometimes called a muni, a debt security issued by a state or local government

Objective

specific statement detailing what an organization intends to accomplish over a shorter period of time.

common stock

stock owned by individuals or firms who may vote on corporate matters but whose claims on profits and assets are subordinate to the claims of others

preferred stock

stock owned by individuals or firms who usually do not have voting rights but whose claims on dividends are paid before those of common-stock owners

common stock

stock whose owners may vote on corporate matters but whose claims on profits and assets are subordinate to the claims of others

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

Inventories

stocks of goods held to satisfy future sales

corporate officers

the chairman of the board, president, executive vice presidents, corporate secretary, treasurer, and any other top executive appointed by the board of directors

flotation costs

the cost of selling stock

maturity date

the date on which a corporation is to repay borrowed money

capital gain

the difference between a security's purchase price and its selling price

net worth

the difference between the value of your total assets and your total liabilities

stock split

the division of each outstanding share of a corporation's stock into a greater number of shares

Liquidity

the ease with which an investment can be converted into cash

Goal

the end result that an organization expects to achieve over a one- to ten-year period

prime interest rate

the lowest rate charged by a bank for a short-term loan

cash flow

the movement of money into and out of an organization

retained earnings

the portion of a corporation's profits not distributed to stockholders

margin requirement

the portion of the price of a stock that cannot be borrowed

insider trading

the practice of board members, corporate managers, and employees buying and selling a corporation's stock

market value

the price of one share of a stock at a particular time

selling short

the process of selling stock that an investor does not actually own but has borrowed from a brokerage firm and will repay at a later date

asset allocation

the process of spreading your money among several different types of investments to lessen risk

Merger

the purchase of one corporation by another

Stock

the shares of ownership of a corporation

speculative production

the time lag between the actual production of goods and when the goods are sold

board of directors

the top governing body of a corporation, the members of which are elected by the stockholders

rate of return

the total dollar amount of return you receive on an investment over a specific period of time divided by the amount invested

financial leverage

the use of borrowed funds to increase the return on owners' equity

personal investment

the use of you personal funds to earn a financial return