Chapter 10: Financial Management

Alison 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

Lenders right require the borrowing firm to pledge assets as...

Collateral

Which of the following is a true statement regarding "collateral"?

Collateral is associated with secured loans.

Which of the following is true regarding corporate bonds?

Corporate bonds can be either secured or unsecured depending on the agreement with the purchaser and issuer.

Which of the following is NOT a true statement regarding the tradeoffs a firm faces when selecting either debt of equity financing options?

Debt financing is advantageous because if the firm does not have positive net cash flow, they do not have to pay principle or interest payments to the lender.

Investments

Encompasses careers related to the securities markets (stocks and bonds) and the investment activities of individuals, firms and other organizations. ex: investment advisors, stockbrokers and securities analysts.

An advantage of debt financing is that the firm can deduct both principle and interest payments when calculating taxable income

False

An advantage of debt financing is that the firm can deduct both principle and interest payments when calculating taxable income.

False

Eduardo is considering an investment opportunity that is more risky than others. He should expect to earn a lower rate of return compared to a similar, but safer investment

False

Eduardo is considering an investment opportunity that is more risky than others. He should expect to earn a lower rate of return compared to a similar, but safer investment.

False

The job of a procurement officer is to find private individuals willing to invest in the company in exchange for an equity stake in the firm

False

The job of a procurement officer is to find private individuals willing to invest in the company in exchange for an equity stake in the firm.

False

Which of the following would NOT be a use of working capital for MacKinnon Trailer Sales?

Financing construction of a new trailer repair center in Orlando

The 3 sequential steps of the financial planning process are, in order:

Forecast, Budget, Control

is NOT a characteristic associated with commercial paper?

High-risk borrowers

Risk-Return trade off

Individuals prefer more certain financial earnings than less certain outcomes, so the riskier the decision the higher possible return if all goes well

Time value of money

Investors demand a premium in exchange for waiting to get their money later, and borrowers are willing to pay an additional amount to postpone making the payment until later

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

Firms take advantage of ______ for the short-term financing needs. _____ is 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

Trade credit

Carl owns a company that produces suspension components for high performance motorcycles. He needs additional funds to support growth in his business, but does not want to give up ownership control of his company. Given his situation, Carl should consider using debt financing for his business

True

Firms are not required to payback the funds contributed by equity investors.

True

Holding all else constant, if a firm's inventories increased by 22% over the past month, this would represent a use of working capital.

True

If a borrower only pays back the principle portion of a loan, the lender will not earn an economic return on the transaction.

True

One attractive aspect of venture capital financing, is that the investors can also provide helpful guidance to a young and growing company.

True

Over the long run, placing your funds in a diversified portfolio of investment opportunities will usually generate higher returns than investing all funds in a single company.

True

Trade credit is one of the most common forms of debt financing that firms use to support operations.

True

Tina Drey is the CFO of Sprouthaus, a chain of German health food restaurants. She is weighing the relative advantages and disadvantages of raising funds via debt or equity instruments. Which of the following is a correct statement.

Using debt will require both principle and interest to be paid back on a regular basis, but equity investments do not need to be repaid.

Cash flow non 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

Corporate bonds

a form of debt in which the borrowing firm agrees to pay the purchaser of the bond a specified amount of money according to some specified schedule of payment in the future--may be secured or unsecured & form of debt financing

Chief financial officer (CFO)/vice president of finance

a senior position within the organization structure that usually reports directly to the chief executive officer (CEO)

Primary tasks of CFO is to

acquire a sufficient quantity of financial capital and continually evaluate the relative attractiveness of the financing alternatives alive to the firm

Capital budgets

aid in decision related to the purchase of long-term assets that usually involve high-dollar expenditures. Can be considered investments of financial capital in the long-term profitability 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

Valuation of assets

an organization's ability to generate positive cash flow over time--assets that generate positive cash flow sooner are valued higher

Long-term cash flow forecasts

based on expectation of new cash flows for one year or more

Short-term cash flow forecasts

based on expectations of net cash flow within the next 12 months

Master budgets

bring all of the information from other budgets together and serve as a master financial plan for the firm over a given planning horizon

commercial banks lend funds that help firms meet long-term financing needs such as

building a production facility or purchasing significant pieces of equipment (payback periods are 3-20 yrs so typically have higher interest and are more likely to be secured)

Inventory

can either be an assortment of finished goods that a firm has available for immediate delivery to customers or it can be a supply of inputs a firm uses to support its operations. Can be thought of as an investment but may have storage costs

Diversification

can moderate risk, shows that spreading your funds across a variety of investment opportunities can earn higher returns in the long run because the risk is diversified. "don't put all your eggs in one basket"

secured loans

collateral can be seized and sold by lender if the borrower does not repay

Dividends

double taxing that can be a return on stock

Sources of equity financing

earnings, issuing stock and center capital

Buyers and procurement officer

employees who work with potential suppliers to evaluate the prices of various inputs to production relative to the value that alternatives provide

Controls

established and administered by financial managers to compare how the firm is performing relative to the budget plan

Issuing stock may be decided if

firms provides the investor an ownership stake in the company, but the firm is under no obligation to repay any funds raised by selling stock to the new investors that purchased the stock

Operating budgets

focused on the expected revenue and expenses related to the firm's predicted sales forecast, end product of an operating budget is the firm's expected gross profit from operations

First step of the financial planning process is to generate a prediction of the upcoming financial needs of the firm by making

forecasts

To improve cash flow and increase the level of working capital in the firm a financial manager would want to

get paid as soon as possible and pay expenses as late as possible--all else being equal

Letters of credit

guarantees that bank 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

CEO is responsible

in forecasting what the financial needs of the firm are going to be in the short and long term, help make decision and generate budgets consistent with those needs and finally prefaced a system of controls as a means to see if the firm is on track with the plan

unsecured loans

in which no assets of the firm need to be pledged as collateral

When financial professionals use the phrase "time value of money", they mean that:

investors demand to be compensated for waiting to get their money sooner, and borrowers are willing to pay money to postpone making payment until later.

Factoring

involves selling their accounts receivables to a specialized lender at a discount and is then responsible for collecting on those accounts

Cash flow forecast

is a prediction of the amount of money that is expected to have to pay out

Deb financing: principle

is the initial amount they borrowed and some amount of interest

Trade credit:accounts payable

most common and convenient forms of debt financing

Retained earnings

most common sources of equity financing and include claims by existing owners so in a sense they are self-financing the needs of their company

In order to improve short-term cash flow in their firm, a financial manager would want to

pay accounts payable later, and collect accounts receivable sooner

managing timing and use of working capital helps to improve

paying bills today and still have profit in the end ex. Perez page 147

Purchasing manager

plans, directs and coordinates activities related to acquiring the materials, products and service that are needed for a firm to operate

Budgets

prepared to demonstrated how the firm plans to allocate its financial assets to achieve the forecasted goals and objectives, reflects the financial manager's solution to any predicted cash flow shortfalls that were identified during the forecasting process

Financial institutions

professionals employed by firms that specialize in financial products such as banking, insurance and leasing

Financial management

referred to as "corporate, internal, or business finance" & work within for-profit, non-profit, and gov entities, role is to manage the org's financial resources

Modern financial management theory suggest that the overall goal of the financial manager is to make decision consistent with

shareholder wealth maximization (SWM): financial manager decisions that create the most value for the shareholders of the firm

Commercial paper

short-term unsecured promissory notes that in denominations are in excess of $100,000.. usually used by large corporations, insurance companies and municipal governments and financial institutions

Commercial finance companies are lenders that specialize in making ________ loans to companies that are usually ________ and have ________ rates of interest.

short-term, secured, higher

Cash flow budgets

show cash flow surpluses and shortfalls over shorter time periods such as one to three months into the future based on current planned operating and financing activities of the firm, highlight periods where the financial manger may need to borrow money or transfer money from other accounts to cover shortfalls

Venture capital

start-up firms that seek funds from wealthy investors in exchange for some percentage of ownership in the company

If Carl's Cardboard Container, Inc. (CCC) offers trade credit to their customers with the terms "5/10 net 60", that means that:

the customer must pay within 60 days, but CCC will give a 5% discount if customer pays within 10 days.

If a CFO notices that the value of his firm's accounts receivable is increasing while the value of the firm's accounts payable is decreasing

the firm's net cash flow is decreasing

Firms utilize short-term lines of credit for all of the following purposes EXCEPT

to finance the construction of a new building or factory

When Tesla formed in 2003 to begin development and eventual production of their 2-seat Roadster, the firm used all of the following sources to gather the funds to support initial operations except

unsecured loans from large commercial banks.

The term "commercial paper" refers to

unsecured, short-term debt

Stock out situations

when a retail business has a customer ready to buy its product but at the last minute it loses the sale because they don't have the product available in store

Finds that firms use to meet their day-day operational cash flow needs

working capital