Chapter 16. Financial Management & Securities Markets

What are three examples of long-term (fixed) assets

Automobiles Heavy machinery Production facilities

Select the two statement(s) below that accurately characterize commercial certificates of deposit (CDs).

Commercial CDs are issued by commercial banks and brokerage companies in minimum amounts of $100,000. Commercial CDs may be traded prior to maturity.

Which type of market serves companies that wish to raise financial capital

Primary market

What are the two largest stock markets in the United States

The NASDAQ The New York Stock Exchange

True or false: When considering the risk of an overseas investment, a company must take into account the political climate of the region

True

How often are T-bills issued

Weekly

Current are short-term resources such as cash, investments, accounts receivable, and inventory

assets

The process of analyzing the needs of the business and selecting assets that will maximize its value is called

capital budgeting

Two common choices for raising funds to pay for long-term assets are equity financing and _____ financing

debt

Overall, a company must be able to cover both _____ costs or it will eventually fail

financial and operating

Production facilities, office equipment, and heavy machinery are assets that are expected to last many years and are called long-term or _____ assets

fixed

Newer and less prosperous firms must pay ______ costs to attract capital because these companies tend to be quite risky

higher

Jarek runs a small manufacturing company. He thinks over the next year he might need to borrow approximately $25,000 for upgrades to his business. He has decided to make an arrangement with the bank for (a) _____, which will allow him to borrow various amounts over time, not to exceed $25,000, if he needs it.

line of credit

In the broadest terms, the securities markets can be thought of as providers of _____ to investors.

liquidity

Bonds accrue interest until they have been repaid on or before the ______ date

maturity

Ali owns stock in a U.S. publicly-traded company. As a shareholder she is a(n) _____ of the corporation

owner

When Sal and Jen bought their first home they obtained a mortgage. The amount of money they borrowed for their mortgage is called

the principal

When individuals and businesses borrow money, the amount of money borrowed is called

the principal

Idle cash typically does not earn interest for the company, thus financial managers try to keep small amounts of cash on hand, called _____, to pay current bills such as wages, supplies, and utilities.

transaction balances

The companies listed on the Dow Jones Industrial Average make up about _____ of the total value of the NYSE

25%

Which type of company will benefit the most from having a lockbox

A company that receives thousands of checks each day.

What do trade credit terms of 2/15 net 30 mean to a buyer

A discount of 2 percent is offered if the bill is paid within 15 days, otherwise, the entire amount is due within 30 days.

What is a bond

Debt instruments that larger companies sell to raise long-term funds

What three things make up stockholders' equity

Preferred stock Retained earnings Common stock

Which two statements correctly represent trade credit

Trade credit is the most widely used source of short-term financing. Trade credit frequently involves discounts to organizations that pay their bills early.

Which investment option is considered to be the safest of all investments since it is issued by the federal government

Treasury bills

Which bonds are not backed by any specific collateral, such as land or equipment

Unsecured bonds

An arrangement by which a bank agrees to lend a specified amount of money to an organization upon request is called

a line of credit

Joan owns a flower shop. As a small business owner, she carefully manages the finances of her business. If Joan purchases flowers from a local producer for $500 and agrees to pay for the flowers within a month, Joan will list the $500 bill as _______ on her balance sheet.

accounts payable

Money an organization owes to suppliers for goods and services is called

accounts payable

Quinn works for a manufacturing company and is in the process of making a decision about the funding of future projects. Since the company has outlined more potential projects than can actually be funded, Quinn must select those projects that promise the greatest future return for the company. Quinn is involved in the process of

capital budgeting

Firms that receive thousands of checks from customers each day may benefit from the use of a(n) ______ to speed up cash collections from customers.

lockbox

Temporary investments of extra cash generated by companies are called

marketable securities

A loan backed by collateral, something valuable like property, is called a ____ loan

secured

An individual wants to sell his or her stocks and bonds to other investors. This is made possible through

securities markets

An investor would check the Dow Jones Industrial Average in order to

see changes in the stock market.

The NYSE and the NASDAQ are

stock markets

A loan that does not require collateral is called a(n) ___ loan

unsecured

Match the market type with its definition

-Primary: Market where new issues of stocks and bonds are sold to the public Secondary: Stock exchanges and over-the-counter markets where investors can trade previously owned stock

Choose the correct definition for a transaction balance

A transaction balance is cash kept on hand by a firm to pay normal daily expenses such as employee wages and bills such as utility payments

What is a debenture

An unsecured bond

What are four examples of temporary marketable security investments utilized by firms to invest idle cash

Certificates of deposit Commercial paper U.S. Treasury bills Eurodollar deposits

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

What are the two common ways firms raise funds for long-term assets

Equity financing Debt financing

Refer to Figure 16.1. Which of these potential projects would create the least risk for a business

Jupiter Mfg. will spend $10,000 to repair its current paint sprayer room.

Because most corporate bonds and all U.S. government debt securities are traded in the _____ market, this market regularly accounts for the largest total dollar value of all the secondary markets

OTC

Which market has no central location and is a network of dealers all over the country

OTC

True or false: Commercial certificates of deposit (CDs) work exactly the same way consumer CDs work, except that commercial CDs are issued in larger dollar amounts.

False