Chapter 16: Financial Management and Securities Markets

The FDIC insures personal bank accounts up to a maximum of

$250,000

What are the two Common Sources for Long-Term Funds

- Attracting new owners (equity financing) - Long-term liabilities (debt financing)

Which four are considered nonbank financial institutions?

- Brokerage firms - Insurance companies - Pension funds - Finance companies

What are three characteristics of a certificate of deposit?

- Covers periods such as six months, one year, or seven years - Substantial penalty for premature withdrawal - Type of savings account

Managing Current Assets: Optimizing inventory

- Financial managers coordinate inventory purchases to manage cash flows - Optimal inventory levels determined mainly by method of production - Excess inventory ties up money unnecessarily vs. inventory shortages could drive customers to competitor

Managing Current Assets: Managing accounts receivable

- Important because many businesses make majority of sales on credit - Discounts for early payment come at cost of lowered profits - Credit ratings provided by credit bureaus, credit-rating agencies, and industry trade groups

What are three important functions of money?

- Measure of value - Medium of exchange - Store of value

What are three characteristics of credit unions?

- Members are allowed to vote for directors. - They are considered financial institutions. - Members are allowed to share in the credit union's profits.

What are three descriptors of "the Fed"?

- Organized into 12 regions - Regulates the U.S. financial industry - Established in 1913

Which two statements are true about commercial banks?

- Their main source of funds comes from checking and savings accounts - They are the largest of all financial institutions

what is included when monitoring the working capital accounts?

- accounts receivable - cash reserves - inventory - accounts payable

What is focused when: develope and implement a financial plan?

- amount of funds - sources of funds - uses of funds

what is focused when: manage cash reserves?

- cash coming in - cash going out - investment options

what is included in external sources?

- credit cards - trade credit - secured loans - unsecured loans - commercial paper - factoring - leases - corporate bonds - equity

what are the six Qualitative Assessment of Capital Budgeting Risk?

- introduce a new product in foreign markets (risk depends on stability of country) - expand into a new market - introduce a new product in a familiar area - add to a product line - buy new equipment for an established market - repair old machinery

what are the five ways of investing idle cash?

- marketable securities - treasury bills (T-bills) - commercial certificates of deposit (CDs) - commercial paper - eurodollar market

what is focused when: monitor cash flow?

- receivables and payables - inventory - cash

what is included in internal sources?

- revenue from sales - investment income - revenue from selling assets

What are the three major sections of understanding financial management?

1. develop and implement a financial plan 2. monitor cash flow 3. manage cash reserves

_____ is likely the most important characteristic of money. If businesses do not take money as payment, consumers will have to find another means of paying for purchases.

Acceptability

Securities trade in the secondary market by _____.

Brokers

If Joe, the owner of Joe's Flowers, has a large stash of cash, he might choose to store the money in a(n) _____ for six months, one year, or even seven years and receive a predetermined rate of interest.

CD

Which banking institution is the largest and oldest of all financial institutions and relies mainly on checking and savings accounts as its major source of funds?

Commercial bank

Extending credit

Credit ratings provided by credit bureaus, credit-rating agencies, and industry trade groups

Banks are able to accomplish "paperless" transactions through the use of

EFTs

What is considered to be one of the most important facets of financial management?

Ensuring that there are sufficient (but not excessive) funds on hand to meet the company's obligations

The _____ was established in 1933 and insures individual bank accounts for Americans.

FDIC

Which nonbank financial service is most closely associated with the use of premiums?

Insurance companies

Floating-rate bonds

Interest rates change with current interest rates

Marketable securities

Investment in U.S. Treasury bills, certificates of deposit, commercial paper, or eurodollar deposits

working capital management

Managing short-term assets and liabilities

Eurodollar market

Market for trading U.S. dollars in foreign countries

Which tool, used by the Federal Reserve Board to control the money supply, is the most common and is performed almost daily?

Open market operations

Pricing Long-Term Money

Returns from any project must cover operating costs and cost of capital used to finance the project.

Who owns and controls a credit union?

The credit union's depositors

accounts receivable

The total amount of money owed to a business, but not ye received

What is the primary purpose of money in a society?

To enable a person or organization to transform a desire into an action

Open market operations consist of the buying and selling of ______.

U.S. Treasury bills

financial plan

a document that outlines the funds a firm will need for a certain period of time, along with the sources and intended uses of those funds.

factor

a finance company to which businesses sell their accounts receivable—usually for a percentage of the total face value

The fee that an insurance company charges for coverage is known as _____.

a premium

Serial bonds

a sequence of small bond issues of progressively longer maturity

Junk bonds

a special type of high interest rate bond that carries higher inherent risks.

If people do not trust the value of a nation's money, companies will not use it as payment for goods and services. This describes the _____ characteristic of money.

acceptability

working capital accounts

accounts receivable, accounts payable, inventory, and cash

An EFT would be accomplished by using

an ATM

lockbox

an address, usually a commercial bank, at which a company receives payments in order to speed collections from customers.

line of credit

an arrangement by which a bank agrees to lend a specified amount of money to the organization upon request.

Current ___ are short-term resources such as cash, investments, accounts receivable, and inventory. (Enter one word in the blank)

assets

Secured bonds

bonds that are backed by specific collateral that must be forfeited in the event that the issuing firm defaults.

transaction balances

cash kept on hand by a firm to pay normal daily expenses, such as employee wages and bills for supplies and utilities.

cash reserves

cash or cash equivalents - readily available under a company's control (can be converted into cash quickly)

Commercial certificates of deposit (CDs)

certificates of deposit issued by commercial banks and brokerage companies, available in minimum amounts of $100,000, which may be traded prior to maturity

In a credit union, a share draft account is the name given to a _____.

checking account

Trade credit

credit extended by suppliers for the purchase of their goods and services.

trade credit

credit extended by suppliers for the purchase of their goods and services.

Unsecured bonds

debentures or bonds that are not backed by collateral.

bonds

debt instruments that larger companies sell to raise long-term funds.

Long-term liabilities

debts that will be repaid over a number of years, such as long-term bank loans and bond issues.

A checking account is also called a(n) _____.

demand deposit

The reserve requirement is the percentage of ______.

deposits that must be kept in reserve by banking institutions

Nonbanks are financial organizations that _____.

do not accept deposits.

Retained earnings

earnings after expenses and taxes that are reinvested in the assets of the firm and belong to the owners in the form of equity.

inventory

economic value that can be converted to cash

strategic plan:

establishes goals, objectives, priorities

The study of money: how it's managed by individuals, companies, and governments is known as ___

finance

Financial management involves:

finding suitable sources of funds and deciding on the most appropriate uses for those funds.

A demand deposit (also known as a checking account) is referred to as such because ______.

funds may be withdrawn by its owner without advance notice

liquidity crisis

having insufficient cash to meet their short-term needs

operating budget:

identifies cash requirements and spending for current time period

start-up budget:

identifies finds and spending needed to launch the company

financial plan:

identifies he amounts and types of capital needed to accomplish hose goals and objectives

budgets:

identify where and when money will be spent

What are the two sources of funds?

internal and external sources

secured loans

loans backed by collateral the bank can claim if the borrowers do not replay them.

Unsecured loans

loans backed only by the borrowers' good reputation and previous credit rating.

Nonbank Liabilities

loans from other financial institutions taxes/ wages

capital lease

long-term contract and shows up on balance sheet as asset and liability

The Fed controls the amount of money available in the U.S. economy through _____.

monetary policy

Anything that can be used for payment of goods and services is defined as ______.

money

accounts payable

money owed by a company to its creditors.

Accounts receivable

money owed to the firm by its customers, while accounts payable are bills that the company owes to its suppliers, lenders, and other parties.

___ funds pool the dollars of individual investors and invests them into a large number of well-diversified securities.

mutual

Which type of investment tool should Carrie use if she wants to pool her small investment of $1,000 with other people who also have a small investment?

mutual fund

project budgets:

plan funding and spending for specific projects

capital budgets:

plan funding for major capital investments

Long-term (fixed) assets

production facilities (plants), offices, and equipment, heavy machinery, furniture, automobiles—all of which are expected to last for many years.

Economic Order Quantity (EOQ)

quantity of materials that results in the lowest ordering and storage costs.

Operating lease

short-term cancelable lease and does not show up on balance sheet

Treasury bills (T-bills)

short-term debt obligations the U.S. government sells to raise money - considered risk-free

The organization in charge of regulating the banking and financial industry in the United States is ______.

the Federal Reserve Board

prime rate

the interest rate that commercial banks charge their best customers (usually large corporations) for short-term loans.

Capital budgeting

the process of analyzing the needs of the business and selecting the assets that will maximize its value.

Finance is defined as ______.

the study of how money is managed by individuals, companies, and governments

What is an example of a P2P electronic payment tool?

venmo

The management of short-term assets and liabilities, which are continually flowing through an organization is referred to as ______ management.

working capital

commercial paper

written promise from one company to another to pay a specific amount of money.