BUSI 1301: CH. 16 Concepts

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.

Which of the following is a type of dividend?

A payment of additional shares or cash to stockholders

A corporation looking to raise funds would look to find people who would be interested in investing with that corporation. What person would help with this task?

An investment banker

What type of specialist helps firms underwrite new issues of securities they need to raise money in the capital markets?

Investment bankers

Short-term debt obligations sold by the U.S. government to raise money are referred to as ______.

T-bills

True or false: The main goal of financial managers who focus on current assets and liabilities is to maximize the return to the business on cash, temporary investments of idle cash, accounts receivable, and inventory.

True

True or false: A firm's cash must be available in the correct amount and on the correct date.

True Recall that ensuring that funds are on hand to meet company obligations is an important goal of financial management.

True or false: The prime rate is reserved for a commercial bank's best customers.

True for short-term loans.

When businesses calculate the costs to borrow money for capital budget projects they must be sure to include the _____ expenses for the debt used to finance the project.

interest

A sequence of small bond issues of progressively longer maturities are called _____ bonds.

serial

Which potential investment project would pose the least amount of risk for a firm?

Repairing old machinery and equipment

What type of stock is the single most important source of capital for most new companies?

Common

_______ stockholders do not have voting rights in a firm.

Preferred

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

The asset that backs a secured loan is called _______.

collateral

The first-time sale of stocks and bonds directly to the public is called a(n) ______.

new issue

One of the strongest motivations for companies to manage their financial resources wisely is the desire to _______ the costs of their funds in order to increase their overall profitability.

reduce

Select the two common ways firms raise funds for long-term assets.

✅ Debt financing ✅ Equity financing

What is debenture?

An unsecured bond

______ financing involves borrowing money; ______ financing is selling part of the company or reinvesting retained earnings in the company.

Debt; equity

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

Treasury bills

The balance sheet item that reflects money owed to a business by credit customers is ______.

accounts receivable

While a loan must be repaid, factoring is the selling of _____ to a finance company who then assumes responsibility for collecting the accounts.

accounts receivable

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

assets

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

debt

An international market for trading U.S. dollars in foreign countries is called the _______ market.

eurodollar

A market for U.S. dollars held in foreign countries is the ______, whereas ______ is sold on the open market.

eurodollar market; a commercial CD

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

fixed

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 ____.

principal

A _______ rate loan has a floating interest rate, whereas _______ rate loans have a rate of interest that does not change during the life of the loan. (two blanks/two words)

variable, fixed

Of the following companies, which two are more likely to issue junk bonds?

✅ Companies in poor financial health ✅ Start-up companies with limited track records

In a secured loan, if the borrower does not repay the loan, the bank can claim the _______ which was used to secure the loan in the first place.

collateral

The term used to describe a written promise from one company to another to pay a specific amount of money is _______ paper.

commercial

A written promise from one company to another to pay a specific amount of money is the definition of ______.

commercial paper

The single most important source of capital for most new companies is _______ stock.

common

A bond's interest is sometimes called the _______ _______.

coupon rate

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

higher

When a small business owner borrows money from a bank, they will repay the original principal amount plus _______.

interest

Juan 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

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

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

working capital

Which of the following are examples of debt financing? (Select all that apply)

✅ Long-term loans ✅ Lines of credit ✅ bonds

Which three statements are true about a factor?

✅ The factor buys a firm's accounts receivables for a discount. ✅ The firm that buys the accounts receivable collects the amount due. ✅ Small businesses often use it for financing in the short term.

True or False: Financial management is limited to business organizations.

False All organizations, not just businesses, must manage their resources effectively and efficiently if they are to achieve their objectives.

Zoe owns shares of Proctor and Gamble stock. If the stock is trading for $66 and the annual dividend payment is $2.00, what is the dividend yield for this stock?

3 percent

If a company issues a $1,000 bond with an interest rate of 5 percent and a maturity date of 2030, what is the company agreeing to pay the bondholder?

A total of $50 interest each year until the specified maturity date in 2030

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.

_____ stockholders have voting rights, whereas ______ stockholders do not.

Common; Preferred

What is a bond?

Debt instruments that larger companies sell to raise long-term funds Select a concept resource to continue.

_______ trading is faster and less expensive than floor trading, and now accounts for most of the stock trading done worldwide.

Electronic

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

True or false: Bonds can only be issued by large corporations.

False

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 A major difference between commercial and consumer CDs is that commercial CDs can be sold before maturity date without penalty.

True or false: Though electronic trading is faster and less expensive than floor trading, most trading is still conducted on the floor of a stock exchange by actual people.

False Most trading world wide is done electronically.

Match the term to its definition. I. Index II. Average

I. A comparison of current stock prices with those in a specified base period II. The calculated average of certain stock prices

Match each example to the type of loan it represents. I. Variable rate loan II. Fixed rate loan

I. A mortgage loan with a beginning interest rate of 4 percent, and the possibility of a rate increase of 2 percent each year, with a maximum rate increase of 5 percent over the original rate. II. A mortgage loan with a rate of 5 percent that will not change over the life of the loan.

Match the market type with its definition. I. Primary market II. Secondary Market

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

Match the marketable security to its correct definition. I. T-bills II. Commercial certificates of deposit III. Eurodollar market IV. commercial paper

I. Short-term debt obligations the U.S. government sells to raise money II. Savings accounts offered by commercial banks and brokerage companies with minimum investment amounts of $100,000 or more III. A market for trading U.S. dollars in foreign countries IV. a written promise from one company to another to pay a specific amount of money

Match the terms to their correct definition. I. Indenture II. Coupon rate III. Maturity date IV. Face value

I. The bond contract II. The annual interest rate on a bond III. The date in which a bond is to be repaid IV. The initial sales price of a bond

What is the first public offering of a corporation's stock?

Initial public offering (IPO)

_____ is a percentage of the principal that a bank charges for use of its money.

Interest

Which of the following does not trade on the OTC (over-the-counter) market?

Large corporate stocks

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

Which type of stock gives its owners preference in the distribution of company profits?

Preferred stock

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

Primary market

What market handles the trading of securities between investors rather than the company that issued the stock or bonds?

Secondary market

Which of the following statements is true regarding secured and unsecured bonds?

Secured bonds are backed by collateral but unsecured bonds are not.

Which type of bond is not one bond, but a sequence of small bonds?

Serial bonds

What is par value?

The dollar amount printed on the stock certificate and has no relation to actual market value

In an economic downturn, what is the likely impact for companies that have relied too heavily on debt?

They may not earn enough income to make the interest payments on their loans.

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

Unsecured bonds

How often are T-bills issued?

Weekly

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

If you use your Macy's credit card to purchase a new outfit, you represent a(n) _____ on Macy's balance sheet.

accounts receivable

A(n) _______ is a debt instrument that larger companies and governments sell to raise long-term funds.

bond

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

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

capital budgeting

When the board of directors distributes some of a corporation's profits to the owners, it issues them as ______.

cash dividend payments

In financial management, the words short-term and _____ are used interchangeably.

current

Cash, investments, accounts receivable and inventory are all examples of ______.

current assets

Accounts payable and short-term bank loans are examples of ______.

current liabilities

The dividend yield is found by dividing the _____ by the ____ per share.

dividend; price

In most cases, bond indentures specify that interest payments be made ______.

every six months

The field that addresses the issues of obtaining and managing the funds and resources necessary to run a business successfully is called ______.

financial management

If bond issuers believe that interest rates will fall, they may issue ______ bonds while rates are still high instead of locking in high fixed rates for the lifetime of their bonds.

floating rate

Bonds that do not have a fixed interest rate, but rather have a rate that changes with the current rates, are called ______.

floating-rate bonds

Naveen owns a distribution supply company. He is trying to decide whether or not to develop a robotic delivery system. All of the following are items Naveen should consider when making his decision EXCEPT ______.

how he can use his competitor's equipment

The bond contract, also called the _____, specifies all of the terms of the agreement between the bondholders and the issuing organization.

indenture

As a measurement of stock prices, a(n) ______ compares current stock prices with those in a specified base period.

index

During an economic downturn, companies with too much long-term debt may find themselves having difficulty making the required _______ payments on their loans. Ultimately the company may be forced into bankruptcy.

interest

The object of ______ is to minimize the firm's investment in inventory without experiencing production cutbacks as a result of critical materials shortfalls.

inventory optimization

A _____ bond is a corporate bond that pays a high interest rate because of the high risk associated with the firm that issued the bond.

junk

Alvin wants to expand his snowplowing business and needs to buy 2 new trucks. He doesn't have the cash to pay for the trucks, so he is thinking about paying a usage fee for the trucks, rather than buying them. This arrangement is called ______.

leasing

Paying a usage fee for a fixed asset, rather than buying it is called _____.

leasing

Current _______ are short-term debts such as accounts payable, accrued salaries, accrued taxes, and short-term bank loans.

liabilities

Debts that will be repaid over a number of years, such as a lengthy bank loan and bond issues are called ______.

long-term liabilities

Temporary investments of extra cash generated by companies are called ______.

marketable securities

Financial managers involved with the management of current assets and liabilities have one primary goal, which is ______.

maximize the return to the business on cash, investments, accounts receivable and inventory

Short-term assets and liabilities are called current because they are always replaced by new assets and liabilities within ______.

one year They are usually replaced within three or four months, but always within a year.

Firms attempt to maximize their accounts receivable by all of the following EXCEPT ______.

only lending to wealthy persons

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

owner

A stock's ______ is a dollar amount assigned to each share of stock on the stock certificate.

par value

Owners of ______ stock are given preference in the payment of company dividends

preferred

The interest rate commercial banks charge their best customers, usually large corporations, for short-term loans is the _____ rate.

prime

If a company balance sheet shows retained earnings, this number represents ______.

profits the company kept and reinvested in the firm

Early payment discounts offered to credit customers increase cash flow for the firm and ______.

reduce the firm's profitability

Profits a company keeps and reinvests in the firm are called _______ _______.

retained earnings

A type of trading that rely on programmed instructions that look for patterns in the market that will trigger a trade to buy or sell is called ______.

robotic trading

The terms "bots" or "algos" are used to refer to ______.

robotic trading

A loan backed by collateral with something valuable (like property) is called a _______ loan.

secured

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

secured

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

secured bonds

If a small business owner takes out a loan to purchase a delivery van, where the delivery van is used as collateral for the loan, it is called a _____.

secured loan

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

securities markets

Which of the following provide a mechanism for buying and selling securities?

securities markets

The NYSE and the NASDAQ are ______.

stock markets

Credit extended by suppliers for the purchase of their goods and services is called _______ _______.

trade credit

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

Bonds that are not backed by collateral are called _______ bonds, whereas _______ bonds are backed by collateral that is pledged to bondholders if interest or principal isn't paid when promised.

unsecured or debenture, secured or Mortgage

Select the two statement(s) that are true about commercial certificates of deposit (CDs).

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

Which of the following inventory issues negatively impact a firm's finances? (pick two answers)

✅ Excess inventory sitting in a warehouse reduces money that could be invested in some other part of the company. ✅ Inventory shortages may cause a customer to seek out a competitor's product for purchase.

Which three items are specified in the bond indenture?

✅ Face value of the bond ✅ Maturity date of the bond ✅ Interest rate of the bond

Choose all of the long-term (fixed) assets from the following list.

✅ Heavy machinery ✅ Automobiles ✅ Production facilities

What three things make up stockholders' equity?

✅ Preferred stock ✅ Retained earnings ✅ Common stock

Name the two largest stock markets in the United States.

✅ The NASDAQ ✅ The New York Stock Exchange

Which of the following are examples of temporary marketable security investments utilized by firms to invest idle cash? (pick four answers)

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

Which of the following can issue bonds? (Select all that apply)

✅ corporations ✅ federal, state, and local governments ✅ public utilities ✅ nonprofit corporations

The term working capital management refers to the continuous flow of _____ and _____ through an organization, which are said to be "working."

✅ short-term assets ✅ short-term liabilities

Which two things will firms do to speed up the collection of payments from customers?

✅ utilize a lockbox ✅ utilize electronic funds transfer systems