Chapter 18 Study Plan Questions

What is used as the basis for the price of an​ IPO? A. Institutional investors B. Road show data C. SEC guidelines D. Sales on a stock exchange E. Underwriter fees

B. Road show data (Before the stock is officially offered for​ sale, the company and its team promote the offering privately to institutional investors through a series of meetings called the road show. Based on the demand they perceive during the road​ show, the company and the underwriter decide how to price the IPO shares.)

Which of the following refers to a financial guide for a given period of​ time? A.Financial plans B.Budget C. Bottom-up request D. Top-down mandate E. Financial control

B. Budget (In addition to developing a financial plan and monitoring cash​ flow, financial managers are responsible for developing a​ budget, a financial guide for a given​ period, usually the​ company's fiscal​ year, or for the duration of a particular project.)

Which of the following describes the typical interest rate a company must disburse for its combined amount of equity and​ debt? A. Equity financing B. Cost of capital C. Zero-based budgeting D. Prime interest rate E. Hedging

B. Cost of capital (Cost of capital is the average rate of interest a firm pays on its combination of debt and equity.)

Which of the following outlines the funds required for a specific length of​ time, along with how that capital will be​ utilized? A. Commercial paper B. Financial plan C. Debenture D. Convertible bond E. Prospectus

B. Financial plan (A financial plan is a document that outlines the funds needed for a certain period of​ time, along with the sources and intended uses of those funds.)

Which of the following represents an agreement lenders make with borrowers which gives those borrowers capital that can be utilized at any time after a loan is​ authorized? A. Capital investment B. Line of credit C. Equity D. Start-up budget E. Collateral

B. Line of credit (A line of credit is an arrangement in which a financial institution makes money available for use at any time after the loan has been approved.)

Which of the​ "five C's" for considering loan applications involves examining a​ company's debt and liquidity ratios and even private​ finances? A. Capacity B. Conditions C. Collateral D. Capital E. Character

A. Capacity (To judge the​ company's capacity or ability to repay the​ loan, lenders scrutinize debt​ ratios, liquidity​ ratios, and other measures of financial health. For small​ businesses, the​ owners' personal finances are also evaluated.)

Harry owns a successful​ company, which he is looking to grow and expand. Instead of using his own money to expand the​ company, he has decided to invest his excess capital in various stocks and other small investments and borrow money to aid in company growth. By doing​ this, Harry believes he will obtain a large rate of return that will help him further expand his company.​ Harry's approach exemplifies which of the​ following? A. Leverage B. Debenture C. Compensating balance D. Collateral E. Trade credit

A. Leverage (A company might be better off investing its excess cash in external​ opportunities, such as stocks of other​ companies, and borrowing money to finance its own growth. Doing so makes sense as long as the company can earn a greater rate of return​ (the percentage increase in the value of an​ investment) on those investments than the rate of interest paid on borrowed money. This concept is called leverage because the loan acts like a​ lever: It magnifies the power of the borrower to generate profits.)

__________ is defined as the possession of assets that are not yet publicly traded. A. Private equity B. debt financing C. A secured bond D. A capital investment E. A debenture

A. Private equity (Private equity is the ownership of assets that​ aren't publicly​ traded, such as venture capital.)

Customers of HandyMan Tools currently owe​ $280,000 for the products they have bought on credit from HandyMan. This amount is considered as​ _______. A. accounts receivable B. zero-based budgeting C. cost of capital D. accounts payable E. hedging

A. accounts receivable (Accounts receivable are amounts that are currently owed to a firm and include factors such as who qualifies for credit and who does​ not, how long customers are given to pay their​ bills, and how aggressive the firm is in collecting its debts.)

A​ ______ tends to have lower interest rates and can be replaced at the​ possessor's preference and transformed into common stock of the issuing company. A. convertible bond B. lease C. secured bond D. bond E. debenture

A. convertible bond (A convertible bond is a corporate bond that can be exchanged at the​ owner's discretion into common stock of the issuing company and has lower interest rates.)

When a company must sell its accounts receivables in order to acquire capital because its customers are taking too long to pay their​ bills, it is called​ ______. A. factoring B. equity financing C. prospectus D. capital budgeting E. debt financing

A. factoring (Factoring involves obtaining funding by selling accounts receivable.)

Companies that carry a lot of debt are said to be​ _______. A. highly leveraged B. carrying a low​ risk/return trade-off C. carrying a high​ risk/return trade-off D. leveraging financial management E. in a liquidity crisis

A. highly leveraged (Companies that are highly leveraged​ (that is, carrying a lot of​ debt) are forced to devote more of their cash flow to debt service and therefore​ can't spend that money on​ advertising, staffing, or product development.)

Earl is a contractor and is scheduled for a large project this month. In order to prepare for the​ project, Earl has compiled a list of the supplies he will need. Earl has made a deal with his supplier to purchase the necessary items directly from the supplier when he needs them and with delayed payment. Which of the following describes what deal Earl has set up with his​ suppliers? A. Unsecured loan B. Trade credit C. Collateral D. Debenture E. Compensating balance

B. Trade credit (A trade credit is credit obtained by a purchaser directly from a​ supplier, creating accounts receivable. This is also called​ open-account purchasing.)

Rita is looking to open her own fashion boutique. She has figured out her startup costs and is now in the process of organizing and gathering capital through various​ lenders, whom she plans to repay within 5 years.​ Rita's approach to gathering capital is called​ _____. A. hedging B. debt financing C. zero-based budgeting D. equity financing E. short-term financing

B. debt financing (Debt financing is arranging funding by borrowing money. When choosing between debt and equity​ financing, companies consider a variety of​ issues, including the prevailing interest​ rates, maturity, the claim on​ income, the claim on​ assets, and the desire for ownership control.)

A​ ______ is a contract created in order to authorize the use of an asset in exchange for consistent compensation. A. convertible bond B. lease C. secured bond D. debenture E. bond

B. lease (Rather than borrow money to purchase an​ asset, a firm may enter into a​ lease, under which the owner of an asset​ (the lessor) allows another party​ (the lessee) to use it in exchange for regular payments.)

​A(n) ____ pinpoints the expenses required to successfully complete an assignment. A. ​start-up budget B. project budget C. zero-based budget D. capital budget E. operating budget

B. project budget (A project budget identifies the costs needed to accomplish a particular project. This can include conducting research or relocating)

To ease the cash flow drain of redeeming its bonds all at​ once, a firm can issue​ _______, which mature at various times. A. mortgage bonds B. serial bonds C. convertible bonds D. debentures E. secured bonds

B. serial bonds (To ease the cash flow burden of redeeming its bonds all at​ once, a company can issue serial​ bonds, which mature at various​ times, as opposed to term​ bonds, which all mature at the same time.)

​_________ involves the goal of holding on to cash as long as possible. A. Cost of capital B. Hedging C. Accounts payable D. Accounts receivable E. Zero-based budgeting

C. Accounts payable (Accounts payable is the bills that the company owes to its​ suppliers, lenders, and other parties. Here the objective is generally to postpone paying bills until the last​ moment, because doing so allows the firm to hold on to its cash as long as possible.)

The total mix of debt and equity a company uses for its capital needs is called​ what? A. Rate of return B. Equity financing C. Capital structure D. Opportunity costs E. Leverage

C. Capital structure (Capital structure is the total mix of debt and equity a company uses to meet its​ short- and​ long-term needs)

​_______ is a​ short-range agreement to pay off a borrowed amount by a specified time with a specified interest rate. A. Financial plan B. Prospectus C. Commercial paper D. A debenture E. A convertible bond

C. Commercial paper (Commercial paper is a​ short-term promissory​ note, or contractual​ agreement, to repay a borrowed amount by a specified time with a specified interest rate.)

Which of the following is risky because it is supported only by the reputation of the​ issuer, and therefore accrues higher​ interest? A. Bond B. Lease C. Debenture D. Secured bond E. Convertible bond

C. Debenture (A debenture is an unsecured corporate bond that is backed only by the reputation of the issuer. The companies that issue them pay higher interest on them.)

Which term defines the amount of materials​ that, when ordered​ strategically, results in the lowest ordering and storage​ costs? A. Risk/return trade-off B. Operating budget C. Economic order quantity D. Financial plans E. Debentures

C. Economic order quantity (Financial managers work with operations managers and marketing managers to determine the economic order quantity​ (EOQ), or quantity of materials​ that, when ordered​ regularly, results in the lowest ordering and storage costs.)

Calvin is a CFO at​ Counting, Inc. At the beginning of each fiscal​ year, the departments in his company start off with nothing in their budget. Before Calvin can approve​ spending, each department must present a report that details how the requested funds will be used toward the​ company's strategic goals. This method is called​ _____________. A. leverage B. short-term financing C. zero-based budgeting D. hedging E. debt financing

C. zero-based budgeting (​Zero-based budgeting is a budgeting approach in which each department starts from zero every year and must justify every item in the​ budget, rather than simply adjusting the previous​ year's budget amounts. This approach forces each department to show how the money it wants to spend will support the overall strategic plan.)

How does economic order quantity​ (EOQ) affect a​ firm's money​ supply? A. EOQ makes a firm highly leveraged. B. EOQ provides liquidity. C. EOQ determines the need for cash on hand. D. EOQ results in the lowest ordering and storage costs. E. EOQ improves​ risk/return trade-off.

D. EOQ results in the lowest ordering and storage costs. (The​ firm's goal is to maintain enough inventory to fill orders in a timely fashion at the lowest cost. To achieve this​ goal, financial managers work with operations managers and marketing managers to determine the economic order quantity​ (EOQ), or quantity of materials​ that, when ordered​ regularly, results in the lowest ordering and storage costs.)

​______ consists of organizing and gathering capital by selling shares of the company stock. A. Debt financing B. Capital budgeting C. Long-term financing D. Equity financing E. Short-term financing

D. Equity financing (Equity financing involves arranging funding by selling ownership shares in the​ company, publicly or privately.)

When a private firm decides to sell shares of a company to the​ public, what is taking​ place? A. Long-term financing B. Debt financing C. Convertible bond offering D. Public stock offering E. Short-term financing

D. Public stock offering (Only companies that are already public or are prepared to go public can raise funds by selling shares on the open market. An initial public offering​ (IPO) is made by firms that have not previously sold stock on the open market.)

Which of the following can provide large sums of money in equity financing to a new​ start-up firm in exchange for a share of​ ownership? A. Underwriting B. Initial public offerings of stock C. Debenture D. Venture capitalists E. Prospectus

D. Venture capitalists (Venture capitalists​ (VCs), as well as angel investors for companies that​ aren't yet ready for VC​ funding, are a key source of equity financing for a certain class of​ start-up companies. In exchange for a share of​ ownership, VCs can invest millions of dollars in companies long before those firms can qualify for most other forms of​ financing, so they represent an essential form of funding for​ high-growth ventures.)

Terri is a financial planner. She is attempting to create​ a(n) _____ by examining the spending trends within her company. She is looking at the sources and amounts of capital coming into the​ company, as well as the amount of capital being expended. By looking at this​ information, Terri will be able to better predict revenues for the remaining fiscal year. A. capital budget B. project budget C. start-up budget D. operating budget E. zero-based budget

D. operating budget (An operating budget identifies all sources of revenue and coordinates the spending of those funds throughout the coming year.)

If a firm wants to issue bonds but prefers to reserve the right to pay off the bonds before​ maturity, what type of bond should it​ issue? A. Debentures B. Term bonds C. Serial bonds D. Convertible bonds E. Callable bonds

E. Callable bonds (With most bond​ issues, a corporation retains the right to pay off the bonds before maturity. Bonds containing this provision are known as​ "callable bonds," or​ "redeemable bonds." If a company issues bonds when interest rates are high and then rates fall later​ on, it might want to pay off its​ high-interest bonds and sell a new issue at a lower rate.)

A few years​ ago, prices for supplies were on the rise. In order to safeguard from future price​ increases, ABC Toys made a deal with its supplier that allowed ABC to purchase raw materials at a set price for 2 years. This allows ABC to better predict a budget for raw materials month to month.​ ABC's deal with its supplier illustrated which of the​ following? A. Capital budgeting B. Zero-based budgeting C. Equity financing D. Start-up budgeting E. Hedging

E. Hedging (Hedging involves protecting against cost increases with contracts that allow a company to buy supplies in the future at designated prices. A risk of hedging against rising prices is that prices could instead​ drop, leaving a company paying more than it would have had to otherwise.0

Which of the following are best suited to take advantage of​ factoring? A. Small, declining companies B. Companies with poor credit C. Start-up companies D. Major corporations with strong credit histories E. Profitable, growing companies

E. Profitable, growing companies (Because it is a comparatively expensive​ method, factoring is generally best suited for​ profitable, growing companies with pressing cash flow needs and​ large, creditworthy customers​ (businesses or government​ agencies, not​ consumers) that are likely to pay their bills but are just slow in doing so.)

Which of the following is a formal document necessary for the SEC to review which presents material about a​ company, its​ capital, and its strategies for utilizing the future capital it hopes to​ raise? A. Private equity B. Debenture C. Commercial paper D. Convertible bond E. Prospectus

E. Prospectus (A prospectus is a document required by the Securities and Exchange Commission that discloses required information about the​ company, its​ finances, and its plans for using the money it hopes to raise.)

Because managers cannot always predict all​ variables, which of the following is used to plan for fluctuating​ costs? A. Scenario planning B. Hedging C. Budgets D. Top-down mandate E. Rolling forecasts

E. Rolling forecasts (Rolling forecasts allow the company to start the year with a budget based on revenue and cost assumptions made at that point but then review economic performance every month or every quarter to see whether the budget needs to be modified as the year progresses.)

Which of the following methods of securing funds has the most​ long-term and significant effect on an​ organization? A. Factoring B. Trade credit C. Selling debt D. Corporate bonds E. Selling equity

E. Selling equity (The most​ far-reaching alternative for securing funds is to sell shares of ownership in a company. Even the most thorough loan application reviews and strict repayment terms​ can't match the degree to which selling equity changes the way a company is managed. In the most extreme​ cases, selling equity can lead to the founders of a firm being ousted from the company.)

​_________ occurs when a bank decides to purchase shares of stock from a business that is arranging an initial public offering and then turns around and sells those shares to various investors. A. Equity financing B. Debt financing C. Hedging D. Zero-based budgeting E. Underwriting

E. Underwriting (Underwriting involves buying shares from a company that is preparing an initial public offering and selling them to investors.)

Mariah is looking to obtain a loan to start a small business. She speaks with a financial institution and it informs her that she will be approved for the​ loan, but that if she were to default on the loan for any​ reason, the bank would have to seize her building and all the equipment in it. This is an example of​ _______. A. an unsecured loan B. a debenture C. a trade credit D. a compensating balance E. collateral

E. collateral (Collateral is a tangible asset a lender can claim if a borrower defaults on a loan. Types of collateral include​ property, equipment,​ inventory, and securities.)