Chapter 9 - Finance

c. is the degree of uncertainty related to the actual outcome of a decision

TIn financial management, risk: a. is the loss that a business incurs because of a bad decision. b. is the potential to obtain a higher rate of return. c. is the degree of uncertainty related to the actual outcome of a decision. d. is the profit that needs to be reinvested.

d. asset management

_____ ratios measure how effectively an organization uses its economic resources to generate income. a. Profitability b. Leverage c. Liquidity d. Asset management

a. cash budget

a _____ is a detailed forecast of future cash flows that help financial managers identify when their firm is likely to experience temporary shortages or surpluses of cash. a. cash budget b. budgeted balance sheet c. budgeted income sheet d. financial ratio

c. promissory note

a _____ specifies the length of the loan, the rate of interest the firm must pay, and other terms and conditions of the loan. a. capital structure b. guaranteed line c. promissory note d. credit agreement

d. short term, usually unsecured, promissory note issued by large corporations

a commercial paper is a: a. cash equivalent issued by the U.S. treasury in time of economic distress. b. note issued by the seller that provides details of the financing granted for the purchased goods. c. short term promissory note issued by the U.S. federal government. d. short term, usually unsecured, promissory note issued by large corporations.

c. issues corporate bonds

a company is said to be replying on debt financing when it _____. a. finds a new investor b. uses retained earnings to meet financial needs c. issues corporate bonds d. issues and sells new stock

factor

a company that provides short-term financing to firms by purchasing their accounts receivables at a discount

c. represents the credit agreement between a bank and a firm

a corporate bond: a. is a marketable certificate of debt. b. cannot have a maturity period higher than twelve months. c. represents the credit agreement between a bank and a firm. d. represents ownership in a firm.

cash budgeted

a detailed forecast of future cash flows that helps financial managers identify when their firm is likely to experience temporary shortages or surpluses of cash

line of credit

a financial arrangement between a firm and a bank in which the bank pre-approves credit up to a specified limit, provided that the firm maintains an acceptable credit rating

dodd-frank act

a law enacted in the aftermath of the financial crisis of 2008-2009 that strengthened government oversight of financial markets and placed limitations on risky financial strategies such as heavy reliance on leverage

money market mutual funds

a mutual fund that pools funds from any investors and uses these funds to purchase very safe, highly liquid securities

budgeted balance sheet

a projected financial statement that forecasts the types and amounts of assets a firm will need to implement its future plans and how the firm will finance those assets (also called a pro forma balance sheet)

budgeted income statement

a projection showing a firm's budgeted sales and costs will affect expected net income (also called a pro forma income statement)

b. corporate bond

a reputed software company faces a shortage of funds. it decides to issue IOUs to investors in order to raise funds. it sets a due date of five years to repay investors. which of the following sources of funding is the software company using in this scenario. a. revolving credit agreement b. corporate bond c. line of credit d. term loan

c. corporate bonds

a reputed software company faces a shortage of funds. it decides to issue IOUs to investors in order to raise funds. it sets a due date of five years to repay the investors. which of the following sources of funding is the software company using in this scenario? a. line of credit b. term loan c. corporate bond d. revolving credit agreement

covenant

a restriction lenders impose on borrowers as a condition of providing long-term debt financing

a. it has more sales than its rival

a retail store gives its customer a credit period of 60, whereas its rival store gives its customers 45 days to make payments. which of the following statements is true of the firm that has a longer credit period? a. It has more sales than its rival. b. It has a smaller proportion of unpaid transactions that its rival. c. It spends more on collecting the money than its rival, as its rival has an aggressive collection policy. d. It receives its payments earlier than its rival.

d. the firm should pay the manufacturer within 35 days

a small-scale pc assembling firm buys parts from the manufacturer by using trade credit. the invoice provided by the manufacturer lists the terms as "3/10 net 35". which of the following is true of the terms of the trade credit? a. The firm gets a discount of 3% on the payment if they pay before 35 days. b. The firm has to pay 30% interest for the credit. c. The buyer has made 3/10th of the payment when the parts were delivered by the manufacturer. d. The firm should pay the manufacturer within 35 days.

a. liquid

a u.s. treasury bill is an example of a(n) _____ asset. a. liquid b. capital c. fixed d. intangible

liquid assets

an asset that compare values of key accounts listed on a firm's financial statements

certificate of deposit (cd)

an interest-earning deposit that requires the funds to remain deposited for a fixed term. withdrawal of the funds before the term expires results in a financial penalty

d. plan for investments in assets or projects that it expects will yield benefits for more than a year

capital budgeting refers to the procedure a firm uses to: a. evaluate the profits and losses made by a company over the past one year. b. identify projects that it can invest in to gain high returns and benefits within a few months. c. obtain the funds required to repay its debts. d. plan for investments in assets or projects that it expects will yield benefits for more than a year.

financial ratio analysis

computing ratios that compare values of key accounts listed on a firm's financial statements

b. funds a firm uses to acquire its assets and finance its operations

financial capital refers to the: a. returns that firms pay to the owners for their investment in the company. b. funds a firm uses to acquire its assets and finance its operations. c. costs a business incurs when its expenses are greater than its revenues. d. money that a business earns in sales, minus the expenses.

liquidity ratios

financial rations that measure the ability of a firm to obtain the cash it needs to pay its short-term debt obligations as they come due

asset management ratios

financial ratios that measure how effectively a firm is using its assets to generate revenues or cash

spontaneous financing

financing that arise during the natural course of business without the need for special arrangements

b. certificate of deposit (cd)

fortune wings, a fast food chain, decides to deposit some of its profits in a bank. the bank provides a fixed rate of interest and requires the funds to remain on deposit for two years. fortune wings is using a _____ to increase the time value of its profits a. savings account b. certificate of deposit (CD) c. cash equivalent d. money market mutual fund

debt financing

funds provided by lenders (creditors)

equity financing

funds provided by the owners of a company

a. a project proposal is accepted if npv is greater than or equal to zero

how is the net present value (npv) used to make capital budgeting decisions? a. A project proposal is accepted if NPV is greater than or equal to zero. b. A project proposal is accepted if NPV is lesser than zero. c. A negative NPV means that the present value of the expected cash flows from the project is greater than the cost of the project. d. A positive NPV indicates that the cost of the project outweighs its cash flow benefits.

c. deleveraging

jacob is appointed as the financial manager of silver star inc., an electrical appliances manufacturer. he examines the company's capital structure and realizes that 40% of silver star's obtained through debt financing. he decides to increase the company's equity financing. jacob is using the strategy of _____. a. restructuring b. equitizing c. deleveraging d. budgeting

c. current ratio

john, the ceo of a start-up air conditioners manufacturing company, wants to pay-off the company's short-term debt. which of the following ratios should he consider to evaluate the feasibility of this plan? a. Return on equity share b. Earnings per share c. Current ratio d. Debt-to-assets ratio

d. factoring

kt's home depot store offers its customers credit for their purchases. these stores find itself in a position where it is running low on funds for the next batch of product arrivals and cannot waste resources in getting back the credit pending. which of the following short-term funding options should the firm use to get the money it has to receive from its customers? a. Bank loan b. Trade credit c. Commercial paper d. Factoring

a. budgeted balance sheet

mark, financial manager of comic brain media, is required to present the financial plans for the coming quarter. he considers the company's strategy for the next quarter and lists the types and amounts of assets required to carry out the plan. mark is preparing a _____ to present the financial plans. a. budgeted balance sheet b. budgeted income statement c. cash budget projection d. financial ratio analysis

leverage ratios

ratios that measure the extent to which a firm relies on debt financing in its capital structure

profitability ratios

ratios that measure the rate of return a firm is earning on various measures of investment

a. the part of a firm's net income that is reinvested in its business

retained earnings is best defined as: a. the part of a firm's net income that is reinvested in its business. b. the portion of profits paid out to a firm's stockholders. c. the nontaxable portion of a firm's income. d. the money that shows up in accounts receivable on a firm's balance sheet.

cash equivilants

safe and highly liquid assets that many firms list with their cash holdings on their balance sheet

commercial paper

short-term (and usually unsecured) promissory notes issued by large corporations

u.s. treasury bills (t-bills)

short-term marketable IOUs issued by the u.s. federal government

trade credit

spontaneous financing granted by sellers when they deliver goods and services to customers without requiring immediate payment

d. leverage ratios

steve is on the verge of buying a huge share in textile industry. he hears rumors that the company is dependent on bank loans for its operation. which of the following ratios will confirm the rumors steve heard? a. Asset management ratios b. Liquidity ratios c. Profitability ratios d. Leverage ratios

b. dodd-frank

the _____ act was enacted in the wake of the 2008-2009 recession and limits the use of risky financial strategies such as heavy reliance on leverage. a. Sarbanes-Oxley b. Dodd-Frank c. Glass-Steagall d. Gramm-Leach-Bliley

b. return on equity

the _____ indicates earnings per dollar invested by the owners of a company a. earnings per share b. return on equity c. average collection period d. inventory turnover ratio

a. capital structure

the _____ represents the extent to which a firm relies on various forms of debt and equity to satisfy its financing needs. a. capital structure b. capital budget c. budget proposal d. net present value

a. risk-return tradeoff

the _____ suggests that financial opportunities that offer high rates of return are generally riskier than those that offer lower returns a. risk-return tradeoff b. time value of money c. financial leverage d. separation property

present value

the amount of money that, if invested today at a given rate of interest (called the discount rate) would grow to become some future amount in a specified number of time periods

risk

the degree of uncertainty regarding the outcome of a decision

finance

the functional area of business that is concerned with finding the best sources and uses of financial capital

financial capital

the funds a firm uses to acquire its assets and finance its operations

capital structure

the mix of equity and debt financing a firm uses to meet its permanent financing needs

c. adding the present values of all its estimated future cash flows and subtracting the initial cost of the investment from the sum

the net present value (npv) of an investment proposal is calculated by: a. subtracting the future values of the estimated cash flows from the future value of the sum of the cost of investment b. adding the future values of all its estimated cash flows and subtracting the future value of the cost of investment from the sum c. adding the present values of all its estimated future cash flows and subtracting the initial cost of the investment from the sum d. subtracting the present values of the estimated cash flows from the present value of the sum of the cost of investment

risk-return tradeoff

the observation that financial opportunities that offer high rates of return are generally riskier that opportunities that offer lower rates of return

retained earnings

the part of a firm's net income it reinvests

time value of money

the principle that a dollar received today is worth more than a dollar received in the future

capital budgeting

the process a firm uses to evaluate long-term investment proposals

c. cash equivalents

the safe and highly liquid assets of a firm are called a. corporate bonds b. equity shares c. cash equivalents d. term loans

net present value (npv)

the sum of the present values of expected future cash flows from an investment, minus the cost of that investment

d. a dollar received today is worth more than a dollar received in the future

the time value of money is best defined as the principle that suggests that: a. the amount of money received is important and not the time at which it is received. b. the value of a dollar received in the future is greater because of the impact of inflation. c. a dollar has the same buying power today as it will in the future. d. a dollar received today is worth more than a dollar received in the future.

financial leverage

the use of debt in a firm's capital structure

c. revolving credit agreement

when a bank makes a formal, legally binding commitment to provide the agreed-upon funds, it provides the borrowing firm a _____.

b. a CD requires the finds to remain in deposit for a fixed term, while a savings account does not.

which of the following is a difference between a savings account and a certificate of deposit (cd)? a. A CD involves no penalty if the funds are withdrawn earlier, while a savings account does. b. A CD requires the funds to remain in deposit for a fixed term, while a savings account does not. c. A CD yields no interest on the funds, while a savings account does. d. A CD has no minimum deposit requirement, while a savings account does.

d. treasury bills are essentially risk-free, while commercial papers are not

which of the following is a difference between commercial papers and u.s. treasury bills? a. Treasury bills mature in two years or more, while commercial papers are short term. b. Treasury bills are available only to firms with excellent credit ratings, while commercial papers are available to all. c. Treasury bills cannot be resold to other investors before maturity, while commercial papers can. d. Treasury bills are essentially risk-free, while commercial papers are not.

a. it doesn't receive the full amount its customers owe

which of the following is a disadvantage for a firm that uses factors? a. It doesn't receive the full amount its customers owe. b. It has to maintain specialized collection departments to receive payments from factors.e c. It gets paid by factors only after the debt has been paid, increasing the firm's waiting time.s d. It has to assume the risk for bad debts on any receivables sold to factors.

d. the borrowing firm pays a commitment fee based on the amount of unused funds

which of the following is a disadvantage of a revolving credit agreement? a. The borrowing firm pays interest on the total amount of funds the bank has committed to provide. b. The bank can decide to decrease the credit limit if it faces a shortage of funds. c. The bank negotiates a separate loan each and every time a borrower needs additional funds. d. The borrowing firm pays a commitment fee based on the amount of unused funds.

a. equity financing does not yield the same tax benefits as debt financing

which of the following is a disadvantage of equity financing? a. Equity financing does not yield the same tax benefits as debt financing. b. Equity financing requires firms to agree to burdensome covenants. c. Existing stockholders are required to make fixed payments. d. Equity financing is less flexible and more risky than debt financing.

c. both are marketable

which of the following is a similarity between corporate stocks and corporate bonds? a. both are informal IOUs b. both are certificates of debt c. both are marketable d. both represent ownership in a corporation

d. trade credit

which of the following is a source of short-term financing? a. Term loan b. Direct investment c. Corporate bond d. Trade credit

d. equity financing imposes no required payments or burdensome covenants

which of the following is an advantage of equity financing? a. Additional funds can be acquired without the sale of stock to new investors. b. Equity financing yields more tax benefits than debt financing. c. A company that relies heavily on equity financing secures opportunities for financial leverage. d. Equity financing imposes no required payments or burdensome covenants.

c. inventory turnover ratio

which of the following is an example of an asset management ratio? a. Return on equity ratio b. Debt-to-assets ratio c. Inventory turnover ratio d. Current ratio

b. a large current ratio indicates that a firm can pay off its short-term debt easily

which of the following is true in the context of current ratios? a. A low current ratio is preferred by creditors who expect to be paid within the next twelve months. b. A large current ratio indicates that a firm can pay off its short-term debts easily. c. A current ratio measures how quickly a firm sells its inventory to generate revenue. d. A current ratio below 1 signifies that a company has enough current assets to pay its short-term liabilities.

d. current ratio

which of the following ratios measures liquidity? a. Debt-to-assets ratio b. Inventory turnover ratio c. Efficiency ratio d. Current ratio

c. trade credit can be called spontaneous financing as it doesn't require special arrangements

which of the following statements is true in the context of sources of funds for firms? a. A line of credit is unaffected by the deterioration of the borrower's credit situation. b. A revolving credit agreement between a firm and a bank lacks a legal commitment to provide funds. c. A trade credit can be called spontaneous financing as it doesn't require special arrangements. d. A commercial paper is a long-term source of funding obtained from commercial banks.

d. trade credit can be called spontaneous financing as it doesn't require special arrangements

which of the following statements is true in the context of sources of funds for firms? a. A revolving credit agreement between a firm and a bank lacks a legal commitment to provide funds. b. A commercial paper is a long-term source of funding obtained from commercial banks. c. A line of credit is unaffected by the deterioration of the borrower's credit situation. d. A trade credit can be called spontaneous financing as it doesn't require special arrangements.