Chapter 9
A U.S. Treasury bill is an example of a(n) _____ asset. a. liquid b. intangible c. fixed d. capital
A
A _____ is a projection showing how a firm's budgeted sales and costs will affect expected net income. a. budget income statement b. financial ratio analysis c. stretch budget d. budget balance sheet
A
A corporate bond: a. is a marketable certificate of debt. b. represents ownership in a firm. c. represents the credit agreement between a bank and a firm. d. cannot have a maturity period higher than twelve months.
A
Finance is the functional area of business: a. that is responsible for finding, among many alternatives, the best sources of funds and the best ways to use them. b. that is responsible for returning the funds acquired through loans. c. that is responsible for utilizing the funds to produce more goods and services. d. that is responsible for advertising the business to attract create awareness among the customers.
A
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 positive NPV indicates that the cost of the project outweighs its cash flow benefits. 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 project proposal is accepted if NPV is lesser than zero.
A
The equity financing a firm needs is provided by the: a. owners. b. trade partners. c. banks. d. customers.
A
Which of the following is a difference between a line of credit and a revolving credit agreement? a. A revolving credit agreement involves a bank making a legal commitment to provide the agreed-upon funds, while a line of credit does not. b. A line of credit provides firms the pre-approval to draw on funds from a bank as needed, while a revolving credit agreement does not. c. A revolving credit agreement is affected when a firm's credit situation deteriorates, but an established line of credit is not. d. A line of credit requires firms to negotiate a separate loan each time funds are needed, while a revolving credit agreement does not.
A
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 is less flexible and more risky than debt financing. c. Existing stockholders are required to make fixed payments. d. Equity financing requires firms to agree to burdensome covenants.
A
Which of the following statements is true of angel investors? a. They typically provide funds to start-ups in exchange for a share of ownership. b. They usually expect a minimum return on investment from the start-ups they fund. c. They typically invest in low-risk opportunities involving established firms. d. They usually fund more mature firms that have an established track record.
A
A _____ allows firms to borrow money from a bank up to a specified limit as long as the borrower's credit situation does not deteriorate. a. money market mutual fund b. line of credit c. trade credit d. corporate bond
B
A commercial paper is a: a. cash equivalent issued by the U.S. treasury in time of economic distress. b. short term, usually unsecured, promissory note issued by large corporations. c. short term promissory note issued by the U.S. federal government. d. note issued by the seller that provides details of the financing granted for the purchased goods.
B
A liquid asset is one that: a. does not have an established market to which it can be sold. b. can be quickly converted into cash with little risk of loss. c. is purchased for its long term returns. d. has an initial useful life greater than one year.
B
A store that sells sports goods gives its customers credit for a period of 30 days, compared to its rival store's credit period of 90 days. Which of the following statements describes the impact of this decision? a. It spends less on collecting money than its rival due its aggressive collection policy. b. It has lesser sales than its rival. c. It receives its payments later than its rival. d. It has a greater proportion of unpaid transactions than its rival.
B
Financing that arises during the natural course of business without the need for special arrangements is known as _____. a. financial leverage b. spontaneous financing c. equity financing d. direct investment
B
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. a dollar received today is worth more than a dollar received in the future. c. a dollar has the same buying power today as it will in the future. d. the value of a dollar received in the future is greater because of the impact of inflation.
B
Which of the following statements best describes a money market mutual fund? a. A financial agreement between a firm and a bank in which the bank pre-approves credit up to a specified limit. b. It pools funds from many investors and uses these funds to purchase very safe, highly liquid securities. c. It is a short-term marketable IOU issued by the U.S. federal government. d. The part of a firm's net income that it reinvests.
B
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 firm should pay the manufacturer within 35 days. d. The buyer has made 3/10th of the payment when the parts were delivered by the manufacturer.
C
John, the CEO of a start-up air conditioners (AC) manufacturing company, wants to pay-off the company's short-term debts. Which of the following ratios should he consider to evaluate the feasibility of this plan? a. Return on equity share b. Debt-to-assets ratio c. Current ratio d. Earnings per share
C
The _____ is computed by dividing accounts receivable by average daily credit sales. a. average earnings per share b. current ratio c. average collection period d. debt-to-asset ratio
C
The _____ is the amount of money that, if invested today at a given discount rate, would grow to become some future amount in a specified number of time periods. a. market value b. capital value c. present value d. growth value
C
Which of the following is a similarity between corporate stocks and corporate bonds? a. Both are informal IOUs. b. Both represent ownership in a corporation. c. Both are marketable. d. Both are certificates of debt.
C
Which of the following is a source of short-term financing? a. Direct investment b. Corporate bond c. Trade credit d. Term loan
C
A firm is utilizing huge sums of debts for its operation. It decides to replace 80% of its debt with equity. The firm is using the strategy of: a. budgeting. b. equitizing. c. factoring. d. deleveraging.
D
A mining company applies for a huge long-term loan from a bank. The bank agrees to lend the amount and puts a few restrictions on the management of the company. The company cannot borrow any more money till it clears the current debt and cannot pay bonuses to its employees till the loan is cleared. These restrictions are a part of the: a. trade credit. b. revolving credit agreement. c. line of credit. d. covenant.
D
Financial capital refers to the: a. returns that firms pay to the owners for their investment in the company. b. money that a business earns in sales, minus the expenses. c. costs a business incurs when its expenses are greater than its revenues. d. funds a firm uses to acquire its assets and finance its operations.
D
The return on equity is a ratio that: a. measures the net income per share of common stock outstanding. b. compares current assets to current liabilities. c. measures how quickly a firm sells its inventory to generate revenue. d. indicates earning per dollar invested by the owners of a company.
D
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 has no minimum deposit requirement, while a savings account does. c. A CD yields no interest on the funds, while a savings account does. d. A CD requires the funds to remain in deposit for a fixed term, while a savings account does not.
D
Which of the following is a disadvantage of debt financing? a. The ownership of existing owners is diluted due to the requirement of sale of stock to new investors. b. The interest payments a firm makes on debt are taxable at a higher rate. c. The existing stockholders are required to invest more if the firm requires additional funds. d. The covenants imposed by the creditors can hamper the borrower's financial flexibility.
D
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 current ratio below 1 signifies that a company has enough current assets to pay its short-term liabilities. c. A current ratio measures how quickly a firm sells its inventory to generate revenue. d. A large current ratio indicates that a firm can pay off its short-term debts easily.
D
Which of the following statements best describes a cash budget? a. It is a prediction that identifies a firm's planned investments in major fixed assets and long-term projects. b. It is an estimate of funds needed to meet the promotion and advertising needs of a product or service. c. It is a prediction that enables the process of allocating cash and resources for major capital investment or expenditures. d. It is an estimate of projected cash inflows and outflows for each month, normally covering a one-year period.
D
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
Dodd-Frank Act
Short-term marketable IOUs issued by the US federal government
US Treasury bills (T-bills)
Financial ratios that measure how effectively a firm is using its assets to generate revenues or cash
asset management ratios
A projected financial statement that forecasts the type 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 balance sheet
A projection showing how a firms budgeted sales and costs will affect expected net income (Also called a pro forma income statement)
budgeted income statement
The process a firm uses to evaluate long-term investment proposals
capital budgeting
The mix of equity and debt financing a firm uses to meet its permanent financing needs
capital structure
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
cash budget
Safe and highly liquid assets that many firms list with their cash holdings on their balance sheet
cash equivalents
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
certificate of deposit (CD)
Short-term (and usually unsecured) promissory notes issued by large corporations
commercial paper
A restriction lenders impose on borrowers as a condition of providing long-term debt financing
covenant
Funds provided by lenders (creditors)
debt financing
Funds provided by the owners of a company
equity financing
A company that provides short-term financing to firms by purchasing their accounts receivable at a discount
factor
The functional area of business that is concerned with finding the best sources and uses of financial capital
finance
The funds a firm uses to acquire its assets and finance its operations
financial capital
The use of debt in a firms capital structure
financial leverage
Computing ratios that compare values of key accounts listed on a firms financial statements
financial ratio analysis
Ratios that measure the extent to which a firm relies on debt financing in its capital structure
leverage ratios
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
line of credit
An asset that can quickly be converted into cash with little risk of loss
liquid asset
Financial ratios that measure the ability of a firm to obtain the cash it needs to pay its short-term debt obligations as they come due
liquidity ratios
A mutual fund that pools funds from many investors and uses these funds to purchase very safe, highly liquid securities
money market mutual funds
The sum of the present values of expected future cash flows from an investment, minus the cost of that investment
net present value (NPV)
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
present value
Ratios that measure the rate of return a firm is earning on various measures of investment
profitability ratios
The part of a firms net income it reinvests
retained earnings
A guaranteed line of credit in which a bank makes a binding commitment to provide a business with funds up to a specified credit limit at any time during the term of the agreement
revolving credit agreement
The degree of uncertainty regarding the outcome of a decision
risk
The observation that financial opportunities that offer high rates of return are generally riskier than opportunities that offer lower rates of return
risk-return tradeoff
Financing that arises during the natural course of business without the need for special arrangements
spontaneous financing
The principle that a dollar received today is worth more than a dollar received in the future
time value of money
Spontaneous financing granted by sellers when they deliver goods and services to customers without requiring immediate payment
trade credit
