Deck 9: Finance: Acquiring and Using Funds to Maximize Value

Question 1

For financial managers to be socially responsible, it is necessary that they:

A)focus solely on the short-term performance of the firm.
B)make a long-term commitment to the needs of stakeholders.
C)focus on maximum utilization of human resources.
D)allot 10 percent of company profit to employee welfare.

Answer 1

B

Question 2

Cash budgets normally cover a five-year period and show projected cash inflows and outflows for each week.

Answer 2

False

Question 3

David needs to acquire financial capital to purchase a printing press for his business. David can either acquire the financial capital for the press by borrowing money from a bank or by purchasing the press on credit from his supplier.

Answer 3

True

Question 4

Financial managers should focus solely on meeting the financial needs of their firms in the short run, leaving the long-term financial issues to the top management.

Question 5

_____ ratios measure the ability of an organization to convert assets into the cash it needs to pay off liabilities that come due in the next year.

A)Activity
B)Leverage
C)Liquidity
D)Profitability

Question 6

The budgeted income statement is 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.

Question 7

Benny-Duke Inc.reported a net income of $7 million but paid no dividends to its shareholders. The shareholders should sue the company for failure to provide a return on their equity investment.

Question 8

Kun works for PowTran Corp. Her primary responsibilities include managing the firm's working capital and analyzing long-term investment opportunities for PowTran. Kun is part of the firm's _____ management team.

A)administrative
B)logistics
C)financial
D)production

Question 9

Financial capital refers to the:

A)money that a business earns in sales, minus the expenses.
B)costs a business incurs when its expenses are greater than its revenues.
C)funds a firm uses to acquire its assets and finance its operations.
D)returns that a firm pays to its owners for their investment in the company.

Question 10

The current ratio is calculated by dividing the firm's current liabilities by its total assets.

Question 11

Projects with the potential for high returns generally have a low degree of uncertainty and risk.

Question 12

The following questions must be answered when setting credit terms: How long should the firm extend credit? What type of cash discount should the firm offer to encourage early payments?

Question 13

The debt-to-asset ratio compares a firm's total liabilities to its total assets and is a way of measuring the degree of financial leverage.

Question 14

Which of the following best describes a highly leveraged firm?

A)A firm that relies heavily on equity
B)A firm that has equity that is twice the debt
C)A firm that relies heavily on debt
D)A firm that has higher current assets than current liabilities

Question 15

A disadvantage of debt financing is that creditors often impose covenants on the borrower.

Question 16

Cash equivalents are long-term, unsecured but highly liquid assets that firms list in the fixed assets section on their balance sheet.

Question 17

Which of the following statements is true of a current ratio?

A)The larger a firm's current ratio, the harder it is for the firm to pay its short-term debts.
B)The current ratio is a type of leverage ratio.
C)A current ratio below 1.0 signifies a company's inability to pay its short-term liabilities with its current assets.
D)The current ratio is computed by dividing a firm's current liabilities by its current assets.

Question 18

Wild Trails Inc., an adventure resort in Texas, has 500 shares of outstanding common stock and has not issued any preferred stock. Net income is $27,500. Wild Trails Inc.'s earnings per share is _____.

A)$55
B)$0.018
C)$13,750
D)$27,000

Question 19

If an invoice lists the terms 2/10 net 30, it means that the supplier is offering a 10 percent cash discount off the invoice price if the buyer pays within 2 days.

Question 20

In financial management, risk is referred to as the:

A)environmental factors that may affect a business adversely.
B)internal factors that may disrupt the smooth functioning of a company.
C)degree of uncertainty about the actual outcome of a decision.
D)various strategies implemented by managers to increase returns.

Question 21

Which of the following statements is true of angel investors?

A)They usually expect a minimum return on investment from the start-ups they fund.
B)They typically invest in low-risk opportunities involving established firms.
C)They usually fund more mature firms that have an established track record.
D)They typically provide funds to start-ups in exchange for a share of ownership.

Question 22

The main disadvantage of financial leverage is that it:

A)increases the taxes of firms that use it.
B)requires owners to invest even more of their own money.
C)reduces the financial return to stockholders when times are bad.
D)requires firms that use it to make higher dividend payments.

Question 23

Alpha Inc.saw an increase in profits in the previous year following which the management decided to reinvest earnings. These retained earnings will be used to:

A)meet the company's long-term financial needs.
B)meet the company's short-term financial needs.
C)pay the owners a dividend.
D)increase the liquid assets of the company.

Question 24

Pro Corp. and Darths Inc.are two companies that are identical in every aspect except for the fact that Pro uses only equity financing, while Darths relies heavily on debt financing. Over the past year, the firms had identical earnings before interest and taxes. If net income for both firms was high, _____.

A)Pro would pay less taxes than Darths
B)Darths would report a higher return on equity than Pro
C)Darths would report a lower return on equity than Pro
D)Pro would be required to pay no taxes, unlike Darths

Question 25

When customers of an equipment manufacturing unit buy equipment on credit and then delay making payments, they receive a bill from a collection agency. What relationship does the collection agency have with the manufacturer?

A)Trade credit
B)Revolving credit agreement
C)Factoring
D)Short-term bank loans

Question 26

Which of the following statements best describes a money market mutual fund?

A)It pools funds from many investors and uses these funds to purchase very safe, highly liquid securities.
B)It is a short-term marketable IOU issued by the U.S. federal government.
C)It is the part of a firm's net income that it reinvests.
D)It is a financial agreement between a firm and a bank in which the bank pre-approves credit up to a specified limit.

Question 27

Which of the following is a key difference between a line of credit and a revolving credit agreement?

A)Under a line of credit, the bank involved agrees to make funds available as long as the borrower's credit rating doesn't deteriorate, while in a revolving credit agreement, the bank guarantees that the funds will be available.
B)Under a line of credit, funds are available for up to a year, while in a revolving credit agreement, funds are available for no more than 90 days.
C)Under a line of credit, the interest rate on borrowed funds is stated in advance, while in a revolving credit agreement, the interest rate is allowed to "float" based on agreed-upon criteria.
D)Under a line of credit, the borrower must secure the funds by pledging collateral, but in a revolving credit agreement, the bank involved agrees to make additional funds available as long as the principal and interest are paid.

Question 28

As a financial manager, Garry wants to know when his firm will need to arrange for short-term financing and when the firm is likely to have surplus cash available to pay off loans or to invest in short-term liquid assets. These concerns suggest that Garry would want to develop a:

A)cash budget.
B)pro forma income statement.
C)sales forecast.
D)projected balance sheet.

Question 29

As the recession of 2007-2008 loomed over both large and small businesses, many firms looked for ways to deleverage. The term "deleveraging" implies that the firms:

A)avoided equity financing.
B)borrowed money at lower interest rates.
C)bought back their own stock to reduce the stock outstanding.
D)replaced much of the debt in their capital structure with equity.

Question 30

_____ are very safe and highly liquid assets that firms list with their cash holdings on their balance sheet.

A)Intangible assets
B)Marketable derivatives
C)Cash equivalents
D)Cash certificates

Question 31

An advantage of offering more lenient credit terms is that it helps a firm _____.

A)decrease its debt
B)increase its sales
C)reduce its risk
D)improve cash flows

Question 32

The _____ forecasts the types and amounts of assets a firm will need to implement its future plans as well as the amount of additional financing the firm must arrange in order to acquire those assets.

A)query report
B)cash budget
C)statement of cash flows
D)budgeted balance sheet

Question 33

A project with a negative net present value should be:

A)rejected as it does not take the time value of money into account.
B)rejected since the expected future cash flows from the project are less than the cost of the investment.
C)accepted since the net present value does not alter the company's capital budgeting.
D)accepted since the expected future cash flows from the project exceed the cost of the investment.

Question 34

One drawback of offering liberal credit to customers is that it can:

A)delay the sales to a future period.
B)increase the cost of credit to customers.
C)delay the receipt of cash that the firm needs to meet its financial obligations.
D)decrease sales by the extension of credit and cause a loss to the company.

Question 35

Which of the following is a characteristic of debt financing?

A)The requirement to make fixed payments
B)Restrictive covenants on borrowings
C)Higher risk than equity financing
D)Tax-deductible interest payments

Question 36

Which of the following best explains the time value of money?

A)It is a concept that explains how inflation works.
B)It means that it's best to have money today, so it can be put to work sooner to make even more money.
C)It refers to the calculation of an amount using compound interest.
D)It is a concept that states that long-term investments are more profitable than short-term investments.

Question 37

Which of the following is a long-term financing option for a firm?

A)Trade credit
B)Revolving credit agreements
C)Commercial paper
D)Corporate bonds

Question 38

Which of the following is uncharacteristic of a capital budgeting proposal evaluation process?

A)Buying Treasury bills and bonds for the next six months
B)Replacing computer equipment with upgraded models
C)Buying new equipment to increase the capacity of the production line
D)Building a new factory, warehouse, or office building

Question 39

A marketable security is a cash equivalent unlike _____.

A)a treasury bill
B)trade credit
C)a money market mutual fund
D)commercial paper

Question 40

The two primary sources of equity financing are:

A)trade credit and commercial paper.
B)stockholder investments and retained earnings.
C)owner debt structure and factoring.
D)liquid assets and the sale of corporate bonds.

Question 41

Name and discuss two main goals of finance. Are these goals mutually exclusive? Explain your answer.

Question 42

Ashton is working on a project at PowerTek Inc., a well-known multinational corporation. He is using capital budgeting to estimate the project's future cash flows. He finds that the present value of the estimated future cash flows is greater than the cost of the project. How likely is he to gain approval from the board?

A)He will quite certainly gain approval since the project has a positive net present value.
B)Approval is probable but not likely as he failed to account for the time value of money.
C)He will not gain approval as he failed to consider whether the project is leading edge or not.
D)Approval is probable but not likely as the project has been constructed on estimates instead of facts.

Question 43

Define net present value (NPV)and describe how it is used to evaluate capital budgeting proposals.

Question 44

Jessie, the regional manager of a large electronics firm, is trying to determine whether a new warehouse is a good investment. After discussing with her firm's financial managers, she concludes that the project carries a negative NPV (Net Present Value). What should Jessie do and why?

A)She should invest in the warehouse to increase profits since a negative NPV indicates that the firm needs to generate more funds to stay afloat.
B)She should not invest in the warehouse since a negative NPV means that the present value of the future cash flows does not justify the cost of the warehouse.
C)She should invest in the warehouse since a negative NPV means that the cost of financing the warehouse is within the company's budget for expenses.
D)She should not invest in the warehouse since a negative NPV means that the firm cannot afford the investment.

Question 45

The Chief Financial Officer of Orange Motors Inc.recently mentioned in an interview that a dollar received today is worth more than a dollar received in the future because the sooner you receive a sum of money, the quicker you can put that money to work. The Chief Financial Officer was speaking about the _________.

A)present value of money
B)assumed value of money
C)future value of money
D)time value of money

Question 46

When financial managers are concerned about their firm's ability to pay off debts that will come due in the next year, they are likely to focus on _________.

A)liquidity ratios
B)activity ratios
C)profitability ratios
D)leverage ratios

Question 47

Financial managers use _________ to assess the financial strengths and weaknesses of their firm.

A)portfolio analysis
B)value stream mapping
C)balance sheets
D)financial ratio analysis

Question 48

A large, well-established company with an impeccable financial record considers borrowing money to meet its short-term financing needs. The company hopes to borrow money using _________ since this form of financing typically carries a lower interest rate than that than commercial banks charge on short-term loans.

A)corporate bonds
B)factoring
C)commercial paper
D)trade credit

Question 49

Define the two primary sources of equity financing.

Question 50

A _____ is 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.

A)term loan agreement
B)revolving credit agreement
C)trade credit
D)commercial paper

Question 51

What role does a factor play in providing short-term financing to a firm? Why would firms that rely heavily on credit sales find factoring attractive?

Question 52

What is a pro forma statement? Describe the two major types of pro forma statements, and explain the role they play in financial planning.