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

Question 1

The extent to which retained earnings are used as a source of long-term capital for a firm, depends on the state of the economy.

Answer 1

True

Question 2

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

Answer 2

True

Question 3

A 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.

Answer 3

False

Question 4

A factor is a restriction lenders impose on borrowers as a condition of providing long-term debt financing.

Question 5

A manufacturing firm does not necessarily need an inventory of parts and materials to assemble its products.

Question 6

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 7

Certificate of deposit is an interest-earning deposit that requires the funds to remain deposited for a fixed term.

Question 8

Because it is normally unsecured, commercial paper is only offered by firms with no credit ratings.

Question 9

Term loans issued by commercial banks are popularly used by financial institutions and large corporations because they typically carry lower interest rates than commercial paper.

Question 10

A commitment to meeting social responsibilities can contribute to a more profitable company and an increase in shareholder value.

Question 11

In the context of accounting for the time value of money, discount rate remains constant in a specified number of time periods.

Question 12

Commercial paper, which is sometimes issued for as little as two days, can be issued for up to 270 days.

Question 13

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

Question 14

If an invoice lists the terms of trade credit as 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 15

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

Question 16

Lean inventory policies can be ineffective in a firm, although they do not leave the firm vulnerable to supply disruptions.

Question 17

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.

Question 18

Return-on-equity indicates how much net income a firm earned per share of common stock outstanding.

Question 19

When conflicts arise between the long-term interests of owners and those of other stakeholders, financial managers generally adopt the policies they believe are most consistent with the interests of ownership.

Question 20

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 21

Timoth Steels, a steel manufacturing company, wants to install a new factory in Temenia. The company decides to use funds from its own account and refrain from borrowing money from banks. Which of the following sources of long-term funds is being used by Timoth Steels in the given scenario?

A)Term loans
B)Corporate bonds
C)Direct investments from owners
D)Long-term debt

Question 22

Timini Inc., a beverage company, wants to produce a new health drink. It borrows money from Maverk Bank to finance the procedure. The bank mandates Timini Inc. to return the amount with interest in a regular schedule of fixed payments. Which of the following sources of long-term funds is being used by Timini Inc. in the given scenario?

A)Commercial paper
B)A term loan
C)A line of credit
D)Trade credit

Question 23

Reesa Mork is a multinational corporation that has good credit ratings. It issues promissory notes to other companies. Based on the given information in the scenario, it appears that Reesa Mork uses _____ as a short-term financing option to other companies.

A)commercial paper
B)factoring
C)line of credit
D)trade credit

Question 24

A budgeted income statement is 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.

Question 25

Maurio Pena, a petroleum company, needs to pay $2 million to Zaiten Inc. Maurio Pena sells its old assets to another company and obtains enough money to pay its debt. In this scenario, Maurio Pena's ability to sell its old assets to another company in order to pay its debt to Zaiten is measured by analyzing _____.

A)leverage ratios
B)asset management ratios
C)liquidity ratios
D)profitability ratios

Question 26

_____ forecasts the types and amounts of assets a firm will need to implement its future plans and help financial managers determine the amount of additional financing the firm must arrange in order to acquire those assets.

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

Question 27

Munit Exon, an automobile company, sells 100 cars in a year. The net income earned by the company is relatively more than the amount invested by it, thereby giving larger returns to its shareholders. To reach this conclusion, Munit Exon most likely analyzed its _____.

A)profitability ratios
B)liquidity ratios
C)asset management ratios
D)leverage ratios

Question 28

A high inventory turnover ratio is good because it indicates that:

A)a firm can continue its daily operations with a small amount of inventory on hand.
B)it is easier for a firm to pay its short-term debts.
C)a firm's customers are paying for their purchases more quickly.
D)a firm produces a larger return to shareholders than investment by the stockholders.

Question 29

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

A)Trade credit
B)A revolving credit agreement
C)Commercial paper
D)A line of credit

Question 30

Juxiplex, an electronics company, introduced a new range of smart phones. It bought the required raw materials from Gunplet Inc. without making payment at the time of purchase. Instead, Gunplet Inc. allowed Juxiplex to pay within fifteen days from the time of purchase. Which of the following short-term financing options was used by Juxiplex in the given scenario?

A)Factoring
B)Trade credit
C)Short-term bank loans
D)Commercial paper

Question 31

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

A)Trade credits
B)Marketable derivatives
C)Cash equivalents
D)Cash certificates

Question 32

Kenneth wants to start a new business. To get start-up capital, he takes a short-term loan from a bank. The bank agrees to provide him the agreed-upon funds as per a legally binding commitment. However, the bank requires Kenneth to pay interest on any fund he borrows and a commitment fee based on the unused amount of funds. Which of the following short-term financing sources does Kenneth utilize to fund his business in the given scenario?

A)Factoring
B)Commercial paper
C)Trade credit
D)Revolving credit agreement

Question 33

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 34

Initiatium, a software development firm, utilized $2 million to create a new software. Half of the total budget was acquired from loans from different sponsors while the rest was funded by the firm. The debt ratio amounts to 0.5. The given scenario illustrates the analysis of _____.

A)leverage ratios
B)asset management ratios
C)liquidity ratios
D)profitability ratiosl

Question 35

__________is an asset management ratio that measures how quickly a firm sells its stock to generate revenue.

A)The current ratio
B)The inventory turnover ratio
C)The debt ratio
D)Return on equity

Question 36

Connink, a software development firm, invested on developing new products from the company's earnings from the previous year. Which of the following sources of long-term funds is being used by Connink in the given scenario?

A)Long-term debt
B)Direct investments from owners
C)Term loans
D)Corporate bonds

Question 37

The time value of money reflects the fact that:

A)spontaneous financing is a particularly important source of financing for small businesses.
B)it is best to have money today, so it can be put to work sooner to make even more money.
C)a covenant requires the borrower to agree not to borrow any additional funds until the specified length of the current loan..
D)long-term investments are more profitable than short-term investments.

Question 38

Renita works as a freelancer. She wants to start her own business, but she does not have the required funding. To meet the working capital for her business, she takes a short-term loan from a bank. The bank agrees to provide her funding up to $50,000, as and when she needs it. However, she can repay the amount immediately or over a pre-specified period of time. Which of the following short-term financing sources does Renita utilize to fund her business in the given scenario?

A)Line of credit
B)Trade credit
C)Commercial paper
D)Factoring

Question 39

Financial managers use__________to assess the financial strengths and weaknesses of their firm.

A)financial leverage
B)value stream mapping
C)cost accounting
D)financial ratio analysis

Question 40

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

Question 41

Omnimenium, an automobile company, incurred a debt of $20 million for the fiscal year of 2016. The company used that money with an additional $20 million of its own to buy out a rival company. The ratio of the company's debt to its investment is 0.5. The given scenario illustrates the analysis of _____.

A)liquidity ratios
B)profitability ratios
C)leverage ratios
D)asset management ratios

Question 42

Tusken Thaw, a shipping industry, plans to expand its customer base to other countries. To facilitate this process, Tusken Thaw seeks financial assistance from Jermino Bank. The bank agrees to lend a specified amount of money; however, it mandates Tusken Thaw to return the amount with interest in a regular schedule of fixed payments. Which of the following sources of long-term funds is being used by Tusken Thaw in the given scenario?

A)A line of credit
B)Commercial paper
C)Trade credit
D)A term loan

Question 43

Trumen House, a confectionary manufacturing company, orders its raw materials in bulk from Nesinbon. Nesinbon allows Trumen House to make the payment at a later date, as opposed to immediate payment. Which of the following short-term financing options is being offered by Nesinbon?

A)Short-term bank loans
B)Commercial paper
C)Factoring
D)Trade credit

Question 44

Which of the following statements is true of 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 that is 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 45

Alpha Inc. saw an increase in profits in the previous year following which the management decided to reinvest its 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 46

Wild Trails Inc., an adventure resort in Texas, has 500 shares of outstanding common stock and has not issued any preferred stock. Its 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 47

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 48

The purpose of _____ is to protect creditors by preventing the borrower from pursuing policies that might undermine its ability to repay the loan.

A)factors
B)covenants
C)corporate bonds
D)retained earnings

Question 49

Ponlinaytion, a clothing company, imports its raw materials from different countries. To cover the cost of expensive raw materials, Ponlinaytion takes a yearly loan of $5 million from Heritage Rimier, a finance company. The remaining budget is covered by the company itself. The given scenario indicates that the firm most likely relies on measuring _____ to decide how it finances its overall operations and growth by using different sources of funds.

A)profitability ratios
B)liquidity ratios
C)asset management ratios
D)leverage ratios

Question 50

Which of the following statements is true of the Dodd-Frank Act?

A)It played a major role in the U.S.economy meltdown of the first decade of the 21st century.
B)It required large firms in the financial sector to hold more equity and less debt in their capital structures.
C)It weakened government oversight of financial markets.
D)It required large firms in the financial sector to increase their debt-to-equity ratio.

Question 51

Maude Shade, a fashion apparel manufacturing company, wants to invest in research before finalizing the production of its proposed product. In order to do so, it approaches Ruemen Bank and takes a loan of $80,000 in the form of bonds. Which of the following financing options is being used by Maude Shade in the given scenario?

A)A revolving credit agreement
B)Commercial paper
C)A line of credit
D)Long-term debt

Question 52

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

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

Question 53

Financial managers evaluate a firm's current strengths and weaknesses by computing ratios that compare values of key accounts listed on their firm's:

A)prospectus and operating budget.
B)statement of cash flows.
C)balance sheet and income statement.
D)cost budget statements.

Question 54

Ashton is working on a project at PowerTek Inc., a well-known multinational corporation. He uses 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 55

Westbro Inc., a home appliances company, wants to invest in marketing new products. In order to generate funds for the process, it issues its own formal IOUs and sells them to its investors. Which of the following sources of long-term funds is being used by Westbro Inc. in the given scenario?

A)Direct investments from owners
B)Corporate bonds
C)Trade credit
D)Term loans

Question 56

Since common stockholders are the true owners, preferred stockholders' dividends are deducted from net income before computing _____.

A)the debt ratio
B)the current ratio
C)return on equity
D)earnings per share

Question 57

Which of the following statements is true of angel investors?

A)They usually fund start-ups and often require the firms to pledge collateral to back the fund.
B)They typically invest in low-risk opportunities that offer the possibility of marginal rates of return.
C)They usually fund mature firms that have an established track record.
D)They typically provide funds to start-ups in exchange for a share of ownership.

Question 58

Trestone, a guitar manufacturing company, produces a thousand units of electric guitars each year. The company has been able to sell all its guitars by the end of the fiscal year and earn twice the amount spent on production and marketing. The given scenario indicates that Trestone most likely analyzes _____ for its financial planning.

A)liquidity ratios
B)profitability ratios
C)leverage ratios
D)asset management ratios

Question 59

Tinix is a well-established petrochemical company that holds excellent credit ratings in the market. It provides short-term financial capital to other big firms by issuing promissory notes that are collateralized by physical assets. Which of the following short-term financing options is being offered by Tinix in the given scenario?

A)Factoring
B)Asset-backed commercial paper
C)Trade credit
D)Line of credit

Question 60

MVJ Corp., a market research firm, borrowed $2 million from Trimitium Bank. While negotiating with the bank, the firm signs a promissory note, which specifies that the firm must pay the borrowed amount in 90 days with interest. However, the bank also requires the firm's inventories and receivables to be pledged as collateral to back the loan. Which of the following short-term financing options is being offered by Trimitium Bank in the given scenario?

A)Spontaneous financing
B)Short-term bank loans
C)Bank debit
D)Factoring

Question 61

Rudolf and Martin, a finance management company, offers funds to corporations that require a permanent source of funding. However, it required the company to make fixed payments on a regular schedule to ensure that the amount borrowed and interest are repaid. Which of the following sources of long-term funds is being offered by Rudolf and Martin in the given scenario?

A)Line of credit
B)Commercial paper
C)Term loans
D)Trade credit

Question 62

Nestrum, a real estate management company, employs qualified analysts to predict customers' buying habits and budgets. Hence, the company has been able to acquire at least one customer per month. In the given scenario, the analysts most likely need to analyze the company's _____ to measure how effectively it has been using its assets to generate revenues.

A)leverage ratios
B)profitability ratios
C)liquidity ratios
D)asset management ratios

Question 63

Dimitium National Bank is well known for lending money to companies who need it as quickly as possible. Any company that takes money from the bank is required to return the amount within six months at an interest at a rate of 12 percent. Which of the following short-term financing options is being offered by Dimitium National Bank in the given scenario?

A)Trade credit
B)Factoring
C)Short-term bank loans
D)Bank debit

Question 64

Pro Corp. and Darths Inc. are two companies that are identical in every aspect except for the fact that Pro only uses 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 is high, _____.

A)Pro would pay lower 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 65

Kitsure, a cosmetics company, was able to sell 20 percent more than its estimated sales in a year. The company was able to acquire its investment along with a higher turnover for its shareholders. Which of the following financial ratios provides the measure of Kitsure's earnings?

A)Leverage ratios
B)Asset management ratios
C)Liquidity ratios
D)Profitability ratios

Question 66

Newot Texin, a pharmaceutical company, introduces a new pain relieving drug in the market. It borrows $1 million from Esterotia, a private bank, to market the drug. In return, Esterotia allows Newot Texin to return the full amount with interest in fixed amounts of $200,000 every six months. Which of the following sources of long-term funds is being used by Newot Texin in the given scenario?

A)A term loan
B)A revolving credit agreement
C)Commercial paper
D)Trade credit

Question 67

Duk Yu, a beverage company, buys its raw materials from Nessange, a fruits and vegetables exporting company, without making any payment at the time of purchase. Instead, Nessange allows Duk Yu to pay the total purchase amount within a period of six months. Which of the following short-term financing options is being used by Duk Yu in the given scenario?

A)Trade credit
B)Factoring
C)Short-term bank loans
D)Commercial paper

Question 68

_____ 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)Profitability ratios
B)Activity ratios
C)Liquidity ratios
D)Leverage ratios

Question 69

Dominic and Matherson, a finance management company, lends money to Ebok, a fast food chain, in order to help Ebok market its new product. Dominic and Matherson provides financial support in the form of bonds. Which of the following financing options is being used by Ebok in the given scenario?

A)Long-term debt
B)Trade credit
C)Commercial paper
D)Factoring

Question 70

Mezzinzi Bank offers loans to companies in the form of bonds. The companies who apply for these loans can repay the amount over a prolonged period of time. Which of the following financing options is being offered by Mezzinzi Bank in the given scenario?

A)A revolving credit agreement
B)Long-term debt
C)Commercial Paper
D)Trade credit

Question 71

Which of the following is a difference between liquidity ratios and leverage ratios?

A)Liquidity ratios measure how effectively a firm uses its assets to generate revenue, whereas leverage ratios compare the amount of profit to some measure of resources invested.
B)Liquidity ratios compare the amount of profit to some measure of resources invested, whereas leverage ratios measure how effectively a firm uses its assets to generate revenue.
C)Liquidity ratios measure a firm's ability to pay its short-term liabilities as they come due, whereas leverage ratios measure the extent to which a firm relies on debt to meet its financing needs.
D)Liquidity ratios measure the net income per share of common stock outstanding, whereas leverage ratios indicate the earnings per dollar by the owners of a company.

Question 72

Merith Qin, a textile company, relies on self-funding in order to sustain the promotion of its new product in the market. The company sold its newly issued stock and was able to amass a sizable amount of money to invest. Which of the following sources of long-term funds is being used by Merith Qin in the given scenario?

A)Direct investments from owners
B)Long-term debt
C)Corporate bonds
D)Term loans

Question 73

Garry, a financial manager at AtoZ technologies, 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 74

Juxipi Inc. is well known for having a stronger credit score than its competitors. that is why, buyers are more willing to buy promissory notes from Juxipi than its competitors. Which of the following short-term financing options is being offered by Juxipi Inc. in the given scenario?

A)Short-term bank loans
B)Factoring
C)Trade credit
D)Commercial paper

Question 75

Under a line of credit, in a revolving credit agreement:

A)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.
B)a bank provides funds for no more than 90 days.
C)the bank interest rate is allowed to float based on agreed-upon criteria.
D)a bank agrees to make additional funds available as long as the principal and interest are paid.

Question 76

The main disadvantage of financial leverage is that:

A)it increases the taxes of firms that use it.
B)it requires owners to invest more of their own money.
C)it reduces the financial return to stockholders' investment when times are bad.
D)it protects firms from predatory lending practices by financial institutions.

Question 77

Umbero Nix, a garment manufacturing company, produces twenty thousand units of sweaters. These units are sold within three months and replenished with another twenty thousand units. In one year, Umbero Nix replaces its inventory of sweaters four times over. Umbero Nix most likely analyzes _____ to measure how many times its inventory is sold and replaced each year.

A)liquidity ratios
B)profitability ratios
C)leverage ratios
D)asset management ratios

Question 78

Hevron Hrist, a multinational company, finances itself each year by procuring 25 percent of its yearly budget through loans from banks. The remaining budget is covered by the company itself. The given scenario suggests that the firm most likely relies on measuring _____ to decide its capital structure.

A)asset management ratios
B)leverage ratios
C)profitability ratios
D)liquidity ratios

Question 79

A _____ can help a firm evaluate how much internal financing (funds generated by earnings) will be available for a planning period.

A)budgeted income statement
B)budgeted balance sheet
C)line of credit
D)revolving credit agreement

Question 80

Vironi Mave, a designer clothing company, wants to hire fashion designers to start a new clothing line for men. To obtain funds for the project, Vironi Mave issues several formal IOUs to sell them to its investors, with a maturation period of ten years. Which of the following sources of long-term funds is being used by Vironi Mave in the given scenario?

A)Commercial paper
B)Term loans
C)Direct investments from owners
D)Corporate bonds