Question 1

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.

Accepted Answer

Angel investors are individuals who provide funds to start-ups in exchange for a share of ownership. They tend to be high-risk investors who are willing to invest in early-stage start-ups and provide seed capital to help them get off the ground. They may also provide mentorship or other types of support to the start-up in addition to funding. They do not typically expect a minimum return on investment from the start-ups they fund, as they understand the high-risk nature of these investments.

Question 2

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.

Accepted Answer

Financial leverage involves borrowing money to finance investments in order to increase returns to stockholders. However, it also increases the risk of financial distress and the possibility of not being able to meet debt obligations during bad times. As a result, stockholders may receive lower returns or even lose their entire investment when the company is unable to meet its debt obligations.

Question 3

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.

Accepted Answer

Retained earnings are the profits that a company chooses to reinvest in the business rather than distribute as dividends to shareholders. Since Alpha Inc. saw an increase in profits in the previous year, it makes sense for the company to utilize retained earnings to meet its long-term financial needs, such as investing in new products, expanding the business, or paying down debt. Using these earnings to meet short-term financial needs or paying a dividend would not be the best use of the funds. Increasing the liquid assets of the company is also not a necessity unless the company faces a liquidity crisis.

Question 4

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

Accepted Answer

Darths Inc., with its heavy reliance on debt financing, benefits from the tax shield provided by interest payments, which can lead to a higher return on equity compared to Pro Corp., which uses only equity financing.

Question 5

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

Accepted Answer

The collection agency is involved in factoring, where the manufacturer sells its accounts receivable to the agency at a discount to get immediate cash.

Question 6

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.

Accepted Answer

A money market mutual fund is a type of mutual fund that invests in short-term, highly liquid and safe securities, such as government bonds, treasury bills, and commercial paper. The fund pools the money of many investors to purchase these securities, with the goal of earning a small return while maintaining a low level of risk.

Question 7

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.

Accepted Answer

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.

Question 8

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.

Accepted Answer

A cash budget is a financial statement that shows expected cash inflows and outflows over a specific period. It provides a detailed analysis of when the firm is likely to have cash surpluses or deficits, allowing Garry to plan for short-term financing or investments accordingly. Pro forma income statements and projected balance sheets provide information about expected profits and financial position, but they do not focus specifically on cash flows. Sales forecasts are important inputs to the cash budget, but they do not provide a complete picture of cash inflows and outflows.

Question 9

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.

Accepted Answer

Deleveraging means reducing debt in the capital structure. Option D states that firms replaced much of the debt in their capital structure with equity, which is the correct explanation of deleveraging. Option A means avoiding equity financing, which doesn't necessarily reduce debt. Option B says borrowing at lower rates, which may reduce cost but not necessarily debt. Option C mentions stock buyback, which doesn't reduce debt directly. So, option D is the best choice.

Question 10

_____ 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

Accepted Answer

Cash equivalents are short-term, highly liquid assets that can be easily converted into cash and are considered almost as good as cash. They are typically listed on a firm's balance sheet along with their cash holdings. Examples of cash equivalents include treasury bills, commercial paper, and money market funds.

Question 11

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

Accepted Answer

By offering more lenient credit terms, a firm can make it easier for customers to make purchases without immediate payment, which can increase sales.

Answer: D 
 While more lenient credit terms may temporarily reduce cash flows due to delayed payments, over time it can lead to improved cash flows as customers continue to make purchases and repay their debts.

Question 12

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

Accepted Answer

The budgeted balance sheet is a statement that projects a company's financial position based on forecasted assets and liabilities. It is used to forecast the types and amounts of assets a firm will need to implement its future plans and the amount of additional financing required to acquire those assets. A cash budget forecasts a firm's anticipated cash inflows and outflows, while the statement of cash flows tracks actual cash flows from operating, investing, and financing activities. A query report is a tool used to extract specific data from a database.

Question 13

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.

Accepted Answer

A negative net present value means that the expected future cash flows from the project are less than the cost of the investment. This means that the project is not generating enough cash to cover its initial cost and is therefore not profitable. As such, it should be rejected. A and C are incorrect because net present value does take the time value of money into account and can significantly impact a company's capital budgeting decision, making it an important consideration. D is incorrect because a negative net present value indicates that the expected future cash flows are less than the cost of the investment, therefore, it is not exceeding it.

Question 14

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.

Accepted Answer

Offering liberal credit to customers creates a delay in the receipt of cash that the firm needs to meet its financial obligations. This delay can lead to cash flow issues and financial instability for the company. It can also increase the risk of bad debt if customers fail to make payments on time, which can further worsen the company's financial position. Therefore, offering liberal credit needs to be carefully balanced against the potential benefits of increased sales and customer loyalty.

Question 15

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

Accepted Answer

The answer of Which of the following is a characteristic...

Question 16

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.

Accepted Answer

The time value of money refers to the principle that a dollar today is worth more than a dollar in the future because it can be invested and earn interest, resulting in a greater amount of money in the future. Therefore, it's best to have money today, so it can be put to work sooner to make even more money.

Question 17

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

Accepted Answer

Corporate bonds are a long-term financing option for a firm as they typically have a maturity of 10 years or longer. Trade credit, revolving credit agreements, and commercial paper are all short-term financing options.

Question 18

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

Accepted Answer

Buying Treasury bills and bonds for the next six months is not a capital budgeting proposal and is not related to the evaluation process of a capital budgeting proposal. The other options involve evaluating potential investments in long-term assets and are typical of a capital budgeting proposal evaluation process.

Question 19

A marketable security is a cash equivalent unlike _____.
A)a treasury bill
B)trade credit
C)a money market mutual fund
D)commercial paper

Accepted Answer

Trade credit is a form of credit extended by one company to another for the purchase of goods or services. Although it may act as a short-term financing option, it is not a cash equivalent or a marketable security. The other choices (treasury bill, money market mutual fund, and commercial paper) are all considered cash equivalents and marketable securities.

Question 20

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.

Accepted Answer

Stockholder investments and retained earnings are the two primary sources of equity financing. Stockholder investments involve issuing shares of ownership in the company, while retained earnings are profits that are reinvested back into the business rather than distributed to shareholders as dividends. Trade credit, commercial paper, owner debt structure, factoring, liquid assets, and the sale of corporate bonds are all sources of financing, but they are not considered to be primary sources of equity financing.

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

Which of the following statements is true of angel investors?

The main disadvantage of financial leverage is that it:

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:

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?

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

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

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:

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:

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

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

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 project with a negative net present value should be:

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

Which of the following is a characteristic of debt financing?

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

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

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

A marketable security is a cash equivalent unlike _____.

The two primary sources of equity financing are: