Question 1

Which of the following statements is incorrect?

Accepted Answer

Statement D is incorrect because the ongoing costs associated with selling stock, such as regulatory compliance and reporting, can be significant.

Question 2

The least expensive form of short-term financing is

Accepted Answer

Trade credit is the least expensive form of short-term financing as it involves a supplier extending credit to a buyer for a short period of time. There is no additional cost of borrowing or interest associated with trade credit, making it a cost-effective option for businesses that need to finance short-term cash flow needs. Promissory notes, unsecured bank loans, secured bank loans, and factoring all typically involve higher costs or interest rates compared to trade credit.

Question 3

Surf 'N' Sun Shop sells ski boats and other boating accessories.It receives most of its inventory about three months in advance of the summer season,but it is not able to pay for the inventory up front.Instead,its suppliers allow Surf 'N' Sun to use its inventory as collateral.This type of agreement is called

Accepted Answer

The type of agreement described in the scenario, where inventory is used as collateral, is known as secured short-term financing. This allows the business to obtain financing without having to pay for the inventory up front.

Question 4

Use of a warehouse receipt in short-term financing indicates that

Accepted Answer

A warehouse receipt is a document that provides proof of ownership of inventory held in a warehouse. It can be used as collateral for short-term financing, such as a loan secured by inventory. This allows the borrower to access funds quickly without having to sell their inventory.

Question 5

When Silver Fitness sells its accounts receivable to a financial institution,it receives less than the full value of the accounts receivable.Which of the following is a benefit Silver Fitness receives from this arrangement?

Accepted Answer

By selling accounts receivable to a financial institution, Silver Fitness is able to shift the responsibility of collecting payment from its customers to the factor, reducing the time and expense of collecting outstanding accounts. This can improve the cash flow of the company and allow it to focus on other business operations. Choice A is not necessarily guaranteed, as the timeline for receiving payment will depend on the agreement with the financial institution. Choice B and C are unrelated to the sale of accounts receivable. Choice E is not accurate, as Platinum is not mentioned in the question stem.

Question 6

Some equity capital generally is used to start a

Accepted Answer

Equity capital can be used to start any type of business regardless of its legal form. It can be used for a sole proprietorship, partnership, corporation, cooperative or any other business structure.

Question 7

A firm that specializes in buying other firms' accounts receivable is called a(n)

Accepted Answer

A firm that specializes in buying other firms' accounts receivable is called a factor. Factors purchase these receivables at a discounted rate, then collect the full amount owed from the debtor.

Question 8

Nick's Wholesale Office Supplies prefers to handle its accounts receivable itself,but it also needs to use them to facilitate short-term borrowing.What can Nick's do?

Accepted Answer

Pledging accounts receivable as collateral allows Nick's Wholesale Office Supplies to use them for short-term borrowing while still retaining control over them. This way, they can still handle the accounts receivable themselves, which is their preferred method. The other options (A, B, D, E) either do not provide a viable solution or require giving up control over the accounts receivable.

Question 9

A loan that is approved before the money is actually needed is called a

Accepted Answer

A loan that is approved before the money is actually needed is called a line of credit. This allows the borrower to access funds as needed up to a certain limit without having to reapply for a new loan. A certificate of deposit, check, credit bounce, and promissory note are all different financial instruments and not related to this type of loan.

Question 10

To raise capital,Financial Fusion sold

Accepted Answer

Selling stock using an IPO (Initial Public Offering) is the best option for raising capital because it allows the company to sell shares of ownership to a large number of investors in the public market. This can provide access to a large pool of funding and potentially increase the company's visibility and credibility. Selling stock to family members and friends or using promissory notes may not provide enough capital, while selling bonds or commercial paper may require a more established credit rating and financial track record.

Question 11

For a corporation,equity capital is obtained from

Accepted Answer

Equity capital is obtained through the sale of stocks to stockholders. Bondholders, banks, insurance companies, and credit unions provide debt capital.

Question 12

Mildred purchased a new dining room table and china cabinet from Discount Furniture,which offered a one-year special with no interest or financing charges.When Mildred makes her purchase,Discount Furniture checks her credit and seeks approval for her.Upon approval,Mildred receives information informing her that she will make payments to Regional Finance Company.This arrangement is an example of

Accepted Answer

The answer of Mildred purchased a new dining room table...

Question 13

A factor will buy accounts receivable for

Accepted Answer

Factors typically buy accounts receivable for less than their face value in order to make a profit. They may offer anywhere from 70-90% of the face value of the receivables, depending on the creditworthiness of the debtor and the age of the receivables.

Question 14

The highest cost of short-term finance generally is

Accepted Answer

Factoring typically involves selling accounts receivable at a discount to a third party, often resulting in a higher cost of finance compared to other short-term options like trade credit, unsecured bank loans, commercial paper, or promissory notes. This is because the factor, or the third party purchasing the receivables, charges fees and takes on the risk of non-payment, leading to higher costs for the company using this financing method.

Question 15

Which of the following generally has no specific repayment period?

Accepted Answer

The answer of Which of the following generally has no...

Question 16

To raise money,Fawcett Productions sold its accounts receivable to a ____.In doing so,Fawcett received cash and shifted to the other company both the task of collecting and the risk of nonpayment.

Accepted Answer

Selling accounts receivable to a factor is a common way for businesses to raise cash. Factoring is a financial transaction in which a company sells its accounts receivable (i.e., invoices) to a third party (the factor) at a discount. The factor then collects payment from the customers and assumes the credit risk if the customer fails to pay.

Question 17

During 2010,Bedford Technology sold common stock for the first time to whoever wanted to buy it.This was the ____ for Bedford.

Accepted Answer

Selling common stock for the first time to the general public is referred to as an initial public offering (IPO). Therefore, the best choice is C - initial public offering.

Question 18

When a corporation uses an initial public offering to raise capital,the stock is sold in the

Accepted Answer

An initial public offering (IPO) involves the sale of a corporation's stock to the public for the first time. This occurs in the primary market, where the issuer (the corporation) receives the proceeds from the sale of the securities. The secondary market is where previously issued securities are traded between investors, and the unsecured financing market and over-the-counter market refer to different types of debt securities markets. The securities exchange is a general term that can refer to any market where securities are traded, including both primary and secondary markets.

Question 19

The amounts owed to a firm by its customers are called

Accepted Answer

Accounts receivable are the amounts owed to a firm by its customers. Factors are financial institutions that buy a firm's accounts receivable, revolving credit agreements are lines of credit that can be repeatedly used up to a certain limit, dividends are payments made to a firm's shareholders, and commercial drafts are a type of payment instrument used in international trade.

Question 20

For a corporation such as AT&T,what are the two primary advantages of equity financing?

Accepted Answer

Equity financing does not require the corporation to pay regular interest payments like debt financing, and there is no obligation to pay dividends or repay the money obtained from the sale of stock. This gives the corporation more financial flexibility in the long run. Another advantage of equity financing is that ownership is spread among many individuals, which can help to reduce the risk of a single large shareholder having too much control over the corporation.

Quiz 16: Mastering Financial Management