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Exam 18: Financial Management

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Question 111

Multiple Choice

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After enjoying increased sales and profits of several popular products, Braggs & Stritton plans to expand their production facilities. The firm, a well-known producer of lawn care products, prefers financing this project with a funding source that avoids interest and dividend payments as well as underwriting costs. Which of the following best meets the needs of Braggs & Stritton?

A) Venture capital
B) Debenture bonds
C) Common stock
D) Retained earnings

E) B) and D)
F) A) and D)

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Question 112

Multiple Choice

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Which of these is backed only by the reputation of the issuer?

A) Venture capital
B) Secured bonds
C) Debenture bonds
D) Long-term financing

E) All of the above
F) B) and C)

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Question 113

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Financial managers examine the data prepared by accountants and make recommendations to top management regarding strategies for improving the financial performance of the company.

The cost to a retailer of accepting credit cards is generally greater than the benefits provided.

. Firms that fail to take advantage of this early payment discount are giving up approximately 36%.

As indicated in the Making Ethical Decisions box, financial controls not only help a firm increase earnings, the process protects a firm from mismanaging funds and even overstating expenses.

An example of a firm using leverage to its advantage is a firm that borrows funds at 9% and invests those funds to earn 14%.

The main objective of financial control is to establish priorities for the purchase of plant and equipment.

The financial manager of Carolina Graphics negotiated a with her bank that allows Carolina to borrow up to $50,000 without collateral. This arrangement eliminates the need to renegotiate the terms of the loan and complete new paper work each time Carolina borrows money. The preapproved short-term loan agreement is contingent upon the bank having the funds available.

Mini-Case Tishian's Funeral Home has been in business for over eighty years. Throughout its history, the firm has been a family-run operation. Today, the business is managed by Mort Tishian, a grandson of the founder. Unfortunately, Mort Tishian's tenure has been plagued with problems neither his father nor grandfather before him experienced. The reason is simple: the funeral business is undergoing rapid change. Small, family-owned funeral homes are losing ground to a new type of competitor, a large national network service that resembles a franchise system. More and more families "in their time of need" are choosing the new, highly promoted competitors instead of the traditional small familyoperated funeral homes. This trend has required a response from organizations like Tishian's Funeral Home. Bigger and better facilities are needed to remain competitive. All of this puts more pressure on the family-owners to be more active in the financial side of the business. Mort summed it up best when he said, "Grandpa told people, 'you pay me when you can, I ain't goin' nowheres.'" His creditors did the same with him. Today, it's a different game. Cash flow is key, and obtaining funds is no simple task. Additionally, creditors want their money now, not later. Banks are also more demanding. "Heck, Grandpa knew all the bankers he dealt with personally. I see new faces every time I go to the bank. If things don't get better, I suspect after eighty years of service, Tishian's Funeral Home will have its own funeral." -Mort approached the chief lending officer at First Virginia Bank about obtaining a $75,000 loan. The banker said she would approve the loan provided that the funeral home's building was pledged as collateral. The banker was offering a(n) :

The cost of capital is the rate of return a firm must earn in order to meet the demands of its lenders and expectations of its equity holders.

One activity of the accounting function is to collect payments from overdue customer accounts.

Retained earnings represent a source of equity financing.

Long-term financing would normally be used to purchase:

A capital budget combines all of the other budgets into one detailed plan for monitoring the operations of the firm.

Organizations can avoid financial difficulties by marketing products that generate a significant rate of growth in sales revenue.

Factoring refers to the process of selling accounts receivable for cash.

By purchasing stock in Entertainment Today, Veronica has become a(n) the company.

A refers to a line of credit that is guaranteed by the bank.

Explain the role the operating budget, the capital budget, and the cash budget play in financial planning.