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Exam 18: Financial Management

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Question 101

Multiple Choice

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Successful use of financial leverage requires a firm to

A) negotiate with lenders to establish a line of credit.
B) establish and operate a venture capital organization to minimize the use of equity financing.
C) register with the local government commission that administers market leverage.
D) earn a higher return on its investments than the interest rate it pays to acquire funds.

E) A) and C)
F) None of the above

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Question 102

Multiple Choice

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If a company secures a one-year bank loan this is considered

A) short-term financing.
B) asset funding.
C) liability funding.
D) long-term financing.

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

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Question 103

True/False

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If a firm earns 10% return on funds they borrowed at 15% interest, the owners of the firm realize a benefit from using leverage.

Many sellers offer a 2% discount to a buyer that makes payment 20 days before the due date, (2/10, net 30). Firms that fail to take advantage of this early payment discount are giving up approximately 36%.

When Portable Pet Care, a mobile veterinary company, first started operations, it extended three months of credit to customers. It soon began to experience a cash flow problem. A finance professional was hired to

Seedling Plant Science invented a drought resistant grass seed that only needs watering three times each year. In order to expand distribution worldwide, the company whose product produces lush green foliage needs a large amount of funding-fast! The handful of seed scientists that own the company decide to offer shares of stock to general investors. This first-time offering is a(n)

Portable Pet Care, Inc., a mobile veterinary clinic, is planning for the future. The company owners (two seasoned veterinarians) have brought together the vice president of marketing and the director of information systems to talk about their expansion campaign, "We come to you!" The talks are in the preliminary stages, so there is no need to concern the finance team at this time because cash flow is currently not a problem.

A debenture bond is backed only by the reputation of the issuer.

Undercapitalization refers to the problem of

By purchasing stock in Film Files, Mackenzie has become a(n) ________ the company.

Mort Tishian feels it's necessary to predict revenues, costs, and expenses on a six-month basis. "It's the only way you get an idea of what to expect," explains Mort. In order to obtain these predictions, Mort needs to develop a(n)

The most widely used source of short-term funding is trade credit.

Finance managers need funds for capital purchases, but seldom for the day-to-day operations.

Willow's small floral shop specializes in weddings. Though she knows her competitors allow customers to buy on credit, she is concerned about the risk and expense of unpaid customer accounts. One strategy to reduce risk and collect sales revenue more quickly would be to accept bank-issued credit cards.

To be effective, budgets are prepared independently of organizational forecasts.

Inadequate control of expenses represents a common financial problem that contributes to business failure.

By identifying variances from the financial plan, managers are able to focus on those departments that require corrective action.

Leverage refers to the use of borrowed funds to increase a firm's rate of return.

Corporations that issue stock to raise long-term funds accept the legal obligation to repay the amount borrowed.

A promissory note that requires the borrower to repay the loan in specified installments is called a(n)