1. Transaction balances refer to cash kept on hand by a firm to pay everyday expenses.

Transcription

1 Chapter 16 Financial Management and Securities Markets / Questions 1. Transaction balances refer to cash kept on hand by a firm to pay everyday expenses. 2. Lockbox systems are beneficial to companies regardless of the number of checks they receive from customers every business day. 3. A marketable security is a temporary investment of cash. 4. Commercial paper issued by large companies is backed by collateral. 5. Eurodollar deposits can only be made at banks located in London. 6. A trade term of "2/10 net 30" means that the purchasing organization may take a 2 percent discount from the invoice amount if it makes payment by the 30 th day after receiving the bill. 7. Unsecured loans are backed by the borrowers' good reputation and prior credit rating. 8. The principal is the amount of money a business pays to use a bank's funds. 9. Businesses build their credit rating from their history of borrowing and repaying loans on time and in full. Source: M Business 5 th edition 1

2 10. Fixed assets are expected to last for many years. 11. An operating lease is a long-term contract that shows up on the balance sheet as an asset and a liability. 12. In capital budgeting, all assets and projects must be continually reevaluated to ensure they remain compatible with the organization's needs. 13. The longer a project or asset is expected to last, the lesser is its potential risk. 14. Equity financing involves taking on long-term liabilities while debt financing attracts new owners. 15. A bond can be transferred from one owner to another. 16. The par value is the guaranteed percentage of face value that the company will pay to the bond owner every year. 17. Serial bonds are a sequence of small bond issues of progressively longer maturity. 18. Stockholders' equity includes common stock, secured bonds, and dividend yield. 19. The market value of common stock is the price at which it is currently trading. 20. The difference between a stock's par value and retained earnings is called capital in excess of par. 21. Common stock is a safer investment than preferred stock. Source: M Business 5 th edition 2

3 22. New issues of stocks and bonds are sold directly to the public and to institutions in what is known as the primary market. 23. Investment banking helps companies raise funds by matching people and institutions who have money to invest with corporations in need of resources to exploit new opportunities. 24. An over-the-counter market is a network of dealers all over the country that has New York as its central location for trading. 25. An index compares current stock prices with those in a specified base period. Multiple Choice Questions 26. Cash, investments, accounts receivable, and inventory are: A. retained earnings. B. current liabilities. C. long-term assets. D. long-term liabilities. E. current assets. 27. Which of the following is a current asset? A. Accrued taxes B. Short-term bank loans C. Unsecured bonds D. Accounts receivable E. Accrued salaries Source: M Business 5 th edition 3

4 28. One of the primary goals of financial managers who focus on current assets and liabilities is to: A. maximize long-term loans. B. minimize returns on temporary investments of idle cash. C. maximize accrued taxes. D. minimize returns on bond issues. E. maximize returns on inventory. 29. Good money managers strive to keep just enough cash on hand to pay employee wages and utility bills. This cash is called: A. long-term assets. B. marketable securities. C. transaction balances. D. retained earnings. E. secured bonds. 30. Because having idle cash on hand is undesirable, a manager may choose to invest this extra cash in temporary investments called: A. junk bonds. B. long-term assets. C. transaction balances. D. marketable securities. E. secured bonds. 31. Which of the following is a reason why companies use a lockbox? A. To effectively manage inventory balances B. To pay off long-term loans C. To manage long-term assets such as plants, building, and equipment D. To speed up cash collection from customers E. To maintain transaction balances 32. are marketable securities that are short-term debt obligations sold by the U.S. government to raise money. A. Commercial certificates of deposits B. T-bills C. Eurodollars deposits D. Secured loans E. Trade credits Source: M Business 5 th edition 4

5 33. are issued by commercial banks and brokerage companies, available in minimum amounts of $100,000, and which may be traded prior to maturity. A. Trade credits B. T-bills C. Serial bonds D. Secured loans E. Commercial certificates of deposits 34. is a written promise from one company to another to pay a certain amount of money. A. Commercial paper B. T-bill C. Certificate of deposit D. Secured bond E. Trade credit 35. Which of the following statements is true of eurodollar market? A. It refers to any dollar-denominated deposit in a U.S. bank. B. It offers risk-free investments as they are backed by the U.S. government. C. It is used by companies to invest idle cash in international markets. D. It was originally developed by American banks. E. It is used to trade the euro in the U.S. markets. 36. Which of the following is money that an organization owes to suppliers for goods and services? A. Accounts receivable B. Accounts payable C. Trade credit D. T-bill E. Secured bond 37. Dan bought three new trucks with a loan obtained from the First National Bank. If he fails to repay the loan, the bank will repossess the trucks. The trucks typically represent: A. line of credit. B. lockbox. C. collateral. D. accounts payable. E. retained earning. Source: M Business 5 th edition 5

6 38. A boat manufacturer orders 50 units of fiberglass material, promising to pay the supplier at a later date. The boat manufacturer will record the amount to be paid as a(n): A. secured loan. B. accounts receivable. C. serial bond. D. accounts payable. E. T-bill. 39. The most widely used source of short-term financing is: A. an unsecured loan. B. a certificate of deposit. C. commercial paper. D. a T-bill. E. trade credit. 40. Which of the following is an arrangement by which a bank agrees to lend a specified amount of money to an organization upon request? A. Trade credit B. A floating-rate bond C. A junk bond D. A lockbox E. A line of credit 41. If a real estate developer borrows $100,000 from a bank and ends up paying back $120,000, the $100,000 represents the: A. collateral. B. interest. C. down payment. D. principal. E. trade credit. 42. If Linda Wilson borrows $20,000 to buy a car and ends up paying the lender a total of $24,000, the $20,000 represents the: A. principal. B. collateral. C. trade credit. D. discount. E. interest. Source: M Business 5 th edition 6

7 43. The is the interest rate commercial bank lenders charge their best customers for short-term loans. A. factor rate B. over-the-counter rate C. prime rate D. credit line E. trade rate 44. If the interest rate on a loan changes according to the daily average of the prime rate over the life of the loan, the interest rate is said to be: A. floating. B. non-variable. C. unsecured. D. sporadic. E. flexible. 45. A finance company that buys other companies' accounts receivable is known as a(n): A. lockbox. B. factor. C. collateral. D. brokerage. E. conciliator. 46. Plants, offices, and equipment are considered: A. long-term assets. B. marketable securities. C. common stock. D. short-term liabilities. E. current assets. 47. Long-term assets are also called assets. A. current B. floating C. unsecured D. fixed E. junk Source: M Business 5 th edition 7

8 48. Which of the following would not be a fixed asset for the Sprocket and Widget Manufacturing Company? A. A 10,000-square-foot factory B. Plastic-extruding equipment with a 15-year lifespan C. $5,000 in T-bills D. Molds with a useful life of five years E. Office furniture 49. Which of the following involves paying a fee for usage rather than owning the asset? A. Leasing B. Factoring C. Purchasing D. Acquiring E. Merging 50. Which of the following is a short-term cancelable lease that does not show up on the balance sheet? A. A capital lease B. A serial bond C. A transaction balance D. A line of credit E. An operating lease 51. is the process of analyzing what fixed assets, projects, and investments will earn profits for a firm beyond the costs necessary to fund them. A. Working capital management B. Factoring C. Risk assessment D. Capital budgeting E. Investment banking 52. The amount of money budgeted for the purchase of long-term assets is called the: A. master budget. B. commercial budget. C. current budget. D. fixed budget. E. capital budget. Source: M Business 5 th edition 8

9 53. When a company invests a lot of money in a particular project, it is concerned about the amount of risk involved. In general, if the expected life of a project is longer, its potential risk is: A. negligible. B. constant. C. greater. D. secondary. E. nonexistent. 54. Based on qualitative assessments, which of the following potential investment projects is the most risky? A. Adding to an existing product line B. Introducing a new product in a foreign market C. Expanding into a new market D. Buying new equipment for an established market E. Repairing old equipment 55. Of the following potential investment projects, the project that poses the least risk is: A. adding to a product line. B. introducing a new product in a foreign market. C. expanding into a new market. D. buying new equipment for an established market. E. repairing old equipment. 56. Which of the following is an example of a long-term liability? A. Commercial paper B. A serial bond C. A T-bill D. A certificate of deposit E. Trade credit 57. Long-term liabilities are: A. marketable securities. B. debts that will be repaid over a number of years. C. frequently traded in eurodollar market. D. trade credits. E. generated internally, like retained earnings. Source: M Business 5 th edition 9

10 58. Which of the following is a long-term debt instrument that requires the issuer to repay the lender regular interest payments until the loan is repaid on or before the specified maturity rate? A. A bond B. Trade credit C. A T-bill D. Commercial paper E. A certificate of deposit 59. Items such as a bond's face value, maturity date, and the interest rate are specified in the: A. indenture. B. interest prospectus. C. equity contract. D. commercial paper. E. lockbox portfolio. 60. Which of the following statements is true of bonds? A. They must be repaid according to the terms set in the indenture. B. They can be defaulted, without penalty. C. They are the same as preferred stock. D. They typically represent the fixed assets of a firm. E. They denote a firm's current liabilities. 61. The face value of a bond or its initial sales price is typically. A. $1 B. $10 C. $100 D. $1,000 E. $10, are also called debentures and are not backed by specific collateral. A. Dividends B. Treasury bills C. Unsecured bonds D. Trade credits E. Commercial certificates of deposit Source: M Business 5 th edition 10

11 63. Which of the following statements is true of floating-rate bonds? A. They are also called serial bonds. B. They offer interest payments much above the prevailing rates. C. They do not have fixed interest payments. D. They have progressively longer maturity. E. They are often associated with startup firms with limited track record. 64. Which of the following types of bonds offer relatively high rates of interest because they have higher inherent risks? A. Secured bonds B. Serial bonds C. Unsecured bonds D. Junk bonds E. Floating-rate bonds 65. is the single most important source of capital for most new companies. A. Commercial paper B. Common stock C. Floating-rate bond D. Treasury bill E. Trade credit 66. Stockholders who receive preference in the distribution of a firm's dividends but cannot vote are called: A. common stockholders. B. proxy stockholders. C. preemptive stockholders. D. secured stockholders. E. preferred stockholders. 67. The dollar amount printed on a stock certificate is known as its: A. dividend yield. B. capital in excess of par value. C. market value. D. par value. E. prime rate. Source: M Business 5 th edition 11

12 68. If the par value of a stock is $2 and the offering price of the stock is $5, the capital in excess of par is: A. $ B. $3.50. C. $7.00. D. $2.00. E. $ are reinvested in the assets of the firm and belong to the owners in the form of equity. A. Dividend yields B. Secured bonds C. Retained earnings D. Transaction balances E. Trade credits 70. The cash return as a percentage of a stock's price is called its: A. capital in excess of par value. B. dividend yield. C. price-earnings ratio. D. retained earnings. E. par value. 71. The first-time sale of stocks and bonds directly to the public is called a(n): A. primary sale. B. new issue. C. follow-on offering. D. preliminary bid. E. fresh deal. 72. Corporations usually employ to help sell their securities in the primary market. A. investment banking firms B. capital budgeters C. commercial banks D. over-the-counter agencies E. stock brokers Source: M Business 5 th edition 12

13 73. The two biggest stock markets in the United States are the: A. American Stock Exchange and the New York Stock Exchange. B. Chicago Stock Exchange and the International Securities Exchange. C. New York Stock Exchange and the NASDAQ market. D. Southeast Regional Stock Exchange and the Chicago Board Options Exchange. E. American Stock Exchange and the NASDAQ market. 74. The over-the-counter securities market: A. does not trade corporate bonds. B. accounts for the least total dollar value of all of the secondary markets. C. does not include illiquid bank stocks. D. does not have a central location. E. is similar to organized stock exchanges. 75. and are measures that are used to measure stock market performance. A. Assets; liabilities B. Indexes; averages C. Dividend yields; current yields D. Profit ratios; loss percentages E. Prime rates; coupon rates Essay Questions 76. Briefly describe a lockbox. Source: M Business 5 th edition 13

14 77. What are T-bills? Discuss commercial paper as a marketable security. 78. Discuss eurodollar market. 79. How do firms maximize accounts receivable? 80. How do firms optimize inventory? Source: M Business 5 th edition 14

15 81. How does trade credit differ from a line of credit? 82. What are secured and unsecured loans? How do banks charge borrowers on loans? 83. Discuss nonbank liabilities. How does a factor benefit organizations? 84. Discuss leasing as an alternative to purchasing long-term fixed assets. Source: M Business 5 th edition 15

16 85. How does capital budgeting help an organization maximize its value? 86. Explain the risk factors a firm must assess when considering an investment in a new asset. 87. Discuss bonds as corporate IOUs. 88. What are the different types of bonds? Briefly describe each type of bond. Source: M Business 5 th edition 16

17 89. What are prime rates? How are they different from coupon rates? 90. Discuss common stock as a source of capital for new companies. 91. Explain the difference between common stock and preferred stock. 92. Discuss retained earnings. Source: M Business 5 th edition 17

18 93. What are primary and secondary markets? 94. Discuss securities markets. How are securities sold in primary and secondary markets? 95. Explain how over-the-counter markets differ from other stock exchanges. Source: M Business 5 th edition 18

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