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Exam 18: Financial Management

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Question 71

Multiple Choice

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Acquiring funds through borrowing represents:

A) debt financing.
B) venture capital.
C) speculative capital.
D) equity financing.

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

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Question 72

Multiple Choice

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is the function in business that is responsible for acquiring funds for the firm, and managing funds within the firm.

A) Accounting
B) Managerial accounting
C) Finance
D) Financial accounting

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

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Question 73

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

The owner of a Mountain Cycle Shop worries that cash flows may be insufficient to pay his current operating expenses. While he anticipates a surplus of cash inflows as warm weather approaches, he needs to borrow funds now to meet his immediate obligations. He can best resolve his cash flow concerns by obtaining financing.

A comptroller is responsible for the acquiring and managing of funds for an organization.

Capital expenditures are major investments in long-term assets such as property and equipment.

As a financial manager, Sabrina's responsibilities include the interpretation of financial statements provided by the firm's accountants and the preparation of recommendations to top management.

Budgets assist managers in performing the functions of planning and control.

Financial managers understand the time value of money. They try to maximize cash expenditures, as opposed to minimizing cash expenditures.

Factoring refers to the process of selling inventory to generate short-term funds.

A capital budget highlights a firm's spending plans for major assets, such as property, buildings, and equipment.

Undercapitalization refers to the problem of insufficient start-up funds.

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 is seriously considering a major expansion in the size of his funeral home. The money spent on this type of project would be classified as a(n) :

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." -After seeing Mort's advertisement: "You Aren't Gettin' Any Younger! Start Planning for Heaven Today!" a firm decided the aging population was a good investment. Although they typically look at start-ups with great promise, they approached Mort with $6 million dollars for a major three-city expansion that included six new funeral homes, a crematory, and mausoleum. After researching the idea, Mort agreed to give-up 50% ownership of the business in order to secure these funds. His last thoughts as he began to sign the papers were: "Now, I'll be able to compete with the big guys!"

A less established company, or a company with a high debt to equity ratio would be considered a riskier investment to the lender. Which of the following principles attests to this axiom?

refers to the strategy of using borrowed funds to increase the rate of return for stockholders.

A major concern for firms selling on credit is:

Venture capital is money that is invested in new or emerging companies that are perceived as having great profit potential.

Tri-State Concrete Construction Company relies on factoring to meet its short-term financing needs. This means that Tri-State borrows money from a finance company and pledges its accounts receivable as collateral.

A loan backed by collateral represents a(n) :