Full Test Bank Financial Management Chapter.17 - Contemporary Business 18e | Test Bank by Louis E. Boone by Louis E. Boone. DOCX document preview.
Package Title: Chapter 17, Testbank
Course Title: Boone, 18e
Chapter Number: 17
Question type: Multiple Choice
1) The technique of increasing the rate of return on an investment by financing it with borrowed funds is called _____.
a) Venture capitalists
b) private placements
c) factoring
d) capital investment analysis
e) debt capital
f) equity capital
g) financial plan
h) leveraged buyout
i) private equity funds
j) divestiture
k) Marketable securities
l) financial manager
m) tender offer
n) Trade credit
o) leverage
p) capital structure
q) Asset intensity
r) bonds
s) spin-off
t) Hedge funds
u) Inventory control
v) dividends
x) debt-to-equity (D/E)
y) compensating balances
z) shareholder’s equity
Difficulty: Medium
Learning Objective 1: 17.4
Section Reference 1: Discuss the sources of funds and capital structure.
Standard 1: AACSB || Analytic
Bloomcode: Knowledge
2) A(n) _____is a document that specifies the funds a company will need for a period of time, the time of inflows and outflows, and the most appropriate uses of funds.
a) Venture capitalists
b) private placements
c) factoring
d) capital investment analysis
e) debt capital
f) equity capital
g) financial plan
h) leveraged buyout
i) private equity funds
j) divestiture
k) Marketable securities
l) financial manager
m) tender offer
n) Trade credit
o) leverage
p) capital structure
q) Asset intensity
r) bonds
s) spin-off
t) Hedge funds
u) Inventory control
v) dividends
x) debt-to-equity (D/E)
y) compensating balances
z) shareholder’s equity
Difficulty: Medium
Learning Objective 1: 17.2
Section Reference 1: Describe financial planning.
Standard 1: AACSB || Analytic
Bloomcode: Knowledge
3) _____ are low-risk securities that either have short maturities or can easily be sold in secondary markets.
a) Venture capitalists
b) private placements
c) factoring
d) capital investment analysis
e) debt capital
f) equity capital
g) financial plan
h) leveraged buyout
i) private equity funds
j) divestiture
k) Marketable securities
l) financial manager
m) tender offer
n) Trade credit
o) leverage
p) capital structure
q) Asset intensity
r) bonds
s) spin-off
t) Hedge funds
u) Inventory control
v) dividends
x) debt-to-equity (D/E)
y) compensating balances
z) shareholder’s equity
Difficulty: Medium
Learning Objective 1: 17.3
Section Reference 1: Outline how organizations manage their assets.
Standard 1: AACSB || Analytic
Bloomcode: Knowledge
4) An offer made by an outside investor or company to the target company’s shareholders is a(n) _____.
a) Venture capitalists
b) private placements
c) factoring
d) capital investment analysis
e) debt capital
f) equity capital
g) financial plan
h) leveraged buyout
i) private equity funds
j) divestiture
k) Marketable securities
l) financial manager
m) tender offer
n) Trade credit
o) leverage
p) capital structure
q) Asset intensity
r) bonds
s) spin-off
t) Hedge funds
u) Inventory control
v) dividends
x) debt-to-equity (D/E)
y) compensating balances
z) shareholder’s equity
Difficulty: Medium
Learning Objective 1: 17.7
Section Reference 1: Describe mergers, acquisitions, buyouts, and divestitures.
Standard 1: AACSB || Analytic
Bloomcode: Knowledge
5) A(n) _____ is a sale of assets by a company.
a) Venture capitalists
b) private placements
c) factoring
d) capital investment analysis
e) debt capital
f) equity capital
g) financial plan
h) leveraged buyout
i) private equity funds
j) divestiture
k) Marketable securities
l) financial manager
m) tender offer
n) Trade credit
o) leverage
p) capital structure
q) Asset intensity
r) bonds
s) spin-off
t) Hedge funds
u) Inventory control
v) dividends
x) debt-to-equity (D/E)
y) compensating balances
z) shareholder’s equity
Difficulty: Medium
Learning Objective 1: 17.7
Section Reference 1: Describe mergers, acquisitions, buyouts, and divestitures.
Standard 1: AACSB || Analytic
Bloomcode: Knowledge
6) Stocks or bonds that are sold exclusively to a small group of major investors are known as _____.
a) Venture capitalists
b) private placements
c) factoring
d) capital investment analysis
e) debt capital
f) equity capital
g) financial plan
h) leveraged buyout
i) private equity funds
j) divestiture
k) Marketable securities
l) financial manager
m) tender offer
n) Trade credit
o) leverage
p) capital structure
q) Asset intensity
r) bonds
s) spin-off
t) Hedge funds
u) Inventory control
v) dividends
x) debt-to-equity (D/E)
y) compensating balances
z) shareholder’s equity
Difficulty: Medium
Learning Objective 1: 17.6
Section Reference 1: Discuss sources of long-term financing.
Standard 1: AACSB || Analytic
Bloomcode: Knowledge
7) _____ consists of funds provided by a company’s owners when they reinvest earnings, make additional contributions, liquidate assets, issue stock, or raise capital.
a) Venture capitalists
b) private placements
c) factoring
d) capital investment analysis
e) debt capital
f) equity capital
g) financial plan
h) leveraged buyout
i) private equity funds
j) divestiture
k) Marketable securities
l) financial manager
m) tender offer
n) Trade credit
o) leverage
p) capital structure
q) Asset intensity
r) bonds
s) spin-off
t) Hedge funds
u) Inventory control
v) dividends
x) debt-to-equity (D/E)
y) compensating balances
z) shareholder’s equity
Difficulty: Medium
Learning Objective 1: 17.4
Section Reference 1: Discuss the sources of funds and capital structure.
Standard 1: AACSB || Analytic
Bloomcode: Knowledge
8) _____ raise money from wealthy individuals and institutional investors, and invest these funds in small, start-up companies.
a) Venture capitalists
b) private placements
c) factoring
d) capital investment analysis
e) debt capital
f) equity capital
g) financial plan
h) leveraged buyout
i) private equity funds
j) divestiture
k) Marketable securities
l) financial manager
m) tender offer
n) Trade credit
o) leverage
p) capital structure
q) Asset intensity
r) bonds
s) spin-off
t) Hedge funds
u) Inventory control
v) dividends
x) debt-to-equity (D/E)
y) compensating balances
z) shareholder’s equity
Difficulty: Medium
Learning Objective 1: 17.6
Section Reference 1: Discuss sources of long-term financing.
Standard 1: AACSB || Analytic
Bloomcode: Knowledge
9) A transaction in which public shareholders are bought out and the company reverts to private status is known as a(n) _____.
a) Venture capitalists
b) private placements
c) factoring
d) capital investment analysis
e) debt capital
f) equity capital
g) financial plan
h) leveraged buyout
i) private equity funds
j) divestiture
k) Marketable securities
l) financial manager
m) tender offer
n) Trade credit
o) leverage
p) capital structure
q) Asset intensity
r) bonds
s) spin-off
t) Hedge funds
u) Inventory control
v) dividends
x) debt-to-equity (D/E)
y) compensating balances
z) shareholder’s equity
Difficulty: Medium
Learning Objective 1: 17.7
Section Reference 1: Describe mergers, acquisitions, buyouts, and divestitures.
Standard 1: AACSB || Analytic
Bloomcode: Knowledge
10) Funds obtained through borrowing are _____.
a) Venture capitalists
b) private placements
c) factoring
d) capital investment analysis
e) debt capital
f) equity capital
g) financial plan
h) leveraged buyout
i) private equity funds
j) divestiture
k) Marketable securities
l) financial manager
m) tender offer
n) Trade credit
o) leverage
p) capital structure
q) Asset intensity
r) bonds
s) spin-off
t) Hedge funds
u) Inventory control
v) dividends
x) debt-to-equity (D/E)
y) compensating balances
z) shareholder’s equity
Difficulty: Medium
Learning Objective 1: 17.4
Section Reference 1: Discuss the sources of funds and capital structure.
Standard 1: AACSB || Analytic
Bloomcode: Knowledge
11) A(n) _____ is an executive who develops and implements a company’s financial plan and determines the most appropriate sources and uses of funds.
a) Venture capitalists
b) private placements
c) factoring
d) capital investment analysis
e) debt capital
f) equity capital
g) financial plan
h) leveraged buyout
i) private equity funds
j) divestiture
k) Marketable securities
l) financial manager
m) tender offer
n) Trade credit
o) leverage
p) capital structure
q) Asset intensity
r) bonds
s) spin-off
t) Hedge funds
u) Inventory control
v) dividends
x) debt-to-equity (D/E)
y) compensating balances
z) shareholder’s equity
Difficulty: Medium
Learning Objective 1: 17.1
Section Reference 1: Define the role of the financial manager.
Standard 1: AACSB || Analytic
Bloomcode: Knowledge
12) A mix of a company’s debt and equity capital is _____.
a) Venture capitalists
b) private placements
c) factoring
d) capital investment analysis
e) debt capital
f) equity capital
g) financial plan
h) leveraged buyout
i) private equity funds
j) divestiture
k) Marketable securities
l) financial manager
m) tender offer
n) Trade credit
o) leverage
p) capital structure
q) Asset intensity
r) bonds
s) spin-off
t) Hedge funds
u) Inventory control
v) dividends
x) debt-to-equity (D/E)
y) compensating balances
z) shareholder’s equity
Difficulty: Medium
Learning Objective 1: 17.4
Section Reference 1: Describe sources of funds and capital structure.
Standard 1: AACSB || Analytic
Bloomcode: Knowledge
13) _____ is extended by suppliers when a company receives goods or services, agreeing to pay them at a later date.
a) Venture capitalists
b) private placements
c) factoring
d) capital investment analysis
e) debt capital
f) equity capital
g) financial plan
h) leveraged buyout
i) private equity funds
j) divestiture
k) Marketable securities
l) financial manager
m) tender offer
n) Trade credit
o) leverage
p) capital structure
q) Asset intensity
r) bonds
s) spin-off
t) Hedge funds
u) Inventory control
v) dividends
x) debt-to-equity (D/E)
y) compensating balances
z) shareholder’s equity
Difficulty: Medium
Learning Objective 1: 17.5
Section Reference 1: Identify short-term funding options.
Standard 1: AACSB || Analytic
Bloomcode: Knowledge
14) The process by which decisions are made regarding investments in long-lived assets is _____.
a) Venture capitalists
b) private placements
c) factoring
d) capital investment analysis
e) debt capital
f) equity capital
g) financial plan
h) leveraged buyout
i) private equity funds
j) divestiture
k) Marketable securities
l) financial manager
m) tender offer
n) Trade credit
o) leverage
p) capital structure
q) Asset intensity
r) bonds
s) spin-off
t) Hedge funds
u) Inventory control
v) dividends
x) debt-to-equity (D/E)
y) compensating balances
z) shareholder’s equity
Difficulty: Medium
Learning Objective 1: 17.3
Section Reference 1: Outline how organizations manage their assets.
Standard 1: AACSB || Analytic
Bloomcode: Knowledge
15) Similar to venture capitalists, _____ are investment companies that raise money to invest in all types of promising companies, including mature businesses.
a) Venture capitalists
b) private placements
c) factoring
d) capital investment analysis
e) debt capital
f) equity capital
g) financial plan
h) leveraged buyout
i) private equity funds
j) divestiture
k) Marketable securities
l) financial manager
m) tender offer
n) Trade credit
o) leverage
p) capital structure
q) Asset intensity
r) bonds
s) spin-off
t) Hedge funds
u) Inventory control
v) dividends
x) debt-to-equity (D/E)
y) compensating balances
z) shareholder’s equity
Difficulty: Medium
Learning Objective 1: 17.6
Section Reference 1: Discuss sources of long-term financing.
Standard 1: AACSB || Analytic
Bloomcode: Knowledge
16) _____ is the amount of assets needed to generate a given level of sales.
a) Venture capitalists
b) private placements
c) factoring
d) capital investment analysis
e) debt capital
f) equity capital
g) financial plan
h) leveraged buyout
i) private equity funds
j) divestiture
k) Marketable securities
l) financial manager
m) tender offer
n) Trade credit
o) leverage
p) capital structure
q) Asset intensity
r) bonds
s) spin-off
t) Hedge funds
u) Inventory control
v) dividends
x) debt-to-equity (D/E)
y) compensating balances
z) shareholder’s equity
Difficulty: Medium
Learning Objective 1: 17.2
Section Reference 1: Describe financial planning.
Standard 1: AACSB || Analytic
Bloomcode: Knowledge
17) In _____, a business sells its accounts receivable to either a bank or finance company at a discount.
a) Venture capitalists
b) private placements
c) factoring
d) capital investment analysis
e) debt capital
f) equity capital
g) financial plan
h) leveraged buyout
i) private equity funds
j) divestiture
k) Marketable securities
l) financial manager
m) tender offer
n) Trade credit
o) leverage
p) capital structure
q) Asset intensity
r) bonds
s) spin-off
t) Hedge funds
u) Inventory control
v) dividends
x) debt-to-equity (D/E)
y) compensating balances
z) shareholder’s equity
Difficulty: Medium
Learning Objective 1: 17.5
Section Reference 1: Identify short-term funding options.
Standard 1: AACSB || Analytic
Bloomcode: Knowledge
18) Certificates of indebtedness sold to raise long-term funds for a corporation or government agency are known as _____.
a) Venture capitalists
b) private placements
c) factoring
d) capital investment analysis
e) debt capital
f) equity capital
g) financial plan
h) leveraged buyout
i) private equity funds
j) divestiture
k) Marketable securities
l) financial manager
m) tender offer
n) Trade credit
o) leverage
p) capital structure
q) Asset intensity
r) bonds
s) spin-off
t) Hedge funds
u) Inventory control
v) dividends
x) debt-to-equity (D/E)
y) compensating balances
z) shareholder’s equity
Difficulty: Medium
Learning Objective 1: 17.6
Section Reference 1: Discuss sources of long-term financing.
Standard 1: AACSB || Analytic
Bloomcode: Knowledge
19) A sell-off is a type of _____.
a) Venture capitalists
b) private placements
c) factoring
d) capital investment analysis
e) debt capital
f) equity capital
g) financial plan
h) leveraged buyout
i) private equity funds
j) divestiture
k) Marketable securities
l) financial manager
m) tender offer
n) Trade credit
o) leverage
p) capital structure
q) Asset intensity
r) bonds
s) spin-off
t) Hedge funds
u) Inventory control
v) dividends
x) debt-to-equity (D/E)
y) compensating balances
z) shareholder’s equity
Difficulty: Medium
Learning Objective 1: 17.7
Section Reference 1: Describe mergers, acquisitions, buyouts, and divestitures.
Standard 1: AACSB || Analytic
Bloomcode: Knowledge
20) When Disney purchased Marvel using a combination of cash and securities, Disney made a(n) _____.
a) Venture capitalists
b) private placements
c) factoring
d) capital investment analysis
e) debt capital
f) equity capital
g) financial plan
h) leveraged buyout
i) private equity funds
j) divestiture
k) Marketable securities
l) financial manager
m) tender offer
n) Trade credit
o) leverage
p) capital structure
q) Asset intensity
r) bonds
s) spin-off
t) Hedge funds
u) Inventory control
v) dividends
x) debt-to-equity (D/E)
y) compensating balances
z) shareholder’s equity
Difficulty: Medium
Learning Objective 1: 17.7
Section Reference 1: Describe mergers, acquisitions, buyouts, and divestitures.
Standard 1: AACSB || Analytic
Bloomcode: Knowledge
21) In a _____ type of transaction, the assets sold form a new firm.
a) Venture capitalists
b) private placements
c) factoring
d) capital investment analysis
e) debt capital
f) equity capital
g) financial plan
h) leveraged buyout
i) private equity funds
j) divestiture
k) Marketable securities
l) financial manager
m) tender offer
n) Trade credit
o) leverage
p) capital structure
q) Asset intensity
r) bonds
s) spin-off
t) Hedge funds
u) Inventory control
v) dividends
x) debt-to-equity (D/E)
y) compensating balances
z) shareholder’s equity
Difficulty: Medium
Learning Objective 1: 17.7
Section Reference 1: Describe mergers, acquisitions, buyouts, and divestitures.
Standard 1: AACSB || Analytic
Bloomcode: Knowledge
22) _____ are private investment companies open only to qualified large investors.
a) Venture capitalists
b) private placements
c) factoring
d) capital investment analysis
e) debt capital
f) equity capital
g) financial plan
h) leveraged buyout
i) private equity funds
j) divestiture
k) Marketable securities
l) financial manager
m) tender offer
n) Trade credit
o) leverage
p) capital structure
q) Asset intensity
r) bonds
s) spin-off
t) Hedge funds
u) Inventory control
v) dividends
x) debt-to-equity (D/E)
y) compensating balances
z) shareholder’s equity
Difficulty: Medium
Learning Objective 1: 17.6
Section Reference 1: Discuss sources of long-term financing.
Standard 1: AACSB || Analytic
Bloomcode: Knowledge
23) Earnings that are paid in dividends are not reinvested in the firm and don’t contribute additional _____.
a) Venture capitalists
b) private placements
c) factoring
d) capital investment analysis
e) debt capital
f) equity capital
g) financial plan
h) leveraged buyout
i) private equity funds
j) divestiture
k) Marketable securities
l) financial manager
m) tender offer
n) Trade credit
o) leverage
p) capital structure
q) Asset intensity
r) bonds
s) spin-off
t) Hedge funds
u) Inventory control
v) dividends
x) debt-to-equity (D/E)
y) compensating balances
z) shareholder’s equity
Difficulty: Medium
Learning Objective 1: 17.4
Section Reference 1: Discuss the sources of funds and capital structure.
Standard 1: AACSB || Analytic
Bloomcode: Knowledge
24) _____ involves managing working capital and making sure that too much cash is not tied up in operations.
a) Venture capitalists
b) private placements
c) factoring
d) capital investment analysis
e) debt capital
f) equity capital
g) financial plan
h) leveraged buyout
i) private equity funds
j) divestiture
k) Marketable securities
l) financial manager
m) tender offer
n) Trade credit
o) leverage
p) capital structure
q) Asset intensity
r) bonds
s) spin-off
t) Hedge funds
u) Inventory control
v) dividends
x) debt-to-equity (D/E)
y) compensating balances
z) shareholder’s equity
Difficulty: Medium
Learning Objective 1: 17.3
Section Reference 1: Outline how organizations manage their assets.
Standard 1: AACSB || Analytic
Bloomcode: Knowledge
25) Periodic cash payments made to shareholders are known as _____.
a) Venture capitalists
b) private placements
c) factoring
d) capital investment analysis
e) debt capital
f) equity capital
g) financial plan
h) leveraged buyout
i) private equity funds
j) divestiture
k) Marketable securities
l) financial manager
m) tender offer
n) Trade credit
o) leverage
p) capital structure
q) Asset intensity
r) bonds
s) spin-off
t) Hedge funds
u) Inventory control
v) dividends
x) debt-to-equity (D/E)
y) compensating balances
z) shareholder’s equity
Difficulty: Medium
Learning Objective 1: 17.4
Section Reference 1: Discuss the sources of funds and capital structure.
Standard 1: AACSB || Analytic
Bloomcode: Knowledge
26) Companies within the automobile industry typically have higher _____ ratios.
a) Venture capitalists
b) private placements
c) factoring
d) capital investment analysis
e) debt capital
f) equity capital
g) financial plan
h) leveraged buyout
i) private equity funds
j) divestiture
k) Marketable securities
l) financial manager
m) tender offer
n) Trade credit
o) leverage
p) capital structure
q) Asset intensity
r) bonds
s) spin-off
t) Hedge funds
u) Inventory control
v) dividends
x) debt-to-equity (D/E)
y) compensating balances
z) shareholder’s equity
Difficulty: Medium
Learning Objective 1: 17.4
Section Reference 1: Discuss the sources of funds and capital structure.
Standard 1: AACSB || Analytic
Bloomcode: Knowledge
27) The debt-to-equity (D/E) ratio indicates how much debt a company is using to finance its assets relative to the amount of value represented by _____.
a) Venture capitalists
b) private placements
c) factoring
d) capital investment analysis
e) debt capital
f) equity capital
g) financial plan
h) leveraged buyout
i) private equity funds
j) divestiture
k) Marketable securities
l) financial manager
m) tender offer
n) Trade credit
o) leverage
p) capital structure
q) Asset intensity
r) bonds
s) spin-off
t) Hedge funds
u) Inventory control
v) dividends
x) debt-to-equity (D/E)
y) compensating balances
z) shareholder’s equity
Difficulty: Medium
Learning Objective 1: 17.4
Section Reference 1: Discuss the sources of funds and capital structure.
Standard 1: AACSB || Analytic
Bloomcode: Knowledge
28) In addition to fees, some lenders require the borrower to keep so-called_____—5 to 20% of the outstanding loan amount—in a checking account.
a) Venture capitalists
b) private placements
c) factoring
d) capital investment analysis
e) debt capital
f) equity capital
g) financial plan
h) leveraged buyout
i) private equity funds
j) divestiture
k) Marketable securities
l) financial manager
m) tender offer
n) Trade credit
o) leverage
p) capital structure
q) Asset intensity
r) bonds
s) spin-off
t) Hedge funds
u) Inventory control
v) dividends
x) debt-to-equity (D/E)
y) compensating balances
z) shareholder’s equity
Difficulty: Medium
Learning Objective 1: 17.5
Section Reference 1: Identify short-term funding options.
Standard 1: AACSB || Analytic
Bloomcode: Knowledge
Question type: Essay
29) Describe each role in the hierarchy of financial management at a large firm.
Solution: In many organizations, the top financial manager is called the chief financial officer (CFO). The CFO reports directly to the company’s chief executive officer (CEO). Right under the CFO are three senior executives: the controller (chief accounting manager), the treasurer (responsible for financing activities and shareholder relations), and the vice president for financial management (prepares financial forecasts and analyzes investment decisions).
Difficulty: Medium
Learning Objective 1: 17.1
Section Reference 1: Define the role of the financial manager.
Standard 1: AACSB || Analytic
Bloomcode: Knowledge
30) Discuss what can be indicated by the growing importance of financial professionals.
Solution: The growing importance of financial professionals is reflected in the growing number of CEOs who have been promoted from financial positions. Indra Nooyi, CEO of PepsiCo, and John Watson, CEO of Chevron, both served as their company’s CFO prior to assuming the top job. The importance of finance professionals is also reflected in how much CFOs earn today. While the median annual salary for CFOs depends largely on the size of the company, in a recent year, CFOs in the Standard & Poor’s 500 (500 of the largest companies), received a median pay increase of almost 14%, and the median compensation package was valued at $3.8 million, as compared to $3.3 million for the prior year prior. Most of the pay raises for CFOs came in the form of stock grants.
Difficulty: Medium
Learning Objective 1: 17.1
Section Reference 1: Define the role of the financial manager.
Standard 1: AACSB || Analytic
Bloomcode: Knowledge
31) Briefly describe the concept of risk-return trade-off.
Solution: Financial managers strive to maximize the wealth of their company’s shareholders by striking the optimal balance between risk and return. Risk is the uncertainty of gain or loss; return is the gain or loss that results from an investment over a specified period of time. This balance is called the risk-return trade-off. Therefore, the more a company borrows, the greater the risk is to shareholders.
Difficulty: Medium
Learning Objective 1: 17.1
Section Reference 1: Define the role of the financial manager.
Standard 1: AACSB || Analytic
Bloomcode: Knowledge
32) What is the purpose of a financial plan?
Solution: A financial plan is a document that specifies the funds a company will need for a period of time, the timing of inflows and outflows, and the most appropriate uses of funds. A financial plan is based on forecasts of production costs, required purchases, plant and equipment expenditures, and expected sales activities for the period covered. Financial plans are often built around the answers to three questions: (1) What funds will the company require during a period of time? (2) When will the company need additional funds? and (3) Where will it obtain the necessary funds? A good financial plan also involves financial control—a process of checking actual revenues and expenses and comparing them against forecasts.
Difficulty: Medium
Learning Objective 1: 17.2
Section Reference 1: Describe financial planning.
Standard 1: AACSB || Analytic
Bloomcode: Knowledge
33) What is the process involved in preparing a financial plan? Explain.
Solution: A financial plan is a document that specifies the funds a company will need for a period of time, the timing of inflows and outflows, and the most appropriate uses of funds. In general, preparing a financial plan consists of three steps. The first is a forecast of sales or revenue over some future time period. This projection is, in fact, the key variable in any financial plan because without an accurate sales forecast, the company will have difficulty accurately estimating other variables, such as production costs and purchasing needs. The best method of forecasting sales depends on the nature of the business. Next, the chief financial officer (CFO) uses the sales forecast to determine the expected level of profits for future periods. This longer-term projection involves estimating expenses such as purchases, employee compensation, and taxes. Many expenses vary with a company’s sales. After coming up with the sales and profit forecast, the CFO needs to estimate how many additional assets the firm will need to support projected sales.
Difficulty: Medium
Learning Objective 1: 17.2
Section Reference 1: Describe financial planning.
Standard 1: AACSB || Analytic
Bloomcode: Knowledge
34) Explain how the cash inflows and outflows of a business are similar to those of a household.
Solution: The members of a household depend on weekly or monthly income, mainly in the form of a paycheck, for funds, but their expenditures vary greatly from one pay period to the next. The financial plan should indicate when the flows of funds entering and leaving the organization will occur and in what amounts. One of the most significant business expenses is employee compensation. A good financial plan also includes financial control, a process of comparing actual revenues, costs, and expenses with forecasts. This comparison may reveal significant differences between projected and actual figures, so it is important to discover them early to take quick action.
Difficulty: Medium
Learning Objective 1: 17.2
Section Reference 1: Describe financial planning.
Standard 1: AACSB || Analytic
Bloomcode: Knowledge
35) Differentiate between an expansion decision and a replacement decision.
Solution: An expansion decision involves decisions about offering new products or building or acquiring new production facilities. A replacement decision is one that considers whether to replace an existing asset with a new one. The BMW’s South Carolina plant investments are examples of expansion decisions. Replacement decisions involve upgrading assets by acquiring new ones. A retailer might decide to replace an old store with a new Supercenter, as Walmart did in Oxford, Ohio.
Difficulty: Medium
Learning Objective 1: 17.3
Section Reference 1: Outline how organizations manage their assets.
Standard 1: AACSB || Analytic
Bloomcode: Knowledge
36) What are the responsibilities of financial managers? Explain.
Solution: Financial managers oversee the finances of government organizations, public companies, and private firms in a variety of industries, including banks and insurance companies. They are responsible for directing investment activities and producing financial reports, cash flow statements, and profit forecasts. In addition, they develop short- and long-term plans and strategies with a focus on the company’s goals and overall financial health. Financial managers act as advisors throughout an organization by providing context and helping others understand the complexities of financial reports and the impact of decisions on financial results. They prepare financial statements, business activity reports, and forecasts. They also monitor details to meet compliance for legal requirements and supervise employees who typically perform budgeting and financial reporting. They review financial data and reports and make recommendations about cost and expense reduction. Financial managers perform advisory services and data analysis. They monitor funds to be sure sufficient money is available for operations and capital investments and cash flow. They evaluate borrowing needs, returns on investment, and cost of funds, including interest rates. They also arrange for debt and equity financing, invest funds, and recommend dividend issuance, when applicable.
Difficulty: Medium
Learning Objective 1: 17.3
Section Reference 1: Outline how organizations manage their assets.
Standard 1: AACSB || Analytic
Bloomcode: Knowledge
37) What are the educational requirements and skills that are essential to become a financial manager? Explain.
Solution: A minimum of a bachelor’s degree in finance, accounting, economics, or business administration, and, on average, five or more years of experience is required. Preference is often given to candidates with a master’s degree in business administration (MBA). Certifications including certified public accountant (CPA), certified management accountant (CMA), and chartered financial analyst (CFA) are common. Financial managers typically have work experience in accounting, auditing, securities, or as financial analysts. Analytical skills and abilities, with an aptitude for math, are required to make impactful decisions. Communication skills are essential to work with a variety of people both inside and outside of an organization and to explain complex financial data, transactions, and information. Experience managing others is beneficial, as financial managers often oversee a staff. Attention to detail is required when preparing and analyzing financial reports. With immense data and information to evaluate and analyze, staying organized is important. In a global environment, understanding international accounting and financial transactions is also crucial.
Difficulty: Medium
Learning Objective 1: 17.3
Section Reference 1: Outline how organizations manage their assets.
Standard 1: AACSB || Analytic
Bloomcode: Comprehension
38) Briefly describe the concept of inventory control.
Solution: Inventory control is more than just managing items going in and out of a company. It involves managing working capital and making sure that too much cash is not tied up in operations. The cost of inventory includes more than just the acquisition cost. It also includes the cost of ordering, storing, insuring, and financing, as well as the cost of stockouts, lost sales due to insufficient inventory. Even production, marketing, and logistics also play important roles in determining proper inventory levels. For instance, because of its focus on building strong relationships, Nordstrom’s inventory management is superior to competitors. The company provides data to suppliers to ensure minimum sales levels that allows the best pricing. As a result, Nordstrom can obtain merchandise that is in strong demand before competitors do.
Difficulty: Medium
Learning Objective 1: 17.3
Section Reference 1: Outline how organizations manage their assets.
Standard 1: AACSB || Analytic
Bloomcode: Comprehension
39) Explain why companies frequently choose to use debt.
Solution: As more debt is used, the risk to the company increases since the company is now obligated to make the interest payments on the money borrowed, regardless of the cash flows coming into the company. Choosing more debt increases the fixed costs a company must pay, which in turn makes a company more sensitive to sales revenues. Debt is frequently the least costly method of raising additional financing dollars, one of the reasons it is so frequently used.
Difficulty: Medium
Learning Objective 1: 17.4
Section Reference 1: Discuss the sources of funds and capital structure.
Standard 1: AACSB || Analytic
Bloomcode: Knowledge
40) What is leverage? Explain.
Solution: Leverage is created by increasing the rate of return on funds invested through borrowed funds. As long as earnings exceed interest payments on borrowed funds, financial leverage allows a firm to increase the rate of return on its shareholders' investment. However, leverage also works in reverse. If earnings decline below the level of interest payments, shareholders will sustain a loss.
Difficulty: Medium
Learning Objective 1: 17.4
Section Reference 1: Discuss the sources of funds and capital structure.
Standard 1: AACSB || Analytic
Bloomcode: Knowledge
41) Describe a disadvantage of equity capital.
Solution: Equity capital is more expensive than debt capital. First, creditors have a senior claim to the assets of a company relative to shareholders. Because of this advantage, creditors are willing to accept a lower rate of return than shareholders are. Second, the firm can deduct interest payments on debt, reducing its taxable income and tax bill.
Difficulty: Medium
Learning Objective 1: 17.4
Section Reference 1: Discuss the sources of funds and capital structure.
Standard 1: AACSB || Analytic
Bloomcode: Knowledge
42) Why do automobile companies have high debt-to equity ratios? Explain, using a suitable example.
Solution: Companies often take very different approaches to choosing a capital structure. Choosing more debt increases the fixed costs a company must pay, which in turn makes a company more sensitive to sales revenues. Debt is frequently the least costly method of raising additional financing dollars, one of the reasons it is so frequently used. Companies choose varying amounts of debt and equity to use when financing, and this will vary by industry. The automobile industry requires large amounts of money to produce goods and services. This industry, therefore, requires far more borrowing than other industries. Companies such as Ford, for instance, have higher debt-to-equity (D/E) ratios, which indicate how much debt a company is using to finance its assets relative to the amount of value represented by shareholders’ equity.
Difficulty: Hard
Learning Objective 1: 17.4
Section Reference 1: Discuss the sources of funds and capital structure.
Standard 1: AACSB || Analytic
Bloomcode: Application
43) Does a company’s investment opportunities influence its dividend policy? Explain.
Solution: Many factors determine a company’s dividend policy, one of which is its investment opportunities. If a company has numerous investment opportunities and wishes to finance some or all of them with equity funding, it will likely pay little, if any, of its earnings in dividends. Shareholders may actually want the company to retain earnings, because if they are reinvested the company’s future profits, and the value of its shares, will increase faster. By contrast, a company with more limited investment opportunities generally pays more of its earnings in dividends.
Difficulty: Medium
Learning Objective 1: 17.4
Section Reference 1: Discuss the sources of funds and capital structure.
Standard 1: AACSB || Analytic
Bloomcode: Comprehension
44) Discuss why companies tend to rely on long-term funds instead of short-term funds.
Solution: Short-term funds consist of current liabilities, and long-term funds consist of long-term debt and equity. Short-term funds are generally less expensive than long-term funds, but they also expose the firm to more risk. This is because short-term funds have to be renewed, or rolled over, frequently. Short-term interest rates can be volatile. During a recent 12-month period, for example, rates on commercial paper, a popular short-term financing option, ranged from a high of 6% (for 90-day loans) to a low of 3.6% (for 1-day loans). Because short-term rates move up and down frequently, interest expense on short-term funds can change substantially from year to year. Another potential risk of relying on short-term funds is availability. Even financially healthy companies can occasionally find it difficult to borrow money. Because of the added risk of short-term funding, most firms choose to finance all of their long-term assets, and even a portion of their short-term assets, with long-term funds.
Difficulty: Medium
Learning Objective 1: 17.5; 17.6
Section Reference 1: Identify short-term funding options; Discuss sources of long-term financing.
Standard 1: AACSB || Analytic
Bloomcode: Comprehension
45) Briefly describe the two types of short-term bank loans.
Difficulty: Medium
Learning Objective 1: 17.5
Section Reference 1: Identify short-term funding options.
Standard 1: AACSB || Analytic
Bloomcode: Comprehension
46) Define factoring.
Solution: Factoring is a form of short-term financing backed by accounts receivable. The business sells its accounts receivable to either a bank or finance company—called a factor—at a discount. The size of the discount determines the cost of the transaction. Factoring allows a company to convert its receivables into cash quickly without worrying about collections.
Difficulty: Easy
Learning Objective 1: 17.5
Section Reference 1: Identify short-term funding options.
Standard 1: AACSB || Analytic
Bloomcode: Knowledge
47) Describe hedge funds.
Solution: Hedge funds are private investment companies open only to qualified large investors. In recent years, hedge funds have become a significant presence in U.S. financial markets. Before the recent recession, some analysts estimated that hedge funds accounted for about 60% of all secondary bond market trading and around one-third of all activity on stock exchanges. In a recent year, according to hedge fund research firm HFR, Inc. hedge funds lost more than 3%, on average, as compared to the S&P 500, which returned 1.4%, including dividends. Losses were due mainly to poor energy bets, currencies, and an overreliance on certain stocks. The world’s largest hedge fund is managed by Ray Dalio, who made more money for investors in a recent year than any other hedge fund manager. With assets under management of $82 billion, Dalio’s firm, Bridgewater Pure Alpha, gained $3.3 billion in a recent year.
Difficulty: Medium
Learning Objective 1: 17.6
Section Reference 1: Discuss sources of long-term financing.
Standard 1: AACSB || Analytic
Bloomcode: Knowledge
48) Define an LBO.
Solution: LBO—leveraged buyout—is a transaction whereby public shareholders are bought out and the company reverts to private status. LBOs are usually financed with large amounts of borrowed money. The term leverage comes from the fact that many of these transactions are financed with high degrees of debt—often in excess of 75%. Private equity companies and hedge funds provide equity and debt financing for many LBOs. The company’s incumbent senior management is often part of the buyout group.
Difficulty: Medium
Learning Objective 1: 17.7
Section Reference 1: Describe mergers, acquisitions, buyouts, and divestitures.
Standard 1: AACSB || Analytic
Bloomcode: Knowledge
49) Why do firms divest assets?
Solution: Sometimes divestitures result from prior acquisitions that didn’t meet expectations. In other cases, a company makes a strategic decision to concentrate on its core businesses and decides to divest anything that falls outside this core. In addition, government regulators may require divestitures of certain assets as a condition for approving a merger.
Difficulty: Medium
Learning Objective 1: 17.7
Section Reference 1: Describe mergers, acquisitions, buyouts, and divestitures.
Standard 1: AACSB || Analytic
Bloomcode: Knowledge
50) Illustrate the concept of synergy.
Solution: Synergy is a term used to describe the benefits produced by a merger or acquisition. It is based on the idea that a combined company is worth more than the buyer and the target are individually. For instance, when Johnson & Johnson decided to enter the contact lens market, they bought Vistakon, the firm that invented disposable contact lenses under the brand name Acuvue. For Johnson & Johnson, this was the most cost-effective method of entering a new market.
Difficulty: Easy
Learning Objective 1: 17.7
Section Reference 1: Describe mergers, acquisitions, buyouts, and divestitures.
Standard 1: AACSB || Analytic
Bloomcode: Application
Question type: Multiple Choice
51) Which business function is responsible for planning, obtaining, and managing a company’s funds to accomplish its objectives as effectively and efficiently as possible?
a) Marketing
b) Operations
c) Finance
d) Human resources
Difficulty: Easy
Learning Objective 1: 17.1
Section Reference 1: Define the role of the financial manager.
Standard 1: AACSB || Analytic
Bloomcode: Knowledge
52) ______ are executives who develop and implement the firm’s financial plan and determine the most appropriate sources and uses of funds.
a) Financial managers
b) Chief Executive Officers
c) Chief Operating Officers
d) Board of Directors
Difficulty: Medium
Learning Objective 1: 17.1
Section Reference 1: Define the role of the financial manager.
Standard 1: AACSB || Analytic
Bloomcode: Knowledge
53) The financial manager for a typical corporation is responsible for
a) designing the accounting system
b) gathering, recording, and reporting financial information
c) determining the most appropriate sources and uses of funds
d) preparing operating budgets for various departments
Difficulty: Medium
Learning Objective 1: 17.1
Section Reference 1: Define the role of the financial manager.
Standard 1: AACSB || Analytic
Bloomcode: Knowledge
54) In the context of the role of the financial manager, who among the following reports directly to the chief financial officer?
a) The CEO
b) The COO
c) The treasurer
d) The investor
Difficulty: Easy
Learning Objective 1: 17.1
Section Reference 1: Define the role of the financial manager.
Standard 1: AACSB || Analytic
Bloomcode: Knowledge
55) ______ has the direct responsibility for shareholder relations.
a) The controller
b) The chief financial officer
c) The chief executive officer
d) The treasurer
Difficulty: Medium
Learning Objective 1: 17.1
Section Reference 1: Define the role of the financial manager.
Standard 1: AACSB || Analytic
Bloomcode: Knowledge
56) In a typical firm, the _____ is the chief accounting manager.
a) chief executive officer
b) controller
c) treasurer
d) chief financial officer
Difficulty: Medium
Learning Objective 1: 17.1
Section Reference 1: Define the role of the financial manager.
Standard 1: AACSB || Analytic
Bloomcode: Knowledge
57) Carter works in the financial division of his company and is responsible for preparing monetary forecasts and analyzing major investment decisions. What is Carter’s title?
a) Treasurer
b) Chief financial officer
c) Vice president for financial management
d) Controller
Difficulty: Medium
Learning Objective 1: 17.1
Section Reference 1: Define the role of the financial manager.
Standard 1: AACSB || Analytic
Bloomcode: Application
58) Which of the following is the best definition of financial risk?
a) It is the uncertainty about the gain or loss from an investment.
b) It is the uncertainty that an investment's actual return will be less than its expected return.
c) It is the possibility that an investment will earn a negative return.
d) It is the possibility that an investment will lose money.
Difficulty: Medium
Learning Objective 1: 17.1
Section Reference 1: Define the role of the financial manager.
Standard 1: AACSB || Analytic
Bloomcode: Comprehension
59) The gain or loss that results from an investment over a specified period of time is known as
a) risk
b) return
c) probability
d) value
Difficulty: Easy
Learning Objective 1: 17.1
Section Reference 1: Define the role of the financial manager.
Standard 1: AACSB || Analytic
Bloomcode: Knowledge
60) The process that periodically checks actual revenues and expenses against forecast values is
a) strategic planning
b) leveraging
c) budgeting
d) financial control
Difficulty: Medium
Learning Objective 1: 17.2
Section Reference 1: Describe financial planning.
Standard 1: AACSB || Analytic
Bloomcode: Knowledge
61) Which of these specifies the funds a company will need for a period of time, the timing of inflows and outflows, and the most appropriate sources and uses of funds?
a) Asset management plan
b) Leverage plan
c) Strategic plan
d) Financial plan
Difficulty: Easy
Learning Objective 1: 17.2
Section Reference 1: Describe financial planning.
Standard 1: AACSB || Analytic
Bloomcode: Knowledge
62) Which of these are short-term in nature, focusing on projections no more than a year or two in the future?
a) Asset management plan
b) Leverage plan
c) Strategic plan
d) Operating plans
Difficulty: Easy
Learning Objective 1: 17.2
Section Reference 1: Describe financial planning.
Standard 1: AACSB || Analytic
Bloomcode: Knowledge
63) Which of these have a much longer time horizon, perhaps up to 5 or 10 years?
a) Inventory management plan
b) Current liability plan
c) Strategic plan
d) Operating plan
Difficulty: Easy
Learning Objective 1: 17.2
Section Reference 1: Describe financial planning.
Standard 1: AACSB || Analytic
Bloomcode: Knowledge
64) What is the first step in preparing a financial plan?
a) Determine the expected level of profits for future periods
b) A forecast of revenue over some future time period
c) Estimate the funds needed to implement the strategies
d) Estimate how many additional assets the company will need
Difficulty: Medium
Learning Objective 1: 17.2
Section Reference 1: Describe financial planning.
Standard 1: AACSB || Analytic
Bloomcode: Knowledge
65) What is the second step in preparing a financial plan?
a) Determine the expected level of profits for future periods
b) A forecast of revenue over some future time period
c) Estimate the funds needed to implement the strategies
d) Estimate how many additional assets the company will need
Difficulty: Medium
Learning Objective 1: 17.2
Section Reference 1: Describe financial planning.
Standard 1: AACSB || Analytic
Bloomcode: Knowledge
66) What is the final step in preparing a financial plan?
a) Determine the expected level of profits for future periods
b) A forecast of revenue over some future time period
c) Estimate the funds needed to implement the strategies
d) Estimate how many additional assets the company will need
Difficulty: Medium
Learning Objective 1: 17.2
Section Reference 1: Describe financial planning.
Standard 1: AACSB || Analytic
Bloomcode: Knowledge
67) A company’s financial plan should answer all of the following questions EXCEPT:
a) What is the contingency plan in case of bankruptcy?
b) What funds will the company require during the appropriate period of operations?
c) How will it obtain the necessary money?
d) When will it need more cash?
Difficulty: Medium
Learning Objective 1: 17.2
Section Reference 1: Describe financial planning.
Standard 1: AACSB || Analytic
Bloomcode: Knowledge
68) Major current assets include all of the following EXCEPT
a) accounts receivable.
b) stockholders’ equity.
c) marketable securities.
d) cash.
Difficulty: Medium
Learning Objective 1: 17.3
Section Reference 1: Outline how organizations manage their assets.
Standard 1: AACSB || Analytic
Bloomcode: Knowledge
69) All of the following actions result in equity capital EXCEPT
a) issuing bonds.
b) liquidating assets.
c) issuing stock.
d) reinvesting earnings.
Difficulty: Easy
Learning Objective 1: 17.4
Section Reference 1: Discuss the sources of funds and capital structure.
Standard 1: AACSB || Analytic
Bloomcode: Knowledge
70) Daniel’s company needs to obtain funds in order to keep the business going; however, he does not want stockholders influencing the direction of his company. What type of financing should Daniel acquire?
a) Angel investment
b) Venture capital
c) Debt capital
d) Equity capital
Difficulty: Hard
Learning Objective 1: 17.4
Section Reference 1: Discuss the sources of funds and capital structure.
Standard 1: AACSB || Analytic
Bloomcode: Application
71) Team-All Pharmaceuticals needs to raise funds to buy new production equipment. The financial manager would probably suggest that his company raise debt capital by
a) using accumulated earnings.
b) selling stock.
c) selling marketable securities.
d) borrowing money from a bank.
Difficulty: Medium
Learning Objective 1: 17.4
Section Reference 1: Discuss the sources of funds and capital structure.
Standard 1: AACSB || Analytic
Bloomcode: Application
72) Melissa is the financial manager for Branson Inc. and has decided to raise additional funds for the company by raising equity capital. She might do so by
a) selling bonds.
b) persuading existing owners to contribute additional funds.
c) selling marketable securities.
d) establishing a line of credit with a local bank.
Difficulty: Medium
Learning Objective 1: 17.4
Section Reference 1: Discuss the sources of funds and capital structure.
Standard 1: AACSB || Analytic
Bloomcode: Application
73) Leverage _____ the return to shareholders and _____ the risk of their investment.
a) lowers; lowers
b) lowers; increases
c) increases; lowers
d) increases; increases
Difficulty: Hard
Learning Objective 1: 17.4
Section Reference 1: Discuss the sources of funds and capital structure.
Standard 1: AACSB || Analytic
Bloomcode: Knowledge
74) Borrowing money
a) creates leverage.
b) increases equity.
c) decreases risk.
d) reduces liquidity.
Difficulty: Medium
Learning Objective 1: 17.4
Section Reference 1: Discuss the sources of funds and capital structure.
Standard 1: AACSB || Analytic
Bloomcode: Knowledge
75) All of the following are sources of short-term funds EXCEPT
a) commercial paper.
b) trade credit.
c) corporate bonds.
d) bank loans.
Difficulty: Easy
Learning Objective 1: 17.5
Section Reference 1: Identify short-term funding options.
Standard 1: AACSB || Analytic
Bloomcode: Knowledge
76) Which of the following is true of short-term funds?
a) They are more expensive than long-term funds.
b) They are less risky than long-term funds.
c) They have volatile interest rates.
d) They include equity and exclude current liabilities.
Difficulty: Medium
Learning Objective 1: 17.4
Section Reference 1: Discuss the sources of funds and capital structure.
Standard 1: AACSB || Analytic
Bloomcode: Comprehension
77) ABC Tools received goods or services from a supplier and agrees to pay for them at a later date. This arrangement is called
a) a short-term loan.
b) a repurchase agreement.
c) trade credit.
d) commercial credit.
Difficulty: Medium
Learning Objective 1: 17.5
Section Reference 1: Identify short-term funding options.
Standard 1: AACSB || Analytic
Bloomcode: Application
78) Short-term assets are expected to be converted into cash within
a) a month.
b) a year.
c) four months.
d) six months.
Difficulty: Medium
Learning Objective 1: 17.5
Section Reference 1: Identify short-term funding options.
Standard 1: AACSB || Analytic
Bloomcode: Knowledge
79) Which of the following assets would a firm most likely finance using long-term sources?
a) Inventory
b) Accounts receivable
c) Marketable securities
d) Another company
Difficulty: Medium
Learning Objective 1: 17.6
Section Reference 1: Describe sources of long-term financing.
Standard 1: AACSB || Analytic
Bloomcode: Knowledge
80) _____ would be the LEAST likely to obtain a private placement.
a) Small individual investors
b) Life insurance companies
c) Commercial banks
d) Pension fund managers
Difficulty: Medium
Learning Objective 1: 17.6
Section Reference 1: Describe sources of long-term financing.
Standard 1: AACSB || Analytic
Bloomcode: Knowledge
81) Most private placements are
a) U.S. government securities.
b) corporate debt issues.
c) corporate equity issues.
d) municipal debt issues.
Difficulty: Medium
Learning Objective 1: 17.6
Section Reference 1: Describe sources of long-term financing.
Standard 1: AACSB || Analytic
Bloomcode: Knowledge
82) Jermaine raises money from wealthy individuals and institutional investors, and invests them in a variety of promising new companies. In exchange, he will become part owner of those businesses. Jermaine is a(n)
a) angel investor.
b) underwriter.
c) entrepreneur.
d) venture capitalist.
Difficulty: Medium
Learning Objective 1: 17.6
Section Reference 1: Describe sources of long-term financing.
Standard 1: AACSB || Analytic
Bloomcode: Application
83) Which of these are investment companies that raise funds from wealthy individuals and institutional investors and use the funds to make investments in both public and private companies?
a) Venture capitalists
b) Private placements
c) Hedge funds
d) Private equity funds
Difficulty: Medium
Learning Objective 1: 17.6
Section Reference 1: Describe sources of long-term financing.
Standard 1: AACSB || Analytic
Bloomcode: Knowledge
84) The sovereign wealth fund is a variation of
a) market securities.
b) private equity fund.
c) private placements.
d) debt capital.
Difficulty: Medium
Learning Objective 1: 17.6
Section Reference 1: Describe sources of long-term financing.
Standard 1: AACSB || Analytic
Bloomcode: Knowledge
85) The term used to describe the benefits produced by a merger or acquisition is
a) partnership.
b) leverage.
c) synergy.
d) profit.
Difficulty: Easy
Learning Objective 1: 17.7
Section Reference 1: Describe mergers, acquisitions, buyouts, and divestitures.
Standard 1: AACSB || Analytic
Bloomcode: Knowledge
86) A(n) _____ is a transaction in which one company buys another.
a) acquisition
b) merger
c) takeover
d) synergy
Difficulty: Medium
Learning Objective 1: 17.7
Section Reference 1: Describe mergers, acquisitions, buyouts, and divestitures.
Standard 1: AACSB || Analytic
Bloomcode: Knowledge
87) Divestitures are of two types:
a) sell-offs and trade-offs.
b) trade-offs and spin-offs.
c) buy-offs and spin-offs.
d) sell-offs and spin-offs.
Difficulty: Medium
Learning Objective 1: 17.7
Section Reference 1: Describe mergers, acquisitions, buyouts, and divestitures.
Standard 1: AACSB || Analytic
Bloomcode: Knowledge
88) In a sense, a(n) ________ is the reverse of a merger.
a) tender offer.
b) leverage buyout.
c) divestiture.
d) acquisition.
Difficulty: Medium
Learning Objective 1: 17.7
Section Reference 1: Describe mergers, acquisitions, buyouts, and divestitures.
Standard 1: AACSB || Analytic
Bloomcode: Knowledge
89) Allen has three subordinates that report to him. They include the treasurer, the controller, and the vice president for financial management. In the context of the role of a financial manager, Allen is the _____ of his organization.
a) CEO
b) COO
c) CFO
d) CRO
Difficulty: Medium
Learning Objective 1: 17.1
Section Reference 1: Define the role of the financial manager.
Standard 1: AACSB || Analytic
Bloomcode: Application
90) Selma, a financial manager at AJS Inc. has to organize the finances of her company for one to two years. In the context of financial planning, she should develop a(n) _____ plan to accomplish this purpose.
a) strategic
b) operating
c) security
d) leverage
Difficulty: Medium
Learning Objective 1: 17.2
Section Reference 1: Describe financial planning.
Standard 1: AACSB || Analytic
Bloomcode: Application
91) Daniel, a financial manager at Faxeltel Inc. holds a meeting to discuss various aspects of investment in long-lived assets. The meeting takes into consideration the buying of new assets and the replacement of old assets. In the context of financial management, this type of decision making is called
a) capital investment analysis.
b) risk-return trade-off.
c) leveraged buyout analysis.
d) divestiture planning.
Difficulty: Medium
Learning Objective 1: 17.3
Section Reference 1: Outline how organizations manage their assets.
Standard 1: AACSB || Analytic
Bloomcode: Application
92) In a quarterly meeting, Antonio, a financial manager at InVest Inc. states that the company will benefit in the long term by utilizing a mix of debentures than focusing only on issuing shares. He states that this strategy will give his company a positive _____, which will increase the rate of return of the firm.
a) risk-return trade-off
b) leverage
c) hedge fund advantage
d) divestiture
Difficulty: Medium
Learning Objective 1: 17.4
Section Reference 1: Discuss the sources of funds and capital structure.
Standard 1: AACSB || Analytic
Bloomcode: Application
93) Altitel Inc. has difficulties with managing operating costs of their company due to shortage of short-term finance. The company needs liquid assets and some capital to improve its performance in the market. Samuel, an established businessman, raises money from wealthy individuals and invests it in the company. He also gives the company critical advice about managing their processes effectively. In exchange, Samuel owns a small part of the company. In the context of the sources of financing, Samuel is a
a) leverage advisor.
b) risk-return trader.
c) venture capitalist.
d) hedge fund consultant.
Difficulty: Medium
Learning Objective 1: 17.6
Section Reference 1: Discuss sources of long-term financing.
Standard 1: AACSB || Analytic
Bloomcode: Application
94) A start-up is being financed by a long-standing and established company. This company takes financial support from wealthy investors. In this context, the company that is financing the start-up is a(n)
a) finance manager.
b) borrower.
c) angel investor.
d) venture capitalist.
Difficulty: Medium
Learning Objective 1: 17.6
Section Reference 1: Discuss sources of long-term financing.
Standard 1: AACSB || Analytic
Bloomcode: Knowledge
95) Which of these deals with the process of planning, obtaining, and managing a company’s funds to accomplish its objectives as effectively and efficiently as possible?
a) Accounting
b) Finance
c) Knowledge management
d) Business analytics
Difficulty: Medium
Learning Objective 1: 17.1
Section Reference 1: Define the role of the financial manager.
Standard 1: AACSB || Analytic
Bloomcode: Knowledge
96) Heath is hired as the chief accounting manager in an automobile company. Which of the following is likely to be included in his list of functions?
a) Conducting internal audits
b) Analyzing major investment decisions
c) Preparing financial forecasts
d) Planning and preparing tax
Difficulty: Medium
Learning Objective 1: 17.1
Section Reference 1: Define the role of the financial manager.
Standard 1: AACSB || Analytic
Bloomcode: Application
97) Which of these is a calculation that determines the difference in revenue of a retailer’s existing supplies over a certain period of time, usually quarterly, compared to the identical period of time, in a prior year?
a) Asset intensity
b) Risk–return tradeoff
c) Same-store sales
d) Capital investment analysis
Difficulty: Medium
Learning Objective 1: 17.2
Section Reference 1: Describe financial planning.
Standard 1: AACSB || Analytic
Bloomcode: Knowledge
98) The chief executive officer (CEO) of a retailer of clothes plans to expand business into the accessories market. For this expansion, the CEO asks the chief financial officer (CFO) of the company to calculate the amount of funds the company will have to borrow from the bank. Which of the following types of funding is the CEO planning to obtain?
a) Factoring
b) Trade credit
c) Equity capital
d) Debt capital
Difficulty: Medium
Learning Objective 1: 17.4
Section Reference 1: Discuss the sources of funds and capital structure.
Standard 1: AACSB || Analytic
Bloomcode: Application
99) Which of the following is true of compensating balances?
a) Compensating balances increase the effective cost of a loan.
b) Compensating balances allow firms to convert their receivables into cash quickly.
c) Only a small percentage of businesses can issue compensating balances.
d) Most compensating balances are unsecured.
Difficulty: Medium
Learning Objective 1: 17.5
Section Reference 1: Identify short-term funding options.
Standard 1: AACSB || Analytic
Bloomcode: Comprehension
100) Identify a true statement about commercial paper.
a) Access to the commercial paper market is restricted to small and medium enterprises.
b) Commercial paper has a maturity that ranges from 10 to 27 years.
c) Most commercial paper is secured.
d) Commercial paper is typically sold in multiples of $100,000 to $1 million.
Difficulty: Medium
Learning Objective 1: 17.5
Section Reference 1: Identify short-term funding options.
Standard 1: AACSB || Analytic
Bloomcode: Comprehension
101) Commercial paper is an attractive short-term financing option because of its
a) discount size.
b) maturity period.
c) interest rates.
d) availability.
Difficulty: Medium
Learning Objective 1: 17.5
Section Reference 1: Identify short-term funding options.
Standard 1: AACSB || Analytic
Bloomcode: Comprehension
102) Which of the following types of funding is likely to help a large corporation acquire a small or medium enterprise?
a) Factoring
b) Trade credit
c) Commercial paper
d) Venture capital
Difficulty: Hard
Learning Objective 1: 17.6
Section Reference 1: Discuss sources of long-term financing.
Standard 1: AACSB || Analytic
Bloomcode: Analysis
103) Liquid Asset, Inc. (LAI) is a beverage company. Three years ago, LAI split its wine business into an entirely separate business called WineYard Treasure. Which of the following concepts does this scenario exemplify?
a) Spin-offs
b) Sell-offs
c) Angel capitalism
d) Venture capitalism
Difficulty: Hard
Learning Objective 1: 17.7
Section Reference 1: Describe mergers, acquisitions, buyouts, and divestitures.
Standard 1: AACSB || Analytic
Bloomcode: Analysis
104) To purchase two electronic retailers, SoundTrak Inc. borrows $40 million from banks and raised $8 million through preferred stock. After the deal closes, SoundTrak Inc. uses $20 million of cash and assets from one of the acquired retailer to clear $25 million of the bank loan. This is an example of
a) trade credit.
b) leveraged buyout.
c) angel capitalism.
d) venture capitalism.
Difficulty: Hard
Learning Objective 1: 17.7
Section Reference 1: Describe mergers, acquisitions, buyouts, and divestitures.
Standard 1: AACSB || Analytic
Bloomcode: Analysis
105) If an automobile company purchases an accessory manufacturing division from another automobile company, then the latter company’s transaction with the former is an example of a
a) consignment
b) wharfage
c) sell-off
d) spin-off
Difficulty: Medium
Learning Objective 1: 17.7
Section Reference 1: Describe mergers, acquisitions, buyouts, and divestitures.
Standard 1: AACSB || Analytic
Bloomcode: Application
106) Time Warner’s decision to separate itself from America Online is an example of
a) divestiture
b) angel capitalism
c) venture capitalism
d) factoring
Difficulty: Medium
Learning Objective 1: 17.7
Section Reference 1: Describe mergers, acquisitions, buyouts, and divestitures.
Standard 1: AACSB || Analytic
Bloomcode: Comprehension
107) If a giant corporation puts up its under-performing or non-core brands for sale to other large corporations, then the former corporation is _____ companies that are not a part of the its core business.
a) acquiring
b) compensating
c) divesting
d) factoring
Difficulty: Medium
Learning Objective 1: 17.7
Section Reference 1: Describe mergers, acquisitions, buyouts, and divestitures.
Standard 1: AACSB || Analytic
Bloomcode: Comprehension
108) An automobile manufacturer, Diamond Securities Inc. offers to purchase 58% shares of a mid-sized start-up that deals with digital accessories for automobiles. However, Diamond Securities Inc. does not specify the price or the form of payment. According to the contract, the price of the purchase will be determined based on the market value of the share on the day of the purchase. This deal is an example of
a) a tender offer.
b) factoring.
c) a spin-off.
d) venture capitalism.
Difficulty: Hard
Learning Objective 1: 17.7
Section Reference 1: Describe mergers, acquisitions, buyouts, and divestitures.
Standard 1: AACSB || Analytic
Bloomcode: Analysis
109) Government-owned companies that invest in a range of financial and real assets together make up the
a) factors.
b) private equity fund.
c) target markets.
d) sovereign wealth fund.
Difficulty: Easy
Learning Objective 1: 17.6
Section Reference 1: Discuss sources of long-term financing.
Standard 1: AACSB || Analytic
Bloomcode: Knowledge
110) Which of the following is true of the lines of credit type of short-term bank loans?
a) Banks typically charge a fee, on top of interest, for lines of credit agreements.
b) It specifies the maximum amount the firm can borrow over a period of time, usually a year.
c) The bank is obliged actually to lend the money, even if there is a shortage of funds.
d) The borrower compulsorily has to repay the original amount, plus interest, within six months.
Difficulty: Medium
Learning Objective 1: 17.5
Section Reference 1: Identify short-term funding options.
Standard 1: AACSB || Analytic
Bloomcode: Comprehension
111) Which of the following is TRUE of trade credit?
a) A company can borrow any amount of funds without restrictions.
b) Its availability is restricted to large corporations.
c) The rate of interest is relatively higher for trade credit.
d) It is free of cost if suppliers do not offer a cash discount.
Difficulty: Medium
Learning Objective 1: 17.5
Section Reference 1: Identify short-term funding options.
Standard 1: AACSB || Analytic
Bloomcode: Comprehension
112) Garden Toys Ltd. pays dividends to its shareholders, irrespective of the market status. Which of the following can be inferred about Garden Toys Ltd. based on its dividend policy?
a) The company believes it can rebound from a recession.
b) The company wants to keep its shareholders satisfied.
c) The company is likely to adopt a “no dividend” policy.
d) The company has weak financial health.
Difficulty: Hard
Learning Objective 1: 17.4
Section Reference 1: Discuss the sources of funds and capital structure.
Standard 1: AACSB || Analytic
Bloomcode: Analysis
113) Quarterly cash payments to shareholders are known as
a) trade credit.
b) special dividends.
c) regular dividends.
d) compensating balances.
Difficulty: Easy
Learning Objective 1: 17.4
Section Reference 1: Discuss the sources of funds and capital structure.
Standard 1: AACSB || Analytic
Bloomcode: Knowledge
Question type: True/False
114) Financial managers are responsible for increasing profits to shareholders.
Difficulty: Medium
Learning Objective 1: 17.1
Section Reference 1: Define the role of the financial manager.
Standard 1: AACSB || Analytic
Bloomcode: Knowledge
115) The treasurer is the chief financial officer of most firms.
Difficulty: Easy
Learning Objective 1: 17.1
Section Reference 1: Define the role of the financial manager.
Standard 1: AACSB || Analytic
Bloomcode: Knowledge
116) In most firms, the controller is the chief accounting manager.
Difficulty: Medium
Learning Objective 1: 17.1
Section Reference 1: Define the role of the financial manager.
Standard 1: AACSB || Analytic
Bloomcode: Knowledge
117) In most companies, the CEO is promoted to the position of CFO.
Difficulty: Easy
Learning Objective 1: 17.1
Section Reference 1: Define the role of the financial manager.
Standard 1: AACSB || Analytic
Bloomcode: Knowledge
118) Virtually, all financial decisions involve a trade-off between risk and return.
Difficulty: Easy
Learning Objective 1: 17.1
Section Reference 1: Define the role of the financial manager.
Standard 1: AACSB || Analytic
Bloomcode: Knowledge
119) Risk is defined as the uncertainty of a profit or a loss.
Difficulty: Easy
Learning Objective 1: 17.1
Section Reference 1: Define the role of the financial manager.
Standard 1: AACSB || Analytic
Bloomcode: Knowledge
120) Investments that promise the highest returns tend to involve the lowest amount of risk.
Difficulty: Easy
Learning Objective 1: 17.1
Section Reference 1: Define the role of the financial manager.
Standard 1: AACSB || Analytic
Bloomcode: Knowledge
121) Financial plans that focus on projections no more than a year or two in the future are known as strategic plans.
Difficulty: Medium
Learning Objective 1: 17.2
Section Reference 1: Describe financial planning.
Standard 1: AACSB || Analytic
Bloomcode: Knowledge
122) The first in preparing a financial plan is a forecast of sales or revenue over some future time period.
Difficulty: Medium
Learning Objective 1: 17.2
Section Reference 1: Describe financial planning.
Standard 1: AACSB || Analytic
Bloomcode: Knowledge
123) After coming up with the costs and expenses forecast, the CFO needs to estimate how many additional shifts the company will need to support projected sales.
Difficulty: Medium
Learning Objective 1: 17.2
Section Reference 1: Describe financial planning.
Standard 1: AACSB || Analytic
Bloomcode: Knowledge
124) A good financial plan also includes financial control, a process of comparing actual revenues, costs, and expenses with forecasts.
Difficulty: Medium
Learning Objective 1: 17.2
Section Reference 1: Describe financial planning.
Standard 1: AACSB || Analytic
Bloomcode: Knowledge
125) The major purpose of cash is to pay day-to-day expenses.
Difficulty: Easy
Learning Objective 1: 17.3
Section Reference 1: Outline how organizations manage their assets.
Standard 1: AACSB || Analytic
Bloomcode: Knowledge
126) Managing assets for an international company creates several new challenges for a financial manager.
Difficulty: Easy
Learning Objective 1: 17.3
Section Reference 1: Outline how organizations manage their assets.
Standard 1: AACSB || Analytic
Bloomcode: Knowledge
127) A balance sheet hedge provides a method for global companies to reduce risks associated with exchange rate fluctuations.
Difficulty: Easy
Learning Objective 1: 17.3
Section Reference 1: Outline how organizations manage their assets.
Standard 1: AACSB || Analytic
Bloomcode: Knowledge
128) The balance sheet hedge is often one of the most difficult activities for minimizing the challenges that come with exchange rates.
Difficulty: Medium
Learning Objective 1: 17.3
Section Reference 1: Outline how organizations manage their assets.
Standard 1: AACSB || Analytic
Bloomcode: Knowledge
129) Debt is frequently the least costly method of raising additional financing dollars, one of the reasons it is so frequently used.
Difficulty: Easy
Learning Objective 1: 17.4
Section Reference 1: Discuss the sources of funds and capital structure.
Standard 1: AACSB || Analytic
Bloomcode: Knowledge
130) When a company borrows money in addition to shares, it creates leverage.
Difficulty: Easy
Learning Objective 1: 17.4
Section Reference 1: Discuss the sources of funds and capital structure.
Standard 1: AACSB || Analytic
Bloomcode: Knowledge
131) Increasing leverage decreases management's flexibility in future financing decisions.
Difficulty: Medium
Learning Objective 1: 17.4
Section Reference 1: Discuss the sources of funds and capital structure.
Standard 1: AACSB || Analytic
Bloomcode: Knowledge
132) Leverage increases the potential return to a firm's shareholders, but also reduces the risk of their investment because shareholders have contributed less capital.
Difficulty: Hard
Learning Objective 1: 17.4
Section Reference 1: Discuss the sources of funds and capital structure.
Standard 1: AACSB || Analytic
Bloomcode: Knowledge
133) Firms often rely on short-term sources of funds to pay for large, permanent assets, such as machinery and buildings.
Difficulty: Easy
Learning Objective 1: 17.5
Section Reference 1: Identify short-term funding options.
Standard 1: AACSB || Analytic
Bloomcode: Knowledge
134) Short-term sources of funds are loans that are repaid within one year.
Difficulty: Easy
Learning Objective 1: 17.5
Section Reference 1: Identify short-term funding options.
Standard 1: AACSB || Analytic
Bloomcode: Knowledge
135) Interest rates on short-term funds move up and down frequently.
Difficulty: Medium
Learning Objective 1: 17.4
Section Reference 1: Discuss the sources of funds and capital structure.
Standard 1: AACSB || Analytic
Bloomcode: Knowledge
136) Trade credit is a major source of short-term financing.
Difficulty: Medium
Learning Objective 1: 17.5
Section Reference 1: Identify short-term funding options.
Standard 1: AACSB || Analytic
Bloomcode: Knowledge
137) Bond sales tend to be higher when interest rates are lower.
Difficulty: Medium
Learning Objective 1: 17.6
Section Reference 1: Discuss sources of long-term financing.
Standard 1: AACSB || Analytic
Bloomcode: Knowledge
138) All short-term bank loans are secured, meaning that the borrower pledges specific assets as collateral.
Difficulty: Medium
Learning Objective 1: 17.5
Section Reference 1: Identify short-term funding options.
Standard 1: AACSB || Analytic
Bloomcode: Knowledge
139) Less government regulation is associated with selling a security privately than publicly since SEC registration is not required for selling securities privately.
Difficulty: Medium
Learning Objective 1: 17.5
Section Reference 1: Identify short-term funding options.
Standard 1: AACSB || Analytic
Bloomcode: Knowledge
140) Hedge funds are private investment companies open only to large qualified investors.
Difficulty: Medium
Learning Objective 1: 17.6
Section Reference 1: Discuss sources of long-term financing.
Standard 1: AACSB || Analytic
Bloomcode: Knowledge
141) Corporate debt securities are the most common type of security sold privately.
Difficulty: Medium
Learning Objective 1: 17.6
Section Reference 1: Discuss sources of long-term financing.
Standard 1: AACSB || Analytic
Bloomcode: Knowledge
142) Unlike private equity funds, which tend to focus on small, start-up companies, venture capital funds invest in all types of businesses, including mature ones.
Difficulty: Medium
Learning Objective 1: 17.6
Section Reference 1: Discuss sources of long-term financing.
Standard 1: AACSB || Analytic
Bloomcode: Knowledge
143) Acquisitions are the opposite of mergers, in which companies sell assets such as subsidiaries, product lines, or production facilities.
Difficulty: Medium
Learning Objective 1: 17.7
Section Reference 1: Describe mergers, acquisitions, buyouts, and divestitures.
Standard 1: AACSB || Analytic
Bloomcode: Knowledge
144) When a buyer makes what is known as a tender offer for the target’s shares, it specifies a price and the form of payment.
Difficulty: Medium
Learning Objective 1: 17.7
Section Reference 1: Describe mergers, acquisitions, buyouts, and divestitures.
Standard 1: AACSB || Analytic
Bloomcode: Knowledge
Document Information
Connected Book
Contemporary Business 18e | Test Bank by Louis E. Boone
By Louis E. Boone