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Exam 19: Mastering Financial Management

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Question 1

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What is a budget? How is it used by a business firm?

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A budget is a financial plan that outlin...

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Question 2

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Which of the following statements is true?

A) Financial leverage should not be considered when a firm borrows money.
B) Under the right circumstances, the use of borrowed money can improve a firm's return on owners' equity.
C) There is no good reason for a firm to borrow money when it has cash to finance expansion.
D) The use of borrowed money always reduces a firm's return on owners' equity.
E) Return on owners' equity is not an important financial calculation.

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

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B

Question 3

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Assume that the First State Bank of Chicago requires a 20 percent compensating balance on short-term loans. If you borrow $50,000, at least ____ of the loan amount must be kept on deposit at the bank.

What right do most common stockholders have that most preferred stockholders do not have?

Downing, Inc., issues bonds to purchase new machinery for its factories. These bonds are secured by the machinery purchased with the proceeds of the bond issue. These are ____ bonds.

During 2011, Bedford Technology sold common stock for the first time to whoever wanted to buy it. This was the ____ for Bedford.

McGines, Inc. Sam McGines, CEO of McGines, Inc., decided that upon his retirement, he would elect his son Derrick to become the new CEO. Sam thought it would be a good idea to have Derrick shadow him at work to understand the roles and responsibilities of a CEO. Derrick shadowed his father for months in order to learn every aspect of the business. Sam knew that the best way for Derrick to learn was to actually perform some of the tasks he did on a daily basis, rather than simply describe them. The company generally focused on short-term financing, and Sam felt that it was important for Derrick to understand the different types of financing. Derrick learned about the type of bonds that the company usually offered to raise capital. These bonds allow the purchasers of the bond to keep them until maturity. Derrick also learned the process of obtaining bonds and the various types of long-term financing methods. Job shadowing was indeed a worthwhile experience for Derrick. -Refer to McGines, Inc. At one point, Derrick was not sure about which type of bond was backed only by the reputation of the issuing corporation. Which of the following would you suggest?

The costs of selling stock to the general public are referred to as flotation costs.

Bonds that can be exchanged for a specified number of shares of common stock are called convertible bonds.

Financial leverage is the use of borrowed funds to increase the return on owners' equity.

A term-loan agreement requires a borrower to repay the loan

Debbie purchases a corporate bond from Safeway. She has the option of redeeming her bond for 55 shares of Safeway common stock at any time. This is a ____ bond.

The lowest rate of interest charged by a bank for a short-term loan is known as

The lowest interest rate charged by a bank for a short-term loan is called the discount rate.

Morgan's Transition Morgan is currently a manager of a small financial planning firm. He is seeking a new career with a large corporation in the banking industry. He recently applied for the financial manager opening at G & T Bank. He is concerned that the transition from his small firm to a large corporation will be difficult. To better prepare himself for this change, he has decided to enroll in a few business classes to strengthen his understanding of corporate finance. The business classes have proven to be a valuable tool for learning the critical skills needed to fully understand a financial plan, equity financing, and debt financing. Morgan now believes he has strengthened his competitive advantage in his quest for the job. -Refer to Morgan's Transition. Morgan's business classes taught him that the financial manager should do which of the following?

Harlen Manufacturing is hesitant to extend trade credit to Brendan Drake. Instead, Brendan agrees to sign a promissory note. Harlen prefers this note because

Melissa feels confident about obtaining short-term financing for her art gallery because, like many companies, she has a(n)

Describe the characteristics and traits required for a successful career in financial management.

Ms. Thomas has received an invoice from the manufacturer for which she distributes products. The invoice states credit terms of 3/10, net/30. Puzzled by this, she calls on you to explain. You indicate that the notation 3/10 means that

The least expensive form of short-term financing is