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Exam 18: Financial Management

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Question 91

Multiple Choice

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According to the Not What the Doctor Ordered! box, a just-in-time inventory system allows a firm to

A) extend credit to new customers.
B) provide sufficient inventory for most contingencies.
C) reduce their investment in inventory.
D) reduce capital expenditures.

E) A) and C)
F) C) and D)

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Question 92

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The cost of capital is the rate of return a firm must earn in order to meet the demands of its lenders and expectations of its equity holders.

A) True
B) False

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Question 93

Multiple Choice

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________ is a form of short-term financing. Businesses buy merchandise from their suppliers, but are not required to pay for their purchases until some future date.

While finance is a critical activity for profit-seeking organizations, by definition nonprofit organizations are not required to fulfill the finance function.

A bond represents a long-term debt obligation of a corporation or government.

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?

A secured loan means the borrower has the security of knowing repayment is not due for several years.

As financial manager for Marshall Manufacturing, Elena evaluates the purchase of expensive machinery and the construction of new facilities. Elena is analyzing capital expenditure proposals.

A firm will choose to seek debt financing only for the purpose of paying for short-term operating needs.

Short-term financing refers to borrowed funds that must be repaid in a year or less.

After enjoying increased sales of and profits from several popular products, Braggs & Stritton plans to expand their production facilities. The firm, a well-known producer of lawn care products, prefers financing this project with a funding source that avoids interest and dividend payments as well as underwriting costs. Which of the following best meets the needs of Braggs & Stritton?

Companies raising funds must choose either debt or equity sources, but not both.

Acquiring and storing inventory represents a sizable expenditure for many businesses.

While firms finance their long-term needs with debt financing, their short-term needs are served by equity financing.

Offering cash discounts to customers who pay their bills by a certain date represents an effective technique to manage accounts receivable.

Ivy has always loved designing and tending to gardens, and now she's a master gardener in charge at a large botanical garden. Ivy requires her staff to pursue continuing education and, because it's an area where she is weak, she is enrolling in two courses-accounting and finance-at the local community college. This is a good plan, especially since she is the boss.

Retained earnings represent a source of equity financing.

Trade credit is the practice of buying goods now and paying for them later.

If you are at the Phoenix Sky Harbor International Airport, you will no longer get a pat-down if you go through the metal detector. The airport now has full body screening ports that scan the entire body and readily detect weapons or explosive devices that someone may want to take on board a plane. These expensive devices represent

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