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Homework answers / question archive / Chapter 16 UNDERSTANDING FINANCIAL MANAGEMENT AND SECURITIES MARKETS TRUE-FALSE QUESTIONS 1
Chapter 16 UNDERSTANDING FINANCIAL MANAGEMENT AND SECURITIES MARKETS
TRUE-FALSE QUESTIONS
1. Financial management is the art and science of managing a firm's money so the firm can meet its goals.
a. True
b. False
2. In finance, the opportunity for a profit is called return.
a. True
b. False
3. In finance, the potential for loss is called probability.
a. True
b. False
4. Treasury bills, certificates of deposit, and mortgage loans are the most popular marketable securities.
a. True
b. False
5. Sales made, but for which payment has not yet been collected, are called accounts payable.
a. True
b. False
6. The benefits from capital expenditures extend beyond one year's time.
a. True
b. False
7. Trade credit is credit extended to the buyer by the seller. It is entered in the buyer's books as an account receivable.
a. True
b. False
8. Lines of credit are short-term loans that are secured by collateral.
a. True
b. False
9. Accounts receivable or inventory usually secures short-term secured loans.
a. True
b. False
10. Selling a firm's accounts receivables to a financial institution at a discount is called countertrading.
a. True
b. False
11. The major disadvantage of debt financing is the inability to deduct interest expenses for income tax purposes.
a. True
b. False
12. Dividends and interest payment are both tax-deductible.
a. True
b. False
13. A term loan is a loan with a maturity of less than a year.
a. True
b. False
14. A mortgage loan is a long-term loan that uses real estate as collateral.
a. True
b. False
15. Equity is the owner's investment in the businesses.
a. True
b. False
16. Preferred stock is a form of debt financing because the dividend must be paid before dividends can be paid to the equity owners.
a. True
b. False
17. Venture capitalists provide a source of debt financing and usually charge high interest for loans because of the high risk of the enterprises they finance.
a. True
b. False
18. Of all the forms of equity capital, venture capital is the easiest to obtain.
a. True
b. False
19. Securities are investment certificates issued by corporations or governments.
a. True
b. False
20. Investment banker is another term for stockbroker.
a. True
b. False
21. The NYSE and NASDAQ are vying for supremacy in the U.S. securities markets.
a. True
b. False
MULTIPLE-CHOICE QUESTIONS
1. _____ management is the art and science used to determine the most effective ways to acquire and use funds to achieve the firm's goals.
A. Operations
B. Financial
C. Accounting
D. Corporate
E. Money
2. Keisha Hunter keeps track of day-to-day operational data to make sure her employer has enough cash to run the business and will determine if and when the company she works for should open a second distribution center. Hunter is a(n) _____ manager.
A. accounting
B. financial
C. operations
D. analysis
E. facilities
3. Financial managers:
A. play such an important organizational role that they often are called operations managers
B. focus on profit maximization
C. are not typically involved in long-term strategic planning
D. are simply a type of bookkeeper
E. are described by none of the above
4. Financial managers focus on _____, the inflow and outflow of cash.
A. financial flows
B. sales revenues
C. cash flows
D. revenue streams
E. profit and loss patterns
5. The primary goal of the financial manager is to:
A. maximize the value of the firm to its owners
B. concentrate on short-term growth strategies
C. develop new goods and services for the company
D. make sure all employees get paid on a regular schedule
E. pay off all debt as quickly as possible
6. Financial managers constantly strive for a balance between:
A. the opportunity for profit and the potential for loss
B. cash and marketable securities
C. economic responsibility and social responsibility
D. common and preferred stock
E. dividends paid out and interest payments
7. In finance, _____ is the potential for loss.
A. leverage
B. risk
C. factoring
D. business chance
E. probability
8. In finance, the opportunity for profit is called:
A. return
B. potential
C. risk
D. value
E. maximization
9. In seeking a balance between the opportunity for profit and the potential for loss, a financial manager is dealing with the concept of _____ trade-off.
A. potential profit
B. risk-return
C. profit-loss
D. sales-profit
E. profit-budget
10. Making sure that enough cash is on hand to pay bills as they come due and to meet unexpected expenses is called cash:
A. maintenance
B. capitalization
C. targeting
D. management
E. administration
11. Chez Dove is an independent coffeehouse/bookstore that went bankrupt only eight months after opening due to an unexpected demand for cash to fix a leaking roof. Better cash _____ might have allowed the business to continue operation.
A. maintenance
B. capitalization
C. targeting
D. management
E. administration
12. Financial managers often shift temporary funds from checking accounts to _____ securities to earn higher interest returns.
A. commercial
B. marketable
C. administrative
D. strategic
E. operational
13. Short-term investments that are easily converted back to cash and are used by financial managers to achieve higher returns than those offered by checking accounts are:
A. management vehicles
B. corporate securities
C. marketable credits
D. corporate equities
E. negotiable securities
14. _____ is a short-term unsecured debt issued by a financially strong corporation.
A. A treasury bill
B. A certificate of deposit
C. A money market deposit
D. Commercial paper
E. Investment credit
15. Commercial paper is:
A. the same thing as accounts receivable recorded in the ledger
B. a type of secured debt
C. typically issued by stakeholders
D. a type of IOU
E. accurately described by none of the above
16. The three most popular types of marketable securities are Treasury bills, certificates of deposit, and:
A. Treasury notes
B. corporate bonds
C. commercial paper
D. money market funds
E. checking accounts
17. Grainger Distribution Company sold Long Electronics ten circuit breakers for $179.00 each. Long Electronics will be allowed thirty days to pay the bill. Grainger will carry the $1790.00 on its books as a(n):
A. account payable
B. current liability
C. account receivable
D. fixed liability
E. marketable security
18. _____ are specific repayment conditions as to how long customers have to pay bills and the amount of cash discount allowed.
A. Credit credentials
B. Credit terms
C. Revolving accounts
D. Liability procedures
E. Sales terms
19. The cost of inventory to the firm includes all of the following EXCEPT:
A. ordering costs
B. handling costs
C. purchase price
D. selling costs
E. insurance costs
20. Funds invested in long-lived assets, such as land, buildings, machinery, and equipment, are called:
A. manufacturing expenses
B. operating expenses
C. capital expenditures
D. production costs
E. material costs
21. As the Toronto-based Four Seasons hotel chain remodels an existing hotel in Mumbai to bring it to the five-star hotel’s exacting standards, it is building a magnificent revolving restaurant overlooking the Arabian Sea at World. The restaurant structure is an example of a(n):
A. capital expenditure
B. material cost
C. operating cost
D. account receivable
E. intangible asset
22. Which of the following would be an example of a capital expenditure for a superstore that specializes in outdoor grills and other items needed for outside dining?
A. order forms
B. cardboard sale signs
C. a handheld calculator
D. pens and markers
E. a parking lot
23. _____ is the process of selecting the capital expenditures that offer the best returns and meet the goal of maximizing the firm's value.
A. Capital evaluation
B. Capital allocation
C. Budget analysis
D. Capital budgeting
E. Budget allocation
24. Capital budgeting:
A. analyzes production costs
B. selects asset proposals for maximum profitability
C. helps select new products
D. combines all budgets into a master budget
E. allows managers to analyze profit and loss statements
25. Short-term loans:
A. have a maturity of one year or longer
B. are always secured
C. are shown as a current liability on the balance sheet
D. do not require any collateral
E. are shown as a capital expenditure on the balance sheet
26. The three main types of unsecured short-term loans are:
A. treasury bills, certificates of deposit, and accounts payable
B. accounts payable, notes payable, and loans payable
C. trade credit, accounts payable, and bank loans
D. trade credit, bank loans, and commercial paper
E. commercial paper, accounts payable, and trade credit
27. When Magna Manufacturing sells hand on screwdriver sets to Malloy Building Supply Company, Magna bills the tool manufacturer for the screwdriver purchase with terms of payment, which specify when the account is due. This type of unsecured loan is called _____ credit.
A. revolving
B. factored
C. product
D. borrower's
E. trade
28. A(n) _____ is a type of loan often used to finance buildup of inventory for seasonal (cyclical) businesses just before their strongest sales period.
A. secured bank loan
B. trade credit
C. unsecured bank loan
D. collateral loan
E. commercial paper loan
29. Which of the following businesses would be most likely to require an unsecured bank loan, such as a line of credit or a revolving credit agreement?
A. a manufacturer of integrated circuits
B. a Christmas tree farm
C. a poultry producer
D. an envelope manufacturer
E. a manufacturer of health and beauty aids
30. Gerald Cooksie owns a restaurant in Panama Beach, Florida. He has arranged a business loan with the bank where he has his business account. The terms of the loan allow him to borrow up to $13,500 within the next year if the bank has funds available to lend; he must pay interest only on the unpaid loan balance. Cooksie has arranged a:
A. collateralized loan
B. line of credit
C. secured loan
D. mortgage loan
E. credit-line loan
31. Herschel George is a soybean farmer. He has arranged a business loan with terms that guarantee that he can borrow up to $30,000 whenever he needs it within the next year. He must pay interest only on the unpaid loan balance. George has arranged a:
A. collateralized loan
B. line of credit
C. credit-line loan
D. single-payment note
E. revolving credit agreement
32. An IOU is most similar to which type of bank loan?
A. revolving credit
B. collateralized credit
C. commercial paper
D. business trade credit
E.a line of credit
33. Albee Construction Company, a financially strong corporation that builds roads and bridges, finances its equipment leases by issuing unsecured short-term debt, which is called:
A. revolving credit
B. commercial paper
C. collateralized loans
D. corporate issues
E. negotiable notes
34. A secured loan requires that the borrower pledge specific assets to secure the loan. These assets are called:
A. collateral
B. pledges
C. intangible assets
D. negotiable assets
E. asset requirements
35. A loan that requires the borrower to pledge specific assets as collateral is called a(n) _____ loan.
A. promissory
B. commercialized
C. unsecured
D. amortized
E. secured
36. Secured short-term loans are usually secured by:
A. accounts payable and accounts receivable
B. buildings and equipment
C. equipment and inventory
D. inventory and raw material
E. accounts receivable and inventory
37. A company sells its accounts receivable to a financial institution that is in the business of buying accounts receivable at a discount. This sale is called:
A. bartering
B. collateralizing
C. factoring
D. countertrading
E. buying on the short
38. In which of the following industries are you most likely to find factoring being used?
A. fast-food industry
B. appliance industry
C. tire industry
D. soft drink industry
E. entertainment industry
39. The major advantage of debt financing is the:
A. number of different sources from which it is available
B. lack of dependence on collateral
C. absence of factoring
D. deductibility of interest expenses
E. amortization benefits
40. Which statement describes the major drawback to the use of debt financing?
A. The interest paid is not tax-deductible.
B. Debt financing is a form of permanent financing.
C. Debt financing gives common stockholders a voice in company management.
D. Financial risk is always a possibility with debt financing.
E. Dividends are paid from after-tax income.
41. Which of the following statements does NOT describe an advantage inherent in equity financing?
A. The company is not required to repay equity.
B. Interest is tax-deductible.
C. Equity has no maturity date.
D. A firm has no obligation to pay dividends.
E. Equity owners have residual claim on income.
42. Long-term debt would be used to:
A. pay employees’ salaries
B. buy new tablecloths for a restaurant
C. replace broken glass in a window
D. provide customer with a cash discount
E. do none of the above
43. Three important forms of long-term (capital) expenditures are:
A. accounts payable, notes payable, and commercial paper
B. treasury bills, certificates of deposit, and accounts payable
C. trade credit, accounts payable, and bank loans
D. trade credit, bank loans, and commercial paper
E. term loans, mortgage loans, and bonds
44. Term loans:
A. are available from commercial banks, insurance companies, pension funds, commercial finance companies, and manufacturer’s financing subsidiaries
B. may be repaid on a quarterly, semiannual, or annual schedule
C. are capital expenditure loans with a maturity of more than one year
D. can be secured or unsecured
E. are accurately described by all of the above
45. Business loans available from commercial banks with terms generally five to twelve years and secured or unsecured are called _____ loans.
A. collateral
B. mortgage
C. line of credit
D. term
E. prime
46. Long-term debts (liabilities) for corporations and governments are called:
A. preferred stock
B. common stock
C. bonds
D. equity funds
E. lines of credit
47. A(n) _____ loan is a long-term loan using real estate or other assets as collateral.
A. unsecured
B. line of credit
C. prime
D. discount
E. mortgage
48. _____ stock is a security that represents an ownership interest in a corporation and has voting rights.
A. Preferred
B. Common
C. Par value
D. Treasury
E. Equity
49. When a firm goes public, it must reveal such information as:
A. financing plans
B. product details
C. financial data
D. operating data
E. all of the above
50. Esselte is a Swedish-based company that sells office supplies. It went public when it was founded, and it remained public until 2002 when it was taken private. Now that Esselte is private, it:
A. has more collateral
B. can deduct any dividends from its taxes
C. offers only preferred stock to its investors
D. no longer sells stock to the public
E. can use unsecured loans
51. Dividends are:
A. annual payments on bonds
B. the earnings of the corporation
C. payments to the shareholders from company earnings
D. guaranteed payments to the common shareholders
E. loans made to the shareholders
52. Payments in the form of more stock to existing stockholders are called:
A. warrants
B. rights offerings
C. stock dividends
D. stock offerings
E. IPOs
53. The funds that are reinvested in the firm out of profits and after dividends are paid are called:
A. retained earnings
B. stock equity
C. investor earnings
D. secondary earnings
E. convertible bonds
54. Which of the following statements about preferred stock is true?
A. Preferred stockholders are paid dividends before the company can pay any dividends to common stockholders.
B. The dividends for preferred stock are a fixed amount.
C. Preferred stock is more costly than debt financing.
D. Preferred stockholders are paid before other debt holders in the event of company dissolution.
E. All of the above statements about preferred stock are true.
55. Which of the following statements about preferred stock is true?
A. Preferred stock carries voting rights.
B. Preferred stockholders receive dividends before bondholders receive interest.
C. Preferred stock can be owned only by upper management.
D. Preferred stockholders receive dividends after common stockholders.
E. Preferred stock produces a fixed-amount dividend.
56. _____ invest in new businesses in return for part of the ownership, sometimes as much as 60 percent.
A. Intrapreneurs
B. Multipreneurs
C. Venture capitalists
D. Leveraged capitalists
E. Business opportunists
57. A secured Internet service provider would be very likely to attract the attention of _____ because it is in a high-tech industry with lots of opportunity for rapid growth.
A. intrapreneurs
B. multipreneurs
C. venture capitalists
D. leveraged capitalists
E. business opportunists
58. Tracy Lefteroff is the global managing partner for PricewaterhouseCoopers. She said that her company is eager to invest in newly created biotech companies because the U.S. has an aging population that will need new medications and treatments. What kind of equity capital would Lefteroff be likely to provide?
A. mortgage loan
B. dividends
C. retained earnings
D. venture capital
E. secured bonds
59. Private individual investors who sometimes provide venture capital to small firms in need of equity capital are called:
A. opportunists
B. entrepreneur backers
C. benefactors
D. angel investors
E. equity developers
60. _____ are investment certificates that represent either ownership of a corporation or a loan to the corporation.
A. Capital funds
B. Securities
C. Deposits
D. Contracts
E. Liquid assets
61. _____ are investment professionals who are paid to manage other people’s money.
A. Account managers
B. Category managers
C. Fiduciary experts
D. Institutional investors
E. Fiscal managers
62. Dalrymple Bay Coal Terminal, a coal-handling facility and export terminal in Queensland, Australia, has issued triple-A rated bonds for $680 million in Australian dollars. The bonds will be used to refinance existing bank debt caused by the acquisition of eases from the Queensland government in 2002. The Commonwealth Bank of Australia acted as investment bankers to the transaction. This means the Commonwealth Bank of Australia:
A. engaged in factoring the sale
B. bought the bonds from Dalrymple and sold them to the public
C. operates in the secondary securities market
D. was responsible for co-insurance of the bond premium
E. would be responsible for paying the dividend if Dalrymple were unable to
63. The primary activity of _____ is underwriting.
A. Securities and Exchange Commission (SEC)
B. the New York Stock Exchange
C. The Wall Street Journal
D. stockbrokers
E. investment bankers
64. _____ is the process of buying securities from corporations and governments and reselling them to the public.
A. Circuit breaking
B. Rounding up
C. Underwriting
D. Brokering
E. Transaction bundling
65. Blackwell Investments specializes in acting as an intermediary in taking companies public. This financial middleman is an example of a(n):
A. stockbroker
B. investment banker
C. transfer agent
D. commercial banker
E. public distributor
66. Another name for a stockbroker is a(n):
A. underwriter
B. fiscal manager
C. investment banker
D. account executive
E. fiduciary expert
67. _____ are the link between public companies and the investors interested in buying their stock.
A. Underwriters
B. Stockbrokers
C. Investment bankers
D. Account managers
E. Securities expert
68. Organized stock exchanges operate like a(n):
A. indirect distribution channel
B. retailer
C. auction company
D. wholesaler
E. warehouse company
69. The oldest and largest organized securities exchange in the United States is the:
A. American Stock Exchange
B. Dow Jones Stock Exchange
C. National Stock Exchange
D. Chicago Board of Exchange
E. New York Stock Exchange
70. Which of the following statements about the New York Stock Exchange (NYSE) and the American Stock Exchange (AMEX) is true?
A. Companies listed on the NYSE cannot be listed on the AMEX at the same time.
B. Most firms traded on the NYSE are smaller than those traded on the AMEX.
C. The AMEX rules are stricter than those of the NYSE.
D. Firms cannot move from one exchange to the other.
E. All AMEX and NYSE transactions occur on the NYSE trading floor.
71. Securities that are not traded on the organized stock exchanges are traded in the:
A. primary market
B. futures market
C. over-the-counter market
D. dealers market
E. open market operation
72. The _____ system is the first electronic-based stock market and the largest over-the-counter market.
A. AMEX
B. NASDAQ
C. AMC
D. NASA
E. NYSE
73. Which of the following statements about competition among stock exchanges is true?
A. Because of the different ways each calculates its index, there is no competition between the NYSE and the NASDAQ.
B. The NYSE lists significantly more stock that NASDAQ.
C. Neither NASDAQ nor NYSE is feeling any competitive pressure from ECNs.
D. ECNs are computerized indexes that are limited to high-tech companies.
E. Electronic communications networks (ECNs) allow institutional traders to make direct transactions in what is called the fourth market.
74. Electronic communications networks (ECNs):
A. have permitted the creation of the fourth market
B. are Web sites for companies that are traded on the NYSE
C. are not exchanges, according to the Securities and Exchange Commission
D. work most effectively for low volume stocks that are traded infrequently
E. are more expensive to use than other trading venues
75. Many large investors are now handling trades without Wall Street's services. Through the use of computer technology, they are making direct transactions. This relatively new development is called the _____ market.
A. second
B. computer-block
C. third
D. unassisted
E. fourth
76. The Securities Act of 1933:
A. requires all companies to comply with IRS rules
B. requires full disclosure of information about new securities issues
C. deals with rules for operating the stock exchanges
D. controls all mutual fund offerings
E. has complete control over the commodities traded through futures contracts
77. The _____ is a law that requires full disclosure of information on new issues and registration statements of financial information.
A. Securities Exchange Act of 1934
B. Securities Industry Act of 1936
C. National Securities Dealers Act of 1934
D. Securities Act of 1933
E. Investment Company Act of 1940
78. The Securities Exchange Act of 1934 gave the SEC the power to:
A. control the organized exchanges
B. police all security transactions
C. deal with commodities as well as stocks
D. oversee real estate exchanges
E. control speculation in the stock market
79. The Securities Investor Protection Corporation (SIPC):
A. protects stock brokers from bad-risk investors
B. is a mutual fund that invests in only profitable securities
C. is like an insurance company for online stock exchanges that sometimes experience technological difficulties beyond their control
D. protects investors up to $10,000 in the event of a bear market
E. insures the accounts of customers of brokerage firms for up to $500,000 against a firm failure
80. What is the name of the SEC regulation that requires public companies to share information with all investors at the same time?
A. Regulation FD
B. the Investment Company Act of 1940
C. the Sarbanes-Oxley Act
D. the Investment Advisors Act of 1940
E. the Securities and Exchange Act of 1934
81. Regulation FD was designed to eliminate:
A. embezzlement by investment bankers
B. short circuiting
C. factoring
D. insider trading
E. the sale of securities without proper SEC registration
82. How would you describe the relationship between NYSE and NASDAQ?
A. so different that they are really not in competition with each other
B. trading partners
C. heated competitors
D. symbiotic
E. supportive
FILL-IN-THE-BLANK QUESTIONS
1. _____ is the art and science of managing a firm's money so that the firm can meet its goals.
2. Because Avril Peters is investing in the commodities market, she stands a chance of losing money. _____ is the term used to describe her potential for loss.
3. ______ loans are given on the basis of the firm's credit and the lender's previous experience with the firm.
4. _____ credit is the extension of credit by the seller to the buyer between the time the buyer receives the goods or services and when it pays for them.
5. ______ is the unsecured short-term debt offered by large, financially strong corporations.
6. A secured loan requires the borrower to pledge specific assets as _____ or security.
7. _____ is an SEC regulation that requires public companies to share information with all investors at the same time, leveling the information playing field.
8. The _____ is the oldest and most prestigious U.S. stock exchange.
SHORT ANSWER QUESTIONS
1. What is financial management?
2. Briefly define the risk-return trade-off.
3. What is a financial manager doing when he or she sets credit terms and decides on collection policies?
4. List three common reasons why companies make capital expenditures.
5. What are the three main types of unsecured short-term loans?
6. What is most commonly used for collateral with secured loans?
7. What is the major drawback to debt financing?
8. What is the oldest and most prestigious of the U.S. stock exchanges?
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