M: Business Ferrell - Chapter 16 - Financial Management and Securities Markets ANSWERS, Appunti di Management Theory

Scarica M: Business Ferrell - Chapter 16 - Financial Management and Securities Markets ANSWERS e più Appunti in PDF di Management Theory solo su Docsity! M: Business, 6e (Ferrell) Chapter 16 Financial Management and Securities Markets 1) Companies try to keep just enough cash on hand to pay their bills. This is called locked investments. Answer: FALSE Explanation: Money managers try to keep just enough cash on hand, called transaction balances, to pay bills—such as employee wages, supplies, and utilities—as they fall due. Difficulty: 1 Easy Topic: Short-Term Assets and Liabilities Learning Objective: 16-01 Describe some common methods of managing current assets. Bloom's: Remember AACSB: Analytical Thinking Accessibility: Keyboard Navigation 2) A marketable security is a temporary investment of cash. Answer: TRUE Explanation: Marketable securities are temporary investments of "extra" cash by organizations for up to one year in U.S. Treasury bills, certificates of deposit, commercial paper, or eurodollar deposits. Difficulty: 1 Easy Topic: Short-Term Assets and Liabilities Learning Objective: 16-01 Describe some common methods of managing current assets. Bloom's: Remember AACSB: Analytical Thinking Accessibility: Keyboard Navigation 3) U.S. T-bills are generally considered to be the safest of all investments and are called risk free because the U.S. government will not default on its debt. Answer: TRUE Explanation: U.S. Treasury bills (T-bills) are short-term debt obligations the U.S. government sells to raise money. Issued weekly by the U.S. Treasury, T-bills carry maturities of between one week and one year. U.S. T-bills are generally considered to be the safest of all investments and are called risk free because the U.S. government will not default on its debt. Difficulty: 1 Easy Topic: Short-Term Assets and Liabilities Learning Objective: 16-01 Describe some common methods of managing current assets. Bloom's: Remember AACSB: Analytical Thinking Accessibility: Keyboard Navigation 1 Copyright © 2019 McGraw-Hill 4) Eurodollar deposits can only be made at banks located in London. Answer: FALSE Explanation: The Eurodollar market is a market for trading U.S. dollars in foreign countries. Because the eurodollar market was originally developed by London banks, any dollar- denominated deposit in a non-U.S. bank is called an eurodollar deposit, regardless of whether the issuing is actually located in Europe, South America, or anyplace else. Difficulty: 1 Easy Topic: Short-Term Assets and Liabilities Learning Objective: 16-01 Describe some common methods of managing current assets. Bloom's: Remember AACSB: Analytical Thinking Accessibility: Keyboard Navigation 5) Because of the seasonal nature of his business, George sometimes had trouble keeping enough cash on hand to make payroll. This problem could be solved if George had a line of credit at his bank. Answer: TRUE Explanation: Virtually all organizations—large and small—obtain short-term funds for operations from banks. In most instances, the credit services granted these firms take the form of a line of credit or fixed dollar loan. A line of credit is an arrangement by which a bank agrees to lend a specified amount of money to the organization upon request. Difficulty: 1 Easy Topic: Short-Term Assets and Liabilities Learning Objective: 16-02 Identify some sources of short-term financing (current liabilities). Bloom's: Remember AACSB: Knowledge Application Accessibility: Keyboard Navigation 6) Most business failures are the result of poor long-term planning. Answer: FALSE Explanation: Most business failures are the result of poor short-term planning; however, successful ventures must also consider the long-term financial consequences of their actions. Difficulty: 1 Easy Topic: Short-Term Assets and Liabilities Learning Objective: 16-03 Summarize the importance of long-term assets and capital budgeting. Bloom's: Remember AACSB: Knowledge Application Accessibility: Keyboard Navigation 2 Copyright © 2019 McGraw-Hill 13) Junk bonds offer high rates of interest. Answer: TRUE Explanation: High-yield bonds, or junk bonds as they are popularly known, offer relatively high rates of interest because they have higher inherent risks. Difficulty: 1 Easy Topic: Methods of Business Financing Learning Objective: 16-04 Specify how companies finance their operations and manage fixed assets with long-term liabilities, particularly bonds. Bloom's: Remember AACSB: Analytical Thinking Accessibility: Keyboard Navigation 14) Common stock, preferred stock, and retained earnings are all forms of stockholder's equity. Answer: TRUE Explanation: Stockholders' equity includes common stock, preferred stock, and retained earnings. Difficulty: 1 Easy Topic: Methods of Business Financing Learning Objective: 16-05 Discuss how corporations can use equity financing by issuing stock through an investment banker. Bloom's: Remember AACSB: Analytical Thinking Accessibility: Keyboard Navigation 15) The single most important source of capital for most new companies is equity. Answer: FALSE Explanation: Common stock is the single most important source of capital for most new companies. Difficulty: 1 Easy Topic: Methods of Business Financing Learning Objective: 16-05 Discuss how corporations can use equity financing by issuing stock through an investment banker. Bloom's: Remember AACSB: Analytical Thinking Accessibility: Keyboard Navigation 5 Copyright © 2019 McGraw-Hill 16) The primary advantage of owning preferred stock is that it is a safer investment than common stock. Answer: TRUE Explanation: Preferred stock is defined as corporate ownership that gives the stockholder preference in the distribution of the company's profits but not the voting and control rights accorded to common stockholders. Thus, the primary advantage of owning preferred stock is that it is a safer investment than common stock. Difficulty: 1 Easy Topic: Methods of Business Financing Learning Objective: 16-05 Discuss how corporations can use equity financing by issuing stock through an investment banker. Bloom's: Remember AACSB: Analytical Thinking Accessibility: Keyboard Navigation 17) Fast growing companies, like Facebook, pay high dividends because the cash is readily available. Answer: FALSE Explanation: Many fast-growing firms like Facebook retain all of their earnings and do not pay dividends because they can earn high rates of return on the earnings they reinvest. Difficulty: 1 Easy Topic: Methods of Business Financing Learning Objective: 16-05 Discuss how corporations can use equity financing by issuing stock through an investment banker. Bloom's: Remember AACSB: Analytical Thinking Accessibility: Keyboard Navigation 18) New issues of stocks and bonds are sold directly to the public and to institutions in what is known as the primary market. Answer: TRUE Explanation: New issues of stocks and bonds are sold directly to the public and to institutions in what is known as the primary market—the market where firms raise financial capital. The primary market differs from secondary markets, which are stock exchanges and over-the-counter markets where investors can trade their securities with other investors rather than the company that issued the stock or bonds. Difficulty: 1 Easy Topic: Methods of Business Financing Learning Objective: 16-05 Discuss how corporations can use equity financing by issuing stock through an investment banker. Bloom's: Remember AACSB: Analytical Thinking Accessibility: Keyboard Navigation 6 Copyright © 2019 McGraw-Hill 19) Secondary market trades are not available over the counter. They can only be done through organized exchanges. Answer: FALSE Explanation: Secondary market trades may take place on organized exchanges or in what is known as the over-the-counter market. Many brokerage houses exist to help investors with financial decisions, and many offer their services through the Internet. Difficulty: 1 Easy Topic: Methods of Business Financing Learning Objective: 16-06 Describe the various securities markets in the United States. Bloom's: Remember AACSB: Analytical Thinking Accessibility: Keyboard Navigation 20) Both the NYSE and NASDAQ are not-for-profit organizations. Answer: FALSE Explanation: Both the NYSE and NASDAQ became publicly traded companies. They were previously not-for-profit organizations but are now for-profit companies. Difficulty: 1 Easy Topic: Methods of Business Financing Learning Objective: 16-06 Describe the various securities markets in the United States. Bloom's: Remember AACSB: Analytical Thinking Accessibility: Keyboard Navigation 21) Simple calculations of averages are used to determine stock prices. Answer: FALSE Explanation: Indexes and averages are used to measure stock prices. An index compares current stock prices with those in a specified base period, such as 1944, 1967, or 1977. An average is the average of certain stock prices. The averages used are usually not simple calculations, however. Difficulty: 1 Easy Topic: Methods of Business Financing Learning Objective: 16-06 Describe the various securities markets in the United States. Bloom's: Remember AACSB: Analytical Thinking Accessibility: Keyboard Navigation 7 Copyright © 2019 McGraw-Hill 26) Working capital management refers to A) managing long-term liabilities. B) managing long-term assets. C) managing short-term assets and liabilities. D) financing internal projects. E) financing small business enterprises. Answer: C Explanation: Managing short-term assets and liabilities is sometimes called working capital management because short-term assets and liabilities continually flow through an organization and are thus said to be "working." Difficulty: 1 Easy Topic: Short-Term Assets and Liabilities Learning Objective: 16-01 Describe some common methods of managing current assets. Bloom's: Remember AACSB: Analytical Thinking Accessibility: Keyboard Navigation 27) Ida is a financial manager who focuses on current assets and liabilities. All of the following are part of her chief goal EXCEPT maximizing returns on A) cash. B) inventory. C) temporary investments of idle cash. D) accounts receivable. E) accrued taxes. Answer: E Explanation: The chief goal of financial managers who focus on current assets and liabilities is to maximize the return to the business on cash, temporary investments of idle cash, accounts receivable, and inventory. Difficulty: 3 Hard Topic: Short-Term Assets and Liabilities Learning Objective: 16-01 Describe some common methods of managing current assets. Bloom's: Apply AACSB: Reflective Thinking Accessibility: Keyboard Navigation 10 Copyright © 2019 McGraw-Hill 28) In the context of managing cash in an organization, which of the following is true? A) Business organizations make money from idle cash. B) Corporate checking accounts typically earn interest. C) Money managers try to keep as much cash in their hands as possible. D) To manage a firm's cash, companies try to speed up cash collections from customers. E) Managers measure cash flow as the amount of cash the firm spends in a period of one year. Answer: D Explanation: To manage a firm's cash and ensure that enough cash flows through the organization quickly and efficiently, companies try to speed up cash collections from customers. Difficulty: 2 Medium Topic: Short-Term Assets and Liabilities Learning Objective: 16-01 Describe some common methods of managing current assets. Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation 29) Florence tries to keep just enough cash on hand to pay employee wages and utility bills. This cash is referred to as A) long-term assets. B) marketable securities. C) transaction balances. D) retained earnings. E) secured bonds. Answer: C Explanation: Astute money managers try to keep just enough cash on hand, called transaction balances, to pay bills—such as employee wages, supplies, and utilities—as they fall due. Idle cash does not make money, and corporate checking accounts typically do not earn interest. Difficulty: 1 Easy Topic: Short-Term Assets and Liabilities Learning Objective: 16-01 Describe some common methods of managing current assets. Bloom's: Remember AACSB: Analytical Thinking Accessibility: Keyboard Navigation 11 Copyright © 2019 McGraw-Hill 30) A large computer technology company wants to collect cash from its customers quickly but pay out cash to its suppliers slowly. How might this company succeed in accomplishing this goal? A) use electronic funds transfers to collect payments and checks to make payments B) use checks to collect payments and electronic funds transfers to make payments C) have customers send payments directly to its mailing address and send payments to suppliers via their lockboxes D) use electronic funds transfers for both, but set the delivery dates to one day for payments from customers and three or four days for payments to suppliers E) use checks for both, but require customers to send checks via express mail and send checks to suppliers via regular mail Answer: A Explanation: Most companies want to collect cash quickly but pay out cash slowly. When companies use electronic funds transfers between buyers and suppliers, the speed of collections and disbursements increases to one day. Only with the use of checks can companies delay the payment of cash by three or four days until the check is presented to their bank and the cash leaves their account. Difficulty: 3 Hard Topic: Short-Term Assets and Liabilities Learning Objective: 16-01 Describe some common methods of managing current assets. Bloom's: Apply AACSB: Reflective Thinking Accessibility: Keyboard Navigation 31) Since idle cash does not make money, a manager may choose to invest this extra cash in temporary investments called A) junk bonds. B) long-term assets. C) transaction balances. D) marketable securities. E) secured bonds. Answer: D Explanation: Sometimes companies receive cash faster than it is needed to pay bills. Organizations often invest this "extra" cash, for periods as short as one day or for as long as a year, until it is needed. Such temporary investments of cash are known as marketable securities. Examples include U.S. Treasury bills, certificates of deposit, commercial paper, and eurodollar deposits. Difficulty: 2 Medium Topic: Short-Term Assets and Liabilities Learning Objective: 16-01 Describe some common methods of managing current assets. Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation 12 Copyright © 2019 McGraw-Hill 36) Which of the following types of marketable securities are the safest? A) U.S. Treasury bills B) commercial paper C) certificates of deposit D) eurodollar deposits E) cash deposits Answer: A Explanation: While all marketable securities are very low risk, U.S. government securities, such as Treasury bills are the safest. U.S. Treasury bills are even called risk free because the U.S. government will not default on its debt. Difficulty: 1 Easy Topic: Short-Term Assets and Liabilities Learning Objective: 16-01 Describe some common methods of managing current assets. Bloom's: Remember AACSB: Analytical Thinking Accessibility: Keyboard Navigation 37) ________ are marketable securities that are short-term debt obligations sold by the U.S. government to raise money. A) Commercial certificates of deposits B) U.S. Treasury bills C) Eurodollar deposits D) Secured loans E) Trade credits Answer: B Explanation: Many large companies invest idle cash in U.S. Treasury bills (T-bills), which are short-term debt obligations the U.S. government sells to raise money. Issued weekly by the U.S. Treasury, T-bills carry maturities of between one week and one year. Difficulty: 1 Easy Topic: Short-Term Assets and Liabilities Learning Objective: 16-01 Describe some common methods of managing current assets. Bloom's: Remember AACSB: Analytical Thinking Accessibility: Keyboard Navigation 15 Copyright © 2019 McGraw-Hill 38) ________ are issued by commercial banks and brokerage companies, are available in minimum amounts of $100,000, and may be traded prior to maturity. A) Trade credits B) U.S. Treasury bills C) Serial bonds D) Commercial loans E) Commercial certificates of deposit Answer: E Explanation: Commercial certificates of deposit (CDs) are issued by commercial banks and brokerage companies. They are available in minimum amounts of $100,000 but are typically in units of $1 million for large corporations investing excess cash. Unlike consumer CDs, which must be held until maturity, commercial CDs may be traded prior to maturity. Difficulty: 1 Easy Topic: Short-Term Assets and Liabilities Learning Objective: 16-01 Describe some common methods of managing current assets. Bloom's: Remember AACSB: Analytical Thinking Accessibility: Keyboard Navigation 39) Globalworld, a company that develops technological innovations, invests its excess cash in a commercial certificate of deposit. If a cash shortage occurs, what will Globalworld most likely do? A) return the CD to the commercial bank or brokerage company and get its money back B) trade the CD for a lower cost CD to obtain needed funds C) sell the CD on the open market and obtain needed funds D) find an unrelated way to obtain needed funds since CDs must be held until maturity E) wait for the CD to reach maturity and then trade it in for the needed funds Answer: C Explanation: Unlike consumer CDs, which must be held until maturity, commercial CDs may be traded prior to maturity. Should a cash shortage occur, the organization can simply sell the CD on the open market and obtain needed funds. Difficulty: 3 Hard Topic: Short-Term Assets and Liabilities Learning Objective: 16-01 Describe some common methods of managing current assets. Bloom's: Apply AACSB: Knowledge Application Accessibility: Keyboard Navigation 16 Copyright © 2019 McGraw-Hill 40) ________ is a written promise from one company to another to pay a certain amount of money. A) Commercial paper B) U.S. Treasury bill C) Certificate of deposit D) Secured bond E) Trade credit Answer: A Explanation: Commercial paper is a written promise from one company to another to pay a specific amount of money. Because commercial paper is backed only by the name and reputation of the issuing company, sales of commercial paper are restricted to only the largest and most financially stable companies. Difficulty: 1 Easy Topic: Short-Term Assets and Liabilities Learning Objective: 16-01 Describe some common methods of managing current assets. Bloom's: Remember AACSB: Analytical Thinking Accessibility: Keyboard Navigation 41) Which of the following is true of commercial paper? A) It is the most popular long-term investment for small businesses. B) It acts as a verbal promise to pay a specific amount of money. C) It is backed only by the name and reputation of the issuing company. D) It is only sold to sole proprietors and small businesses. E) It is only sold for durations of two years or more. Answer: C Explanation: Commercial paper is backed only by the name and reputation of the issuing company, and sales of commercial paper are restricted to only the largest and most financially stable companies. Commercial paper is a written promise from one company to another to pay a specific amount of money. Difficulty: 2 Medium Topic: Short-Term Assets and Liabilities Learning Objective: 16-01 Describe some common methods of managing current assets. Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation 17 Copyright © 2019 McGraw-Hill 46) Which of the following is money owed to a business by credit customers? A) accounts receivable B) accounts payable C) trade credit D) U.S. Treasury bill E) secured bond Answer: A Explanation: Accounts receivable is money owed to a business by credit customers. Many businesses make the vast majority of their sales on credit, so managing accounts receivable is an important task. Difficulty: 1 Easy Topic: Short-Term Assets and Liabilities Learning Objective: 16-02 Identify some sources of short-term financing (current liabilities). Bloom's: Remember AACSB: Analytical Thinking Accessibility: Keyboard Navigation 47) Which of the following is one of the utilities of the radio frequency identification (RFID) technology? A) It is used for office communication with the help of radio waves. B) It is used to track stock exchange developments. C) It is used to better manage inventory by tracking inventory shipments. D) It is used by consumers to pay bills from any chosen location. E) It is used to relay radio signals for business promotion through radio broadcasting. Answer: C Explanation: One way that companies are optimizing inventory is through the use of radio frequency identification (RFID) technology. A RFID tag, which contains a silicon chip and an antenna, allows a company to use radio waves to track and identify the products to which the tags are attached. These tags are primarily used to track inventory shipments from the manufacturer to the buyer's warehouses and then to the individual stores and also cut down on trucking theft because the delivery truck and its contents can be tracked. Difficulty: 1 Easy Topic: Short-Term Assets and Liabilities Learning Objective: 16-02 Identify some sources of short-term financing (current liabilities). Bloom's: Remember AACSB: Analytical Thinking Accessibility: Keyboard Navigation 20 Copyright © 2019 McGraw-Hill 48) Barb's Construction Company receives weekly shipments of lumber, vinyl siding, and stone slabs from one of its materials suppliers on credit. Since Barb's Construction Company is a regular customer, the supplier has made an agreement to give the company discounts if it pays its bill early. Which of the following short-term liabilities does this scenario best describe? A) accounts receivable B) certificates of deposit C) line of credit D) trade credit E) discount window Answer: D Explanation: This scenario best describes trade credit, which is credit extended by suppliers for the purchase of their goods and services. While varying in formality, depending on both the organizations involved and the value of the items purchased, most trade credit agreements offer discounts to organizations that pay their bills early. Difficulty: 3 Hard Topic: Short-Term Assets and Liabilities Learning Objective: 16-02 Identify some sources of short-term financing (current liabilities). Bloom's: Apply AACSB: Knowledge Application Accessibility: Keyboard Navigation 49) Which of the following is the most widely used form of short-term financing, and therefore, the most important account payable? A) commercial paper B) trade credit C) treasury bills D) commercial certificates of deposit E) marketable securities Answer: B Explanation: The most widely used source of short-term financing, and therefore the most important account payable, is trade credit—credit extended by suppliers for the purchase of their goods and services. Difficulty: 1 Easy Topic: Short-Term Assets and Liabilities Learning Objective: 16-02 Identify some sources of short-term financing (current liabilities). Bloom's: Remember AACSB: Analytical Thinking Accessibility: Keyboard Navigation 21 Copyright © 2019 McGraw-Hill 50) The Equestrian Shoppe offers trailering services to equestrian stables shipping horses to long-distance horse shows. It offers customers trade credit agreements with terms of 2/10 net 30. What does this mean? A) Customers have 2 days to pay 10 percent of their bill, and then, they have 30 days to pay the rest. B) Customers can save 2 percent off the invoice amount if they pay within 10 days, or they can pay the entire amount within 30 days. C) Customers can save 30 percent off their invoice amount if they pay 10 percent of the bill within 2 days. D) Customers can save $2 for every $10 they spend if they pay within 30 days. E) Customers can save 10 percent off the invoice amount if they pay within 2 days, or they can pay the entire amount within 30 days. Answer: B Explanation: Trade terms of 2/10 net 30 means that the purchasing organization may take a 2 percent discount from the invoice amount if it makes payment by the 10th day after receiving the bill. Otherwise, the entire amount is due within 30 days. Difficulty: 3 Hard Topic: Short-Term Assets and Liabilities Learning Objective: 16-02 Identify some sources of short-term financing (current liabilities). Bloom's: Apply AACSB: Knowledge Application Accessibility: Keyboard Navigation 51) Dan bought three new trucks with a loan obtained from the First National Bank. If he fails to repay the loan, the bank will repossess the trucks. The trucks typically represent A) a line of credit. B) a lockbox. C) collateral. D) accounts payable. E) retained earnings. Answer: C Explanation: In the given scenario, the trucks typically represent collateral. Secured loans are backed by collateral that the bank can claim if the borrowers do not repay the loan. Difficulty: 3 Hard Topic: Short-Term Assets and Liabilities Learning Objective: 16-02 Identify some sources of short-term financing (current liabilities). Bloom's: Apply AACSB: Knowledge Application Accessibility: Keyboard Navigation 22 Copyright © 2019 McGraw-Hill 56) Nora wants to open a new dance studio. She goes to the bank to get a loan to start her business, and the bank gives her a loan that is backed by her good reputation and previous credit rating. Which type of bank loan does this scenario best describe? A) a secured loan B) an unsecured loan C) a line of credit D) a prime rate loan E) a collateral loan Answer: B Explanation: This scenario describes an unsecured loan, which is backed only be the borrower's good reputation and previous credit rating. Both individuals and businesses build their credit rating from their history of borrowing and repaying borrowed funds on time and in full. Difficulty: 2 Medium Topic: Short-Term Assets and Liabilities Learning Objective: 16-02 Identify some sources of short-term financing (current liabilities). Bloom's: Apply AACSB: Knowledge Application Accessibility: Keyboard Navigation 57) When Padma started her own cosmetics company, she took out a loan from her local bank. Padma took a second mortgage on her home as collateral for the loan. Which type of bank loan does this scenario best describe? A) a secured loan B) an unsecured loan C) a line of credit D) a credit rating loan E) a prime rate loan Answer: A Explanation: This scenario best describes a secured loan, which is backed by collateral that the bank can claim if the borrower does not repay the loan. Difficulty: 3 Hard Topic: Short-Term Assets and Liabilities Learning Objective: 16-02 Identify some sources of short-term financing (current liabilities). Bloom's: Apply AACSB: Knowledge Application Accessibility: Keyboard Navigation 25 Copyright © 2019 McGraw-Hill 58) The ________ rate is the interest rate commercial banks charge their best customers for short-term loans. A) factor B) over-the-counter C) prime D) credit E) trade Answer: C Explanation: The prime rate is the interest rate commercial banks charge their best customers for short-term loans. For many years, loans at the prime rate represented funds at the lowest possible cost. Difficulty: 1 Easy Topic: Short-Term Assets and Liabilities Learning Objective: 16-02 Identify some sources of short-term financing (current liabilities). Bloom's: Remember AACSB: Analytical Thinking Accessibility: Keyboard Navigation 59) Which type of commercial loan offers an advantage when interest rates are falling but represents a distinct disadvantage when interest rates are rising? A) a floating-rate loan B) a non-variable loan C) an unsecured loan D) a secured loan E) a flexible loan Answer: A Explanation: A variable or floating-rate loan offers an advantage when interest rates are falling but represents a distinct disadvantage when interest rates are rising. Difficulty: 1 Easy Topic: Short-Term Assets and Liabilities Learning Objective: 16-02 Identify some sources of short-term financing (current liabilities). Bloom's: Remember AACSB: Analytical Thinking Accessibility: Keyboard Navigation 26 Copyright © 2019 McGraw-Hill 60) A finance company that buys other companies' accounts receivable for less than they are worth and assumes the responsibility for collecting the debt is known as a A) lockbox. B) factor. C) collateral. D) brokerage. E) conciliator. Answer: B Explanation: In some instances, businesses actually sell their accounts receivable to a financial company known as a factor, which gives the selling organizations cash and assumes responsibility for collecting the accounts. Difficulty: 1 Easy Topic: Short-Term Assets and Liabilities Learning Objective: 16-02 Identify some sources of short-term financing (current liabilities). Bloom's: Remember AACSB: Analytical Thinking Accessibility: Keyboard Navigation 61) When Farrell's Appliances struggles financially, Farrell decides to sell his accounts receivable to a financial company, known as a factor, which pays him $60,000 for receivables with a total face value of $100,000. Which of the following best describes how the financial company can make a profit off these accounts receivable? A) The factor only profits if it can secure more sales from these customers. B) The factor only profits if the customers don't know that a factor has bought their receivables. C) The factor profits if it can produce the same products the company did at a lower cost. D) The factor profits if it can collect more than it paid for the accounts. E) The factor profits only if new accounts receivable are acquired. Answer: D Explanation: In some instances, businesses actually sell their accounts receivable to a finance company known as a factor, which gives the selling organizations cash and assumes responsibility for collecting the accounts. The factor profits if it can collect more than what it paid for the accounts. Difficulty: 3 Hard Topic: Short-Term Assets and Liabilities Learning Objective: 16-02 Identify some sources of short-term financing (current liabilities). Bloom's: Apply AACSB: Knowledge Application Accessibility: Keyboard Navigation 27 Copyright © 2019 McGraw-Hill 66) Which of the following is a short-term cancelable lease that does not show up on a balance sheet? A) a capital lease B) a serial bond C) a transaction balance D) a line of credit E) an operating lease Answer: E Explanation: An operating lease is a short-term cancelable lease and does not show up on the balance sheet. Difficulty: 1 Easy Topic: Risk-Return Relationship Learning Objective: 16-03 Summarize the importance of long-term assets and capital budgeting. Bloom's: Remember AACSB: Analytical Thinking Accessibility: Keyboard Navigation 67) The process of analyzing the needs of a business and selecting the assets that will maximize its value is called A) working capital management. B) factoring. C) risk assessment. D) capital budgeting. E) investment banking. Answer: D Explanation: The process of analyzing the needs of a business and selecting the assets that will maximize its value is called capital budgeting. The capital budget is the amount of money budgeted for investment in such long-term assets. Difficulty: 1 Easy Topic: Risk-Return Relationship Learning Objective: 16-03 Summarize the importance of long-term assets and capital budgeting. Bloom's: Remember AACSB: Analytical Thinking Accessibility: Keyboard Navigation 30 Copyright © 2019 McGraw-Hill 68) The amount of money budgeted for the purchase of long-term assets is called the ________ budget. A) master B) commercial C) current D) fixed E) capital Answer: E Explanation: The capital budget is the amount of money budgeted for investment in long-term assets that will maximize the value of the business. The process of analyzing the needs of a business and selecting the assets that will maximize its value is called capital budgeting. Difficulty: 1 Easy Topic: Risk-Return Relationship Learning Objective: 16-03 Summarize the importance of long-term assets and capital budgeting. Bloom's: Remember AACSB: Analytical Thinking Accessibility: Keyboard Navigation 69) When a company invests a lot of money in a particular project, it is concerned about the amount of risk involved. In general, if the expected life of a project is longer, its potential risk is A) negligible. B) constant. C) greater. D) secondary. E) nonexistent. Answer: C Explanation: The longer a project or asset is expected to last, the greater its potential risk because it is hard to predict whether a piece of equipment will wear out or become obsolete in 5 or 10 years. Predicting cash flows one year down the road is difficult, but projecting them over the span of a 10-year project is a gamble. Difficulty: 1 Easy Topic: Risk-Return Relationship Learning Objective: 16-03 Summarize the importance of long-term assets and capital budgeting. Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation 31 Copyright © 2019 McGraw-Hill 70) Based on qualitative assessments, which of the following potential investment projects is the most risky? A) adding to an existing product line B) introducing a new product in a foreign market C) expanding into a new market D) buying new equipment for an established market E) repairing old equipment Answer: B Explanation: Introducing a new product in a foreign market has the highest risk. When considering investments overseas, risk assessments must include the political climate and economic stability of a region. Difficulty: 2 Medium Topic: Risk-Return Relationship Learning Objective: 16-03 Summarize the importance of long-term assets and capital budgeting. Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation 71) Of the following potential investment projects, the project that poses the least risk is A) adding to a product line. B) introducing a new product in a foreign market. C) expanding into a new market. D) buying new equipment for an established market. E) repairing old equipment. Answer: E Explanation: Based on qualitative assessments, repairing old machinery poses the least risk. However, every investment carries some risk. Difficulty: 2 Medium Topic: Risk-Return Relationship Learning Objective: 16-03 Summarize the importance of long-term assets and capital budgeting. Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation 32 Copyright © 2019 McGraw-Hill 76) Which of the following is a long-term debt instrument that requires the issuer to repay the lender in regular interest payments until the loan is repaid on or before the specified maturity date? A) a bond B) trade credit C) a Treasury bill D) commercial paper E) a certificate of deposit Answer: A Explanation: Much long-term debt takes the form of bonds, which are debt instruments that larger companies sell to raise long-term funds. In essence, the buyers of bonds loan the issuer of the bonds cash in exchange for regular interest payments until the loan is repair on or before the specified maturity date. Difficulty: 2 Medium Topic: Bonds Learning Objective: 16-04 Specify how companies finance their operations and manage fixed assets with long-term liabilities, particularly bonds. Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation 77) Factors such as a bond's face value, maturity date, and interest rate are specified in the A) indenture. B) interest prospectus. C) equity contract. D) commercial paper. E) lockbox portfolio. Answer: A Explanation: The indenture, or bond contract, specifies all of the terms of the agreement between the bondholders and the issuing organization. It can run more than 100 pages, and it specifies the basic terms of the bond, such as its face value, maturity date, and the annual interest rate. Difficulty: 1 Easy Topic: Bonds Learning Objective: 16-04 Specify how companies finance their operations and manage fixed assets with long-term liabilities, particularly bonds. Bloom's: Remember AACSB: Analytical Thinking Accessibility: Keyboard Navigation 35 Copyright © 2019 McGraw-Hill 78) The face value of a bond is typically A) $1. B) $10. C) $100. D) $1,000. E) $10,000. Answer: D Explanation: The typical face value of a bond, its initial sale price, is $1,000. After this, however, the price of the bond on the open market will fluctuate along with changes in the economy and in the creditworthiness of the issuer. Difficulty: 1 Easy Topic: Bonds Learning Objective: 16-04 Specify how companies finance their operations and manage fixed assets with long-term liabilities, particularly bonds. Bloom's: Remember AACSB: Analytical Thinking Accessibility: Keyboard Navigation 79) To help itself succeed in the competitive technology marketplace, Roboman started selling bonds to raise long-term funds. Which of the following is Roboman most likely to do with these bonds? A) hold onto them until they reach maturity B) create a brief one-page bond contract C) keep its bond prices constant on the open market D) pay bondholders the face value of the bond without any interest E) transfer its bonds to secondary markets of brokers and dealers Answer: E Explanation: Most likely, Roboman would not hold its bonds until maturity; rather, the existence of active secondary markets of brokers and dealers allows for the quick and efficient transfer or bonds from owner to owner. Difficulty: 3 Hard Topic: Bonds Learning Objective: 16-04 Specify how companies finance their operations and manage fixed assets with long-term liabilities, particularly bonds. Bloom's: Apply AACSB: Knowledge Application Accessibility: Keyboard Navigation 36 Copyright © 2019 McGraw-Hill 80) ________ are also called debentures and are not backed by specific collateral. A) Dividends B) Treasury bills C) Unsecured bonds D) Trade credits E) Commercial certificates of deposit Answer: C Explanation: Unsecured bonds are called debentures, and they are not backed by specific collateral. Difficulty: 1 Easy Topic: Bonds Learning Objective: 16-04 Specify how companies finance their operations and manage fixed assets with long-term liabilities, particularly bonds. Bloom's: Remember AACSB: Analytical Thinking Accessibility: Keyboard Navigation 81) ________ bonds are best described as a sequence of small bond issues of progressively longer maturity. A) Floating-rate B) Junk C) Secured D) Serial E) Debenture Answer: D Explanation: Serial bonds, which are different from secured bonds, are actually a sequence of small bond issues of progressively longer maturity. The firm pays off each of the serial bonds as they mature. Difficulty: 1 Easy Topic: Bonds Learning Objective: 16-04 Specify how companies finance their operations and manage fixed assets with long-term liabilities, particularly bonds. Bloom's: Remember AACSB: Analytical Thinking Accessibility: Keyboard Navigation 37 Copyright © 2019 McGraw-Hill 86) Which of the following statements is true of junk bonds? A) They are short-term liabilities. B) They are a sequence of small bond issues of progressively longer maturity. C) They have low inherent risks. D) They are typically associated with companies in good financial health. E) They offer relatively high rates of interest. Answer: E Explanation: Junk bonds offer relatively high rates of interest because they have higher inherent risks. Difficulty: 1 Easy Topic: Bonds Learning Objective: 16-04 Specify how companies finance their operations and manage fixed assets with long-term liabilities, particularly bonds. Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation 87) Whether secured or unsecured, bonds may be repaid A) only after the maturity date passes. B) only when bondholders decide to cash out the bond. C) in daily installments. D) in one lump sum or with many payments spread out over a period of time. E) in payments that start after the maturity date and continue for several years. Answer: D Explanation: Whether secured or unsecured, bonds may be repaid in one lump sum or with many payments spread out over a period of time. Difficulty: 1 Easy Topic: Bonds Learning Objective: 16-04 Specify how companies finance their operations and manage fixed assets with long-term liabilities, particularly bonds. Bloom's: Remember AACSB: Analytical Thinking Accessibility: Keyboard Navigation 40 Copyright © 2019 McGraw-Hill 88) ________ is the single most important source of capital for most new companies. A) Commercial paper B) Common stock C) A floating-rate bond D) A Treasury bill E) Trade credit Answer: B Explanation: Common stock is the single most important source of capital for most new companies. On the balance sheet, the common stock account is separated into two basic parts— common stock at par and capital in excess of par. Difficulty: 1 Easy Topic: Methods of Business Financing Learning Objective: 16-05 Discuss how corporations can use equity financing by issuing stock through an investment banker. Bloom's: Remember AACSB: Analytical Thinking Accessibility: Keyboard Navigation 89) The stated value of one share of stock is known as its A) dividend yield. B) capital in excess of par value. C) market value. D) par value. E) prime rate. Answer: D Explanation: The stated value of one share of stock is known as its par value. It has no relation to its actual market value, or the price at which the common stock is currently trading. Difficulty: 1 Easy Topic: Methods of Business Financing Learning Objective: 16-05 Discuss how corporations can use equity financing by issuing stock through an investment banker. Bloom's: Remember AACSB: Analytical Thinking Accessibility: Keyboard Navigation 41 Copyright © 2019 McGraw-Hill 90) Fresh and Fit, a large chain of health-food stores, sells its common stock at a par value of $15, and the offering price of the stock is $10. This means that the capital in excess of par is A) $2.00. B) $5.00. C) $5.50. D) $7.00. E) $10.00. Answer: B Explanation: If the par value of a stock is $15 and the offering price of the stock is $10, the capital in excess of par is $5.00. The difference between a stock's par value and its offering price is called capital in excess of par. Difficulty: 3 Hard Topic: Methods of Business Financing Learning Objective: 16-05 Discuss how corporations can use equity financing by issuing stock through an investment banker. Bloom's: Apply AACSB: Knowledge Application Accessibility: Keyboard Navigation 91) A sportswear company has gone public, and its stock's beta is listed as 0.35. What does this indicate? A) Its stock price is 35 percent as volatile as the Standard & Poor's 500 Index. B) Its stock price is only 35 percent of what it should be, compared to other companies' stock prices. C) Its stock price is 35 percent higher than it should be, compared to other companies' stock prices. D) The par value of its stock is $35 per share. E) The market value of its stock is $35 per share. Answer: A Explanation: If the beta is 0.35, this indicates that its stock price is 35 percent as volatile as the Standard & Poor's 500 Index. Difficulty: 3 Hard Topic: Methods of Business Financing Learning Objective: 16-05 Discuss how corporations can use equity financing by issuing stock through an investment banker. Bloom's: Apply AACSB: Knowledge Application Accessibility: Keyboard Navigation 42 Copyright © 2019 McGraw-Hill 96) ________ are reinvested in the assets of the firm and belong to the owners in the form of equity. A) Dividend yields B) Secured bonds C) Retained earnings D) Transaction balances E) Trade credits Answer: C Explanation: Retained earnings are earnings after expenses and taxes that are reinvested in the assets of the firm and belong to the owners in the form of equity. Retained earnings are an important source of funds and are, in fact, the only long-term funds that the company can generate internally. Difficulty: 1 Easy Topic: Methods of Business Financing Learning Objective: 16-05 Discuss how corporations can use equity financing by issuing stock through an investment banker. Bloom's: Remember AACSB: Analytical Thinking Accessibility: Keyboard Navigation 97) The cash return as a percentage of a stock's price is called its A) capital in excess of par value. B) dividend yield. C) price-earnings ratio. D) retained earnings. E) par value. Answer: B Explanation: The dividend yield is the cash return as a percentage of the stock price and does not reflect the total return an investor earns on an individual stock. If the dividend yield is 2.06 percent on Campbell Soup and the stock price increases by 10 percent from $60.64 to $66.70 then the total return would be 12.06 percent. Difficulty: 1 Easy Topic: Methods of Business Financing Learning Objective: 16-05 Discuss how corporations can use equity financing by issuing stock through an investment banker. Bloom's: Remember AACSB: Analytical Thinking Accessibility: Keyboard Navigation 45 Copyright © 2019 McGraw-Hill 98) If the dividend of a stock is $20.00 and its price is $4.00, then its dividend yield is A) $1.00. B) $2.00. C) $3.00. D) $5.00. E) $8.00. Answer: D Explanation: If the dividend of a stock is $20.00 and its price is $4.00, then its dividend yield is $5.00. When the dividend of a stock is divided by the price, the result is the dividend yield. Difficulty: 3 Hard Topic: Methods of Business Financing Learning Objective: 16-05 Discuss how corporations can use equity financing by issuing stock through an investment banker. Bloom's: Apply AACSB: Reflective Thinking Accessibility: Keyboard Navigation 99) Which of the following types of companies is most likely to pay out large proportions of their earnings in the form of dividends? A) fast-growing firms B) companies with fewer growth opportunities C) firms that can earn high rates of return on reinvested earnings D) smaller companies E) companies that are preferred by investors Answer: B Explanation: Not all firms pay dividends. Many fast-growing firms like Facebook retain all of their earnings because they can earn high rates of return on the earnings they reinvest. Companies with fewer growth opportunities like Campbell Soup or Verizon typically pay out large proportions of their earnings in the form of dividends, thereby allowing their stockholders to reinvest their dividend payments in higher-growth companies. Difficulty: 2 Medium Topic: Methods of Business Financing Learning Objective: 16-05 Discuss how corporations can use equity financing by issuing stock through an investment banker. Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation 46 Copyright © 2019 McGraw-Hill 100) If the dividend of a stock is $20.00 and its dividend yield is $5.00, then the price of the stock is A) $1.00. B) $2.00. C) $3.00. D) $4.00. E) $8.00. Answer: D Explanation: If the dividend of a stock is $20.00 and its dividend yield is $5.00, then the price of the stock is $4.00. When the dividend of a stock is divided by the price, the result is the dividend yield. Hence, price of a stock equals dividend of the stock divided by its dividend yield. Difficulty: 3 Hard Topic: Methods of Business Financing Learning Objective: 16-05 Discuss how corporations can use equity financing by issuing stock through an investment banker. Bloom's: Apply AACSB: Reflective Thinking Accessibility: Keyboard Navigation 101) The first-time sale of stocks and bonds directly to the public is called a A) primary sale. B) new issue. C) follow-on offering. D) preliminary bid. E) fresh deal. Answer: B Explanation: The first-time sale of stocks and bonds directly to the public is called a new issue. Companies that already have stocks or bonds outstanding may offer a new issue of stock to raise additional funds for specific projects. Difficulty: 1 Easy Topic: Methods of Business Financing Learning Objective: 16-05 Discuss how corporations can use equity financing by issuing stock through an investment banker. Bloom's: Remember AACSB: Analytical Thinking Accessibility: Keyboard Navigation 47 Copyright © 2019 McGraw-Hill 106) The two biggest stock markets in the United States are the A) American Stock Exchange and the New York Stock Exchange. B) Chicago Stock Exchange and the International Securities Exchange. C) New York Stock Exchange and the NASDAQ market. D) Southeast Regional Stock Exchange and the Chicago Board Options Exchange. E) American Stock Exchange and the NASDAQ market. Answer: C Explanation: The two biggest stock markets in the United States are the New York Stock Exchange and the NASDAQ market. Both of these stock markets became publicly traded companies and bought or merged with electronic exchanges. Difficulty: 1 Easy Topic: Securities and Stock Markets Learning Objective: 16-06 Describe the various securities markets in the United States. Bloom's: Remember AACSB: Analytical Thinking Accessibility: Keyboard Navigation 107) Which of the following is a similarity between the New York Stock Exchange (NYSE) and the NASDAQ market? A) Recently, both have become privately traded companies. B) Previously, they were for-profit companies, but now, they are not-for-profit organizations. C) Both exchanges bought or merged with electronic exchanges. D) Traditionally, both have been electronic markets. E) Traditionally, both have been floor-traded markets. Answer: C Explanation: Exchanges used to be divided into organized exchanges and over-the-counter markets, but during the past several years, dramatic changes have occurred in the markets. Both the NYSE and NASDAQ became publicly traded companies. They were previously not-for- profit organizations but are now for-profit companies. Additionally, both exchanges bought or merged with electronic exchanges. Difficulty: 1 Easy Topic: Securities and Stock Markets Learning Objective: 16-06 Describe the various securities markets in the United States. Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation 50 Copyright © 2019 McGraw-Hill 108) The over-the-counter securities market A) does not trade corporate bonds. B) accounts for the least total dollar value of all of the secondary markets. C) does not include illiquid bank stocks. D) does not have a central location. E) is similar to organized stock exchanges. Answer: D Explanation: Unlike the organized exchanges that have a central location, the over-the-counter market is a network of dealers all over the country linked by computers, telephones, and Teletype machines. Today, the OTC market consists of small stocks, illiquid bank stocks, penny stocks, and companies whose stocks trade on the "pink sheets." Because most corporate bonds and all U.S. securities are traded over the counter, the OTC market regularly accounts for the largest total dollar value of all of the secondary markets. Difficulty: 2 Medium Topic: Securities and Stock Markets Learning Objective: 16-06 Describe the various securities markets in the United States. Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation 109) Carl is a dealer who trades small stocks and illiquid bank stocks using his computer. He trades with other dealers all over the country without having to go to a physical location. Which type of market does this scenario best describe? A) stock markets B) primary markets C) over-the-counter markets D) foreign-exchange markets E) futures markets Answer: C Explanation: This scenario describes the over-the-counter (OTC) market. Unlike the organized exchanges that have a central location, the over-the-counter market is a network of dealers all over the country linked by computers, telephones, and Teletype machines. It also trades most corporate bonds and U.S. government securities. Today, the over-the-counter market consists of small stocks, illiquid bank stocks, penny stocks, and companies whose stocks trade on the "pink sheets." Difficulty: 3 Hard Topic: Securities and Stock Markets Learning Objective: 16-06 Describe the various securities markets in the United States. Bloom's: Apply AACSB: Knowledge Application Accessibility: Keyboard Navigation 51 Copyright © 2019 McGraw-Hill 110) Gloria is an investor who buys securities when everyone else is panicked and prices are low. As a result, she is considered a ________ investor. A) conservative B) contrarian C) short-term D) smart E) prime Answer: B Explanation: In this scenario, Gloria is considered a contrarian investor because she buys when everyone else is panicked and prices are low. Thus, she plays the long-term trends. However, for many, this is a psychologically tough way to play the market. Difficulty: 3 Hard Topic: Securities and Stock Markets Learning Objective: 16-06 Describe the various securities markets in the United States. Bloom's: Apply AACSB: Knowledge Application Accessibility: Keyboard Navigation 111) ________ stocks were responsible for the huge increase in stock prices in the period between 1982 and 2000. A) Manufacturing B) Automobile C) Banking D) Clothing E) Technology Answer: E Explanation: The Dow Jones Industrial Average climbed from 860 in August 1982 to a high of 11,497 in the beginning of 2000. Technology stocks and new Internet companies were responsible for the huge increase in stock prices. Difficulty: 1 Easy Topic: Securities and Stock Markets Learning Objective: 16-06 Describe the various securities markets in the United States. Bloom's: Remember AACSB: Analytical Thinking Accessibility: Keyboard Navigation 52 Copyright © 2019 McGraw-Hill