Chapter 18 – Financial Management
257. Farmers Savings and Loan agreed to extend Eckert’s Orchards $200,000 of unsecured
short-term funds, contingent upon the bank having the funds available. This arrangement
represents a:
A. line of credit.
B. pledge agreement.
C. factoring agreement.
D. trade voucher.
Feedback: A line of credit is an agreement that states that a bank will extend a specified
amount of unsecured short-term credit to a business, provided that the bank has the funds
available.
258. Many small businesses rely on factoring as a source of short-term financing because:
A. factoring provides a much cheaper source of funds than bank loans.
B. interest paid to a factor qualifies for a tax credit.
C. small firms often find it difficult to qualify for bank loans.
D. loans provided by factors do not require collateral.
Feedback: Factoring is the sale of accounts receivables at a discount for cash. Since factoring
involves a sale of an asset, the funds received are not a loan. Small businesses often find it
difficult to obtain loans from bankers. These same firms often can obtain the needed funds
from factors if their customers are judged to be creditworthy.
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284. The rate of return a company must earn to meet the demands of its lenders and
expectations of its equity holders is called:
A. opportunity rate.
B. retained earning.
C. cost of capital.
D. acquisition cost.
285. The interest paid on ________ represents a tax-deductible business expense.
A. bonds
B. stock
C. retained earnings
D. depreciated assets
Feedback: Lenders usually require borrowers to pay interest on loans. Firms must also pay
interest to their bondholders. Interest payments are deductible expenses on the firm’s income
statement.
286.
Chapter 18 – Financial Management
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Which of these is a common source of long-term financing for a corporation?
A. a revolving credit agreement
B. commercial paper
C. a bond issue
D. trade credit
Feedback: When firms issue bonds, they are seeking a very large, long-term loan. Investors
will lend their money to the company in exchange for one or more bonds. The company will
borrow these funds for an extended period of time, anywhere from 2 to several years, with the
understanding that the bondholder expects repayment, plus interest.
287. One of the primary factors that influences the interest rate a firm pays on long-term
loans is the:
A. Intensity of competition the firm faces with new products.
B. Current level of government regulations.
C. General level of market interest rates.
D. Exchange rate of the euro to the U.S. dollar.
Feedback: A business’ credit rating, the type of collateral offered, and the general level of
market interest rates are factored into the rate of interest a company will pay.
288.
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Venture capital firms look to invest their funds in firms that __________.
A. operate in established, mature industries
B. present financial statements indicating stronger than average cash flows
C. are new with great profit potential
D. require extra funding to avoid financial difficulties
Feedback: Venture capital is a source of funds for new and emerging companies with great
profit potential.
289. Which of these statements about corporate bonds is correct?
A. Bonds provide equity financing.
B. Issuing new bonds dilutes the existing ownership in the firm.
C. Interest paid to bondholders represents a tax-deductible business expense.
D. Debenture bonds require assets pledged as collateral.
Feedback: Corporate bonds are essentially long-term IOUs issued by corporations. The
interest paid on long-term debt is a tax-deductible expense.
290.
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Successful use of financial leverage requires a firm to:
A. negotiate with lenders to establish a line of credit.
B. establish and operate a venture capital organization to minimize the use of equity
financing.
C. register with the local government commission that administers market leverage.
D. earn a higher return on its investments than the interest rate it pays to acquire funds.
Feedback: The goal of leverage is to use borrowed funds to increase a firm’s rate of return.
This can be accomplished by investing borrowed funds at a higher rate of return than the cost
of acquiring those funds.
291. To maximize the benefits of using financial leverage, a firm should:
A. strive to minimize their cost of capital.
B. avoid securing funds through long-term debt financing.
C. limit their investments to projects with minimum risk levels.
D. incorporate in states with relatively low tax rates.
Feedback: Financial leverage involves raising needed funds through borrowing to increase a
firm’s rate of return. By reducing the cost of acquiring funds, the firm positions itself to earn a
rate of return greater than the interest costs associated with borrowing.
292.
Chapter 18 – Financial Management
As John considers approaching a venture capital firm to provide funding for his new
software firm, he should realize that a venture capital firm will:
A. offer no more than 20 percent of the funding he needs.
B. charge a higher interest rate than a commercial bank.
C. expect the company to provide a steady dividend income.
D. probably want an ownership interest in the business.
Feedback: Venture capitalists typically expect a share of ownership in the company.
293. By purchasing stock in Entertainment Today, Veronica has become a(n) ________ the
company.
A. creditor of
B. owner of
C. general partner of
D. venture capitalist in
Feedback: Selling stock in an organization is actually selling ownership in a firm.
294.