1. In what situations would you seek short-term financing? In what situations would you seek long-term financing?
2. What is cash flow? Why is cash flow important to a business?
3. What is speculative production and how does it impact a firm’s financial planning?
4. Often high–risk decisions generate larger returns while conservative decisions generate lesser returns. From a
financial management standpoint does this make sense?
5. What is a budget? How is it used by a business firm?
6. Compare the traditional approach to budgeting with the zero-base budgeting approach.
7. Assume you are a small retailer selling women’s fashions. What actions can you take to build a credit relationship
with a manufacturer or wholesaler to ensure that you can use trade credit to purchase needed inventory for your
store?
8. State the purpose of a promissory note. Describe why a supplier would use a promissory note for short-term
financing instead of trade credit.
9. Your small business has been very successful and has amassed a large amount of accounts receivable from
reputable firms, but you find yourself short of ready cash to replace inventory. How could a factor help you?
10. Explain the primary differences between the primary market and the secondary market. Is an IPO most related to
the primary market or the secondary market? Explain.
11. What types of businesses obtain venture capital financing? How does venture capital differ from a private
placement?
12. What do experts consider the key to securing a long-term business loan? Explain.
13. Describe corporate bonds. What affects the interest rate paid by a corporation?
14. What is a trustee and why type of financing is a trustee associated with?
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.
15. Refer to Morgan‘s Transition. Morgan‘s business classes taught him that the financial manager should do which of
the following?
a. Determine the best way to raise money.
b. Ensure the business success of the company.
c. Ensure that projected uses are in keeping with the organization‘s goals.
d. Both A and B.
e. Both A and C.
16. Refer to Morgan’s Transition. Having taken the classes, Morgan should describe cash flow as which of the
following?
a. The movement of money from one account to another
b. Money that will be used for one year or less
c. The movement of money into and out of an organization
d. Money that will be used for longer than one year
e. Proceeds from any sales transactions only
17. Refer to Morgan’s Transition. When Morgan has to counsel clients on short-term versus long-term financing needs,
which of the following should he identify as a short–term financing need?
a. Speculative production
b. Business start-up costs
c. Acquisitions and mergers
d. Replacement of equipment
e. Expansion of facilities
18. Refer to Morgan’s Transition. When Morgan creates a financial plan, his first step should be which of the
following?
a. Identify available sources of financing.
b. Decide which goals to finance.
c. Describe which type of financing to use.
d. Establish a set of valid goals and objectives.
e. Determine how much money is needed to accomplish each goal.
19. Refer to Morgan’s Transition. During his job interview, Morgan was asked to talk about money received from the
owners or from the sale of shares of ownership in a business. Which of the following would best describe these
funds?
a. Debt capital
b. Equity capital
c. Proceeds from a merger or acquisition
d. Proceeds from the sale of assets
e. Sales revenue
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.
20. Refer to McGines, Inc. From his work experience, Derrick should have learned that
of thirty to sixty days.
a. factoring
b. a promissory note
c. commercial paper
d. trade credit
e. a secured loan
has a repayment period
21. Refer to McGines, Inc. If Derrick were to offer advice to a client about obtaining a loan, which of the following
would be the first step?
a. Get to know potential lenders before requesting debt financing.
b. Have the financial manager meet with the loan officer.
c. Fill out a loan application.
d. Show current business plan.
e. Have your CPA prepare financial statements.
22. Refer to McGines, Inc. If Derrick has learned and understood the business, he should know that today most
corporate bonds are
a. convertible bonds.
b. mortgage bonds.
c. sinking fund bonds.
d. nonconvertible bonds.
e. registered bonds.
23. 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?
a. Mortgage bond
b. Convertible bond
c. Debenture bond
d. Registered bond
e. Corporate bond
24. All of the activities concerned with obtaining money and using it effectively are called
a. financial management.
b. long-term financing.
c. budgeting.
d. financial planning.
e. unsecured financing.
25. Casey Broadway’s responsibility at his company is overseeing all the activities concerned with obtaining money and
using it effectively. Casey is a(n)
a. accountant.
b. financial manager.
c. financial planner.
d. investment advisor.
e. loan officer.
26. Money that will be used for one year or less is called
a. open credit.
b. equity capital.
c. short-term financing.
d. nonsecured financing.
e. long-term financing.
27. The movement of money into and out of an organization is called
a. equity financing.
b. a revolving credit agreement.
c. factoring.
d. cash flow.
e. budgeting.
28. In regards to cash flow, a firm should ideally have
a. enough money coming into the firm to cover the expenses in that period.
b. more cash flowing out than in since this represents growth.
c. to use short-term financing only two to three times a year.
d. a constant need for short-term financing.
e. most of its cash going to its customers.
29. MCB Company experienced a significant increase in sales as a result of its new promotional campaign. Yesterday,
however, it realized that because most of those sales were on credit, it did not have enough money in the bank to
pay this month‘s bills. MCB can take care of this situation temporarily by
a. obtaining long-term financing.
b. disallowing credit sales.
c. selling commercial drafts.
d. obtaining short-term financing.
e. issuing stock.
30. Each of the following causes a cash flow problem except
a. a large proportion of credit sales.
b. embezzlement of company funds.
c. unexpected slow selling seasons.
d. slow-paying customers.
e. customers who pay early.
31. Inventory requires considerable investment for most manufacturers, wholesalers, and retailers. This problem is
complicated by the fact that most goods are manufactured four to nine months before they are actually sold to
consumers. Manufacturers that engage in this type of speculative production often need short-term financing to do
all of the following except
a. buy materials.
b. pay wages.
c. pay rent.
d. buy equipment.
e. buy supplies.
32. For a department store such as Macy’s, the most likely need for short-term financing will be for
a. inventory.
b. employee wages.
c. extending credit policies.
d. new locations.
e. additional cash registers.
33. Tidewater Distributors is successfully using short-term financing to buy inventory for resale. As sales climb, the
managers realize that they must decide what to do with the money. Since you are the financial manager, they ask
for your advice. You advise them to first
a. repay the short-term obligations out of the sales revenue.
b. use the money to buy a yacht for the managers.
c. increase all employees’ wages.
d. enroll all the salespeople in a sales training course.
e. borrow more money.
34. Borrowed money that will be used for more than one year is called
a. trade credit.
b. long-term financing.
c. equity capital.
d. secured financing.
e. short-term financing.
35. All of the following are uses of long-term financing except
a. beginning a new business.
b. eliminating immediate cash-flow problems.
c. executing mergers and expansions.
d. developing and marketing new products.
e. replacing obsolete equipment.
36. Slater Co. has very old computers and manufacturing equipment and knows it needs to upgrade them or risk losing
much of its business. Slater does not have the money to purchase the computers, so it will most likely need
a. a short-term loan.
b. to keep using the old computers.
c. to deduct the cost from employees’ salaries.
d. long-term financing.
e. to use increased cash flow from sales.
37. Long-term financing should be used to do which of the following?
a. Pay for speculative production
b. Purchase inventory for resale
c. Pay salaries
d. Pay utilities
e. Develop new products
38. During the recent economic crisis, many companies found that it was
a. accessible and easy to acquire and use many of the traditional sources of short- and long-term financing that
they were accustomed to.
b. easy to shift their methods of financing from one traditional method to another.
c. an opportune time to acquire long-term loans and build their current inventory.
d. increasingly difficult to acquire and use many of the traditional sources of financing that they were
accustomed to.
e. increasingly easy to sell stock for the first time to the general public.
39. Of the following, only would not be considered proper financial management during both good and bad times.
a. investing excess cash in CDs, government securities, or conservative securities
b. making sure that funds are available to meet tax deadlines
c. paying bills promptly
d. investing all excess cash in long-term securities
e. planning for sufficient financing when needed
40. Which of the following is not a financial reform regulation proposed by the U.S. House of Representatives and
Senate as a reaction to the economic crisis?
a. End taxpayer bailouts.
b. Tighten access to long-term financing by large corporations.
c. Tighten regulations for major financial firms.
d. Increase government oversight.
e. Make Wall Street firms accountable for their actions.