99. (p. 492) Successful businesses establish restrictive credit policies encouraging customers to pay cash.
100. (p. 492) Offering cash discounts to customers who pay their bills by a certain date represents an effective
technique to manage accounts receivable.
101. (p. 492) Effective financial managers carefully review customer credit histories to decrease inventory costs.
102. (p. 492-493) An effective strategy to manage cash flows requires retail businesses to eliminate their inventory.
103. (p. 493) As a financial manager for a large manufacturing firm, Gail evaluates the purchase of expensive
machinery and construction of new facilities. She is analyzing capital expenditure proposals.
104. (p. 492) Anna operates a florist shop specializing in weddings. While she knows that her competitors allow
customers to buy on credit, she is concerned about the risk and expense of unpaid customer accounts. One
strategy to reduce risk and collect sales revenue more quickly would be to accept bank-issued credit cards.
105. (p. 493) Debt financing provides funds to satisfy exclusively short-term financing needs.
106. (p. 493) Utilizing equity financing may result in new owners buying an interest in the firm.
107. (p. 493) White Palace operates a chain of restaurants specializing in hamburgers. The firm plans to expand to
new communities. The acquisition of land and construction of new restaurants represent capital expenditures.
108. (p. 494) Financial managers devote the majority of their time obtaining long-term financing to fund the firm’s
capital expenditures.
109. (p. 494) Small businesses rely heavily on long-term financing.
110. (p. 494) Much of a financial manager’s day-to-day activities is involved in managing the short-term financial
needs of the firm.
111. (p. 494) Most small businesses are unable to secure long-term financing.
112. (p. 494) Suppliers of short-term financing are prohibited from requiring collateral for the funds they lend to
small businesses.
113. (p. 494) The most widely used source of short-term funding is trade credit.
114. (p. 494) Trade credit represents one of the most expensive forms of short-term financing.
115. (p. 494) Trade credit is the practice of buying goods now and paying for them later.
116. (p. 495) The terms “2/10, net 30” indicate that the seller is offering a 10% discount for early payment.
117. (p. 494) Suppliers offer trade credit to their business customers by providing merchandise and requiring
payment at a later date.
118. (p. 495) Suppliers prefer to offer trade credit to customers with poor credit ratings or no credit history.
119. (p. 495) Businesses often require customers with poor credit ratings to sign a promissory note as a condition
for obtaining credit.
120. (p. 495) A promissory note is a written contract with a promise that one party will pay a specified amount to
another party.
121. (p. 495) Family and friends represent the most important source of credit for most small businesses.
122. (p. 495) Bankers are often reluctant to make loans to small businesses.
123. (p. 497) A revolving credit agreement is designed to reduce the risk of lending money.
124. (p. 497) Inventory financing represents the pledging of accounts receivables as collateral for a loan.
125. (p. 496) The most difficult kind of loan to obtain from a bank is a secured loan.
126. (p. 497) An unsecured loan does not require a borrower to provide collateral to secure a loan.
127. (p. 497) In an effort to reduce the risk of lending money, banks require that some borrowers pledge certain
types of assets as collateral.
128. (p. 497) A line of credit represents a guarantee from a bank to lend a firm a given amount of money.
129. (p. 497) A revolving credit agreement represents a line of credit that is guaranteed.
130. (p. 497) Commercial finance companies normally charge lower rates on short-term loans than those charged
by commercial banks.
131. (p. 497) Factoring refers to the process of selling accounts receivable for cash.
132. (p. 497) Factoring refers to the process of selling inventory to generate short-term funds.
133. (p. 498) Factoring represents the least expensive way for a firm to raise short-term funds.
134. (p. 498, Reaching Beyond Our Borders box) According to the “Reaching Beyond Our Borders” box in Chapter 18,
international factoring is called “forfeiting.”
135. (p. 498) According to the National Small Business Association, about half of all small businesses finance
their formation or first-level expansion with credit cards.
136. (p. 498) Commercial paper consists of unsecured short-term debt.
137. (p. 498) Only financially stable firms are able to sell commercial paper to raise short-term funds.
138. (p. 494) Bill is a financial manager for Like Eye Care, a chain of retail stores offering glasses and optical
health care. The majority of Bill’s day likely involves efforts to locate and secure long-term financing to fund
Like Eye Care’s capital expenditures.
139. (p. 495) Many sellers offer a 2% discount to a buyer that makes payment 20 days before the due date, (2/10,
net 30). Firms that fail to take advantage of this early payment discount are losing approximately 36%.
140. (p. 495) If a buyer is offered the terms of sale of “3/10, net 30” this means that the buyer can receive a 10
percent discount by making full payment within 3 days of the billing date.
141. (p. 496) Rod was required to pledge his house and car as collateral for a loan he received from the First
National Bank. The money from the loan was used to start his new business, which unfortunately failed within 6
months. The bank can now claim Rod’s house and car to satisfy their claims.
142. (p. 497) A line of credit from a bank guarantees a firm that a specified amount of financing will be available
whenever it is needed.
143. (p. 497) As the chief financial officer (CFO) for a medium-sized service company, Shelley is concerned about
the possibility of temporary cash shortages. Given the irregular cash flows from seasonal sales, she wants to
ensure that her company’s bank will provide adequate funds to cover any potential cash flow problem. The best
strategy to ease Shelley’s concern would be to arrange a revolving credit agreement with the bank.
144. (p. 497) The FeelsoGood Furniture Stores often rely on factoring to meet their short-term financing needs.
This means that FeelsoGood borrows money from a finance company and pledges its accounts receivable as
collateral.
145. (p. 498-499) Kereck owns commercial paper issued by Prude Insurance Corporation that matures in 180 days.
However, shortly after Kereck purchased the commercial paper, Prude Insurance went out of business. Kereck
is not worried because his loan to the corporation is secured by collateral that he can now claim.
146. (p. 500) Long-term financing is used to buy long-lived assets, such as buildings and equipment.
147. (p. 500) In large corporations, the board of directors is normally involved in decisions regarding long-term
financing.
148. (p. 500) The two primary sources of long-term business financing are government loans and debt capital.
149. (p. 500) Equity financing refers to the money a firm receives from the sale of bonds.
150. (p. 500) When using equity financing, firms incur a legal obligation to repay the amount of money invested.
151. (p. 500) A term-loan agreement requires the borrower to repay the loan in one lump sum at the end of the loan
period.
152. (p. 500) The interest paid for debt financing is a tax-deductible expense for the firm.
153. (p. 501) According to the risk/return tradeoff, the higher the risk, the lower the interest rate charged by the
lender.
154. (p. 501) A share of stock represents a company-issued IOU including a promise to repay on a certain date.
155. (p. 501) A bond represents a long-term debt obligation of a corporation or government.
156. (p. 501) An unsecured corporate bond is known as a debenture bond.
157. (p. 501) A debenture bond is backed only by the reputation of the issuer.
158. (p. 501) A debenture is a special type of stock that pays a higher dividend than common stock.
159. (p. 501) A bond is like a company-issued IOU with a promise to repay the amount borrowed plus interest on
certain date.
160. (p. 501) The terms of the agreement in a bond issue are referred to as the indenture terms.
161. (p. 502, figure 18.5) Foreign governments and corporations can issue bonds.
162. (p. 502) Equity financing represents funds provided by the owners of a firm.
163. (p. 502) Retained earnings represent a source of equity financing.
164. (p. 502) The first time a company offers to sell its stock to the general public is called an initial private label
(IPL).
165. (p. 502) Corporations must comply with the Securities and Exchange Commission (SEC) requirements in
order to sell their stock publicly.
166. (p. 503) Venture capital is money that is invested in new or emerging companies that are perceived as having
great profit potential.
167. (p. 504) Venture capitalists expect lower than average returns on their investment since they are exposed to
little risk.
168. (p. 502, figure 18.6) When debt financing is used the borrowing company must agree to management influence by
the lender.
169. (p. 502, figure 18.6) Acquiring funds through equity financing requires the firm to pay annual dividends.
170. (p. 504) Acquiring funds through debt financing actually decreases the overall risk of the firm.
171. (p. 504, figure 18.7) Acquiring funds through debt financing enhances the firm’s ability to increase profits.
172. (p. 504, figure 18.7) Leverage allows a firm to use borrowed funds to increase the firm’s rate of return.
173. (p. 504) The cost of capital is the rate of return a firm must earn in order to meet the demands of its lenders
and expectations of its equity holders.
174. (p. 500) Long-term loans are often more expensive than short-term loans.
175. (p. 501) Central Vermont Power sold $200 million of bonds to finance a major upgrade of one of its largest
power plants. The sale of these bonds indicates that Central Vermont utilizes equity capital to meet its long-term
financing needs.
176. (p. 501) Corporations that issue debenture bonds are required to provide collateral.
177. (p. 502) Corporations that issue stock to raise long-term funds accept the legal obligation to repay the amount
borrowed.
178. (p. 503) Determining the number of shares of stock to be issued each year is one of the responsibilities of a
financial manager.
179. (p. 502, figure 18.6) Unlike bonds, stocks offer the advantage of tax deductible interest payments
180. (p. 503) As a financial manager for a very profitable manufacturer of specialty steel, Kurt has been asked to
investigate sources of long-term funds to finance the construction of a new facility. Kurt would prefer a funding
source that does not require interest payments or involve major underwriting fees. One source that Kurt will
find attractive is retained earnings.
181. (p. 504) One important consideration for a firm accepting funds from a venture capitalist is the ownership
interest demanded by the venture capital firm.
182. (p. 504) Financial managers at Sasha Deal Electronics have always had a conservative attitude toward
long-term financing. In particular, they are interested in keeping risk to a minimum. This philosophy suggests
that managers at Sasha Deal consider the extensive use of leverage an attractive financial strategy.
183. (p. 504) An example of a firm using leverage to its advantage is a firm that borrows funds at 9% and invests
those funds to earn 14%.
184. (p. 504) If a firm earns 10% on funds they borrowed at 15% interest, the owners of the firm realize a benefit
from using leverage.
185. (p. 504) Effective managers strive to minimize their firm’s cost of capital.
186. (p. 484) ________ examine the data prepared by ________ and then make recommendations to top
management regarding strategies for improving the firm.
A. Accountants; financial managers
187. (p. 484) _____________ is the function in business that is responsible for acquiring funds for the firm, and
managing funds within the firm.
A. Accounting
188. (p. 484) Which of the following correctly identifies areas of responsibilities for a chief financial officer
D. finance and research and development
189. (p. 485) No matter the size, finance is a critical activity for:
D. accountants, but not for financial managers.
190. (p. 485) Undercapitalization refers to the problem of:
D. under-valued capital stock.
191. (p. 484) Which of the following statements is most accurate?
A. Accounting and finance are not related.
192. (p. 485) Which of the following is a primary area of concern for financial managers?
D. inadequate market control