Chapter 20 1 All of the following are responsibilities of the financial manager

Business, Eighth Canadian Edition Griffin, Ebert, Starke, Dracopoulos, Lang

Chapter 20—Financial Decisions and Risk Management

Chapter 20: Financial Decisions and Risk Management

1. Which term is used to identify the business activity that is concerned with determining a firm’s long–

term investments, obtaining the funds to pay for those investments, and conducting the firm’s everyday

financial activities?

a. Bookkeeping

b. Corporate finance

c. Investment brokers

d. Chartered banks

e. Money markets

Difficulty: 2 Page-Reference: 632

Question ID: 20-1-01 Skill: Knowledge

Objective: 20.1

2. Which of the following is not a responsibility of financial managers?

a. Determining a firm’s long-term investments

b. Managing risks

c. Obtaining loans

d. Identifying markets for the company’s products in order to ensure good cash flow

e. Conducting the firm’s everyday financial activities

Difficulty: 2 Page-Reference: 632

Question ID: 20-1-02 Skill: Comprehension

Objective: 20.1

3. Which of the following represents the overall objective of financial managers?

a. To ensure that the company has enough funds on hand to purchase materials needed to produce

goods and services

b. To ensure that the company has enough money to pay for its debts

c. To increase the supply of money for the economy

d. To increase the value of the firm and thus to increase shareholder wealth

e. To manage the firm’s cash flow

Difficulty: 2 Page-Reference: 632

Question ID: 20-1-03 Skill: Knowledge

Objective: 20.1

4. ________ are at the heart of financial control.

a. Accounting managers

b. Budgets

c. Approval sign-offs

d. Financial managers

e. Authorized spending levels

Difficulty: 2 Page-Reference: 633

Question ID: 20-1-04 Skill: Knowledge

Objective: 20.1

Business, Eighth Canadian Edition Griffin, Ebert, Starke, Dracopoulos, Lang

Chapter 20—Financial Decisions and Risk Management

5. All of the following are responsibilities of the financial manager except

a. determining a firm’s long-term investments.

b. obtaining funds to pay for those investments.

c. developing the firm’s financial statements.

d. conducting the firm’s everyday financial activities.

e. managing the risks that the firm takes.

Difficulty: 1 Page-Reference: 632-633

Question ID: 20-1-05 Skill: Comprehension

Objective: 20.1

6. Tony is responsible for planning and controlling the acquisition and dispersal of the company’s

financial assets. What is Tony’s job title?

a. Management information systems manager

b. Financial manager

c. Purchasing manager

d. Accounting manager

e. Chief risk manager

Difficulty: 1 Page-Reference: 632

Question ID: 20-1-06 Skill: Comprehension

Objective: 20.1

7. In 2012, Canadian Pacific Railway Ltd. announced that it would make investments totaling $1.2

billion in order to improve its operating ratio, which in 2011 was the worst among North America’s Big Six

railways. This activity is CPR’s

a. cash flow management plan.

b. financial plan.

c. leveraging.

d. budget.

e. financial control.

Difficulty: 1 Page-Reference: 633

Question ID: 20-1-07 Skill: Comprehension

Objective: 20.1

8. David is in the process of checking actual performance against plans to ensure that the desired

financial outcome occurs. David is involved in

a. cash flow management.

b. financial control.

c. financial planning.

d. determining the firm’s long-term investments.

e. obtaining funds to pay for investments.

Difficulty: 1 Page-Reference: 633

Question ID: 20-1-08 Skill: Comprehension

Objective: 20.1

Business, Eighth Canadian Edition Griffin, Ebert, Starke, Dracopoulos, Lang

Chapter 20—Financial Decisions and Risk Management

9. When constructing a financial plan, which one of the following questions does a financial manager

not ask?

a. What funds are needed to meet immediate plans?

b. When will the company need more funds?

c. Where can the company get the funds to meet its short-term needs?

d. Where can the company get the funds to meet its long-term needs?

e. How well will the stock market do next year?

Difficulty: 2 Page-Reference: 633

Question ID: 20-1-09 Skill: Comprehension

Objective: 20.1

10. Henry has received notice from a supplier that all invoices must be paid within 30 days rather than

60 days as previously given. Which of the following will be impacted by this change?

a. Inventories

b. Raw materials inventory

c. Accounts receivable

d. Capital expenditures

e. Cash flow

Difficulty: 2 Page-Reference: 634

Question ID: 20-1-10 Skill: Comprehension

Objective: 20.2

11. For most companies, the largest single category of a firm’s short-term debt is

a. buildings.

b. inventories.

c. accounts receivable.

d. accounts payable.

e. equipment.

Difficulty: 1 Page-Reference: 634

Question ID: 20-1-11 Skill: Knowledge

Objective: 20.2

12. Which of the following demonstrates good management of short-term debt?

a. Delaying bill payments as long as possible

b. Selling stock instead of bonds

c. Paying bills when they are received

d. Prepaying taxes

e. Renting or leasing instead of buying

Difficulty: 2 Page-Reference: 634

Question ID: 20-1-12 Skill: Application

Objective: 20.2

Business, Eighth Canadian Edition Griffin, Ebert, Starke, Dracopoulos, Lang

Chapter 20—Financial Decisions and Risk Management

13. When managers at Kraft Foods anticipate how much cheddar cheese Safeway supermarkets will

buy each month and when they will pay for those purchases, Kraft is managing its

a. accounts payable.

b. accounts receivable.

c. credit policies.

d. capital expenditures.

e. inventories.

Difficulty: 1 Page-Reference: 634

Question ID: 20-1-13 Skill: Comprehension

Objective: 20.2

14. David is looking at a bill for supplies his company bought. It is dated May 1st and the terms are

2/10; net 30. In order to pay the least amount, when should he pay the bill?

a. Any day in May

b. May 10

c. May 21

d. May 31

e. May 15

Difficulty: 2 Page-Reference: 634

Question ID: 20-1-14 Skill: Application

Objective: 20.2

15. Which of the following terms would a firm use to speed up cash flow?

a. 1/10; net 60

b. 1/10; net 30

c. 3/10; net 30

d. 2/10; net 60

e. 2/10; net 30

Difficulty: 2 Page-Reference: 634

Question ID: 20-1-15 Skill: Comprehension

Objective: 20.2

16. A credit policy of “2/10, net 30″ means

a. That if a customer pays its bill within 10 days, it will receive a 30 percent discount.

b. That if a customer pays its bill within 30 days, it will receive a 10 percent discount.

c. That if a customer pays its bill within 2 days, it will receive a 10 percent discount.

d. That if a customer pays its bill within 10 days, it will receive a 2 percent discount.

e. None of these.

Difficulty: 2 Page-Reference: 634

Question ID: 20-1-16 Skill: Comprehension

Objective: 20.2

Business, Eighth Canadian Edition Griffin, Ebert, Starke, Dracopoulos, Lang

Chapter 20—Financial Decisions and Risk Management

17. What does a credit policy of “2/10, net 30” mean?

a. That the selling company offers a 10 percent discount if the customer pays within 2 days. The

customer has 30 days to pay the regular price.

b. That if the buyer pays the net bill within 10 days, a 2 percent discount will be given.

c. That the selling company offers a offers a 2 percent discount if the customer pays within 10 days.

The customer has 30 days to pay the regular price.

d. That the buyer has two months to pay the bill. If the buyer pays before that time, a 10 percent

discount will be given.

e. None of these is correct.

Difficulty: 2 Page-Reference: 634

Question ID: 20-1-17 Skill: Comprehension

Objective: 20.2

18. Sally is looking at an invoice dated July 1st for $1000 that has terms of 2/10; net 30. If she pays

the bill on July 3rd how much should she write the cheque for?

a. $900

b. $980

c. $998

d. $1000

e. $700

Difficulty: 3 Page-Reference: 634

Question ID: 20-1-18 Skill: Application

Objective: 20.2

19. Why is it necessary for a business firm to establish a credit policy?

a. A credit policy is necessary to determine how much money the business can borrow to purchase

supplies.

b. A credit policy is necessary to determine how dividends will be distributed to the shareholders.

c. A credit policy is necessary to determine which suppliers the firm needs to pay.

d. A credit policy is a means of accounting for the dollar value of inventory–in-process.

e. A credit policy provides financial managers with expected dates of payment from buyers of the

firm’s products and services.

Difficulty: 3 Page-Reference: 634

Question ID: 20-1-19 Skill: Comprehension

Objective: 20.2

20. Why is it in the firm’s interest to withhold payment as long as it can?

a. Withholding payment increases the value of the accounts payable that may be subsequently

factored.

b. The longer the firm withholds payment, the longer it will have cash available for investments or

other uses.

c. The longer it withholds interest, the higher the amount that can be factored from accounts

receivable.

d. The longer it withholds payments the more it can raise the selling price of its own goods.

e. The longer it withholds funds, the lower the interest rate will be.

Difficulty: 2 Page-Reference: 634

Question ID: 20-1-20 Skill: Comprehension

Business, Eighth Canadian Edition Griffin, Ebert, Starke, Dracopoulos, Lang

Chapter 20—Financial Decisions and Risk Management

Objective: 20.2

21. With respect to inventory, which of the following is correct?

a. Inventory is not an asset.

b. All inventory is an asset except work–in-process inventory.

c. Factoring inventory is generally a bad idea.

d. Finished goods inventory is twice the value of work–in-process inventory.

e. Rolls of denim at a Levi’s factory is raw materials inventory.

Difficulty: 2 Page-Reference: 634

Question ID: 20-1-21 Skill: Comprehension

Objective: 20.2

22. Which of the following is not an accurate statement about long-term expenditures?

a. Long-term expenditures represent an ongoing tie-up of the firm’s funds.

b. Normally, long-term fixed assets are not sold or converted into cash.

c. Long-term expenditures usually require less planning than operating expenditures.

d. Acquisition of fixed assets requires a very large investment of company funds.

e. Long-term expenditures are usually more carefully planned than short-term outlays.

Difficulty: 1 Page-Reference: 635

Question ID: 20-1-22 Skill: Comprehension

Objective: 20.2

23. Scott is managing a company and he has been advised by his financial manager that his largest

source of short-term debt is too high. What source of funding is Scott’s financial manager probably talking

about?

a. Inventory loans

b. Bank notes

c. Credit cards

d. Commercial paper

e. Accounts payable

Difficulty: 1 Page-Reference: 634

Question ID: 20-1-23 Skill: Comprehension

Objective: 20.2

24. Scott has been informed by his financial manager that his accounts receivable are being paid

much too late. To fix this problem, Scott should

a. develop a credit policy.

b. call the companies and request the funds.

c. charge higher interest rates.

d. demand that the money be paid.

e. sell the late accounts to collection agents.

Difficulty: 2 Page-Reference: 634

Question ID: 20-1-24 Skill: Application

Objective: 20.2

Business, Eighth Canadian Edition Griffin, Ebert, Starke, Dracopoulos, Lang

Chapter 20—Financial Decisions and Risk Management

25. Mountain Steel brings in graphite, carbon, iron ore, nickel, and sulphur to produce steel. These

supplies are

a. production inventory.

b. merchandise inventory.

c. raw materials inventory.

d. work-in-process inventory.

e. finished goods inventory.

Difficulty: 2 Page-Reference: 634

Question ID: 20-1-25 Skill: Comprehension

Objective: 20.2

26. For Levi Strauss‘ jean-making operation, rolls of denim are considered __________, while cut–

but–not-yet-sewn jeans are considered ___________ .

a. work-in-process inventory; raw materials inventory

b. short-term capital; long-term capital

c. capital stock; supplies

d. raw materials inventory; work–in-process inventory

e. short-term credit; long-term credit

Difficulty: 2 Page-Reference: 634

Question ID: 20-1-26 Skill: Comprehension

Objective: 20.2

27. The Gap has t-shirts boxed and ready to ship to retailers. These goods make up part of the

________ inventory.

a. accounts receivable

b. sales

c. sales-in-process

d. credit

e. finished goods

Difficulty: 2 Page-Reference: 635

Question ID: 20-1-27 Skill: Comprehension

Objective: 20.2

28. ATC Machine Shops sends its ________ inventory to Warm Inc. to have its manufactured tools

heat-treated.

a. raw materials

b. work-in-process

c. capital goods

d. finished goods

e. supplies

Difficulty: 2 Page-Reference: 634

Question ID: 20-1-28 Skill: Comprehension

Objective: 20.2

Business, Eighth Canadian Edition Griffin, Ebert, Starke, Dracopoulos, Lang

Chapter 20—Financial Decisions and Risk Management

29. Capital expenditures differ from operating expenditures in that

a. they are much smaller.

b. they are shorter commitments.

c. they are part of working capital.

d. they are not budgeted.

e. they are not normally sold or converted into cash.

Difficulty: 2 Page-Reference: 635

Question ID: 20-1-29 Skill: Knowledge

Objective: 20.2

30. Working capital is calculated as follows:

a. work-in-process inventory plus accounts receivable minus accounts payable.

b. long-term assets plus short-term assets.

c. inventory plus accounts receivable minus accounts payable.

d. goodwill plus current assets.

e. finished goods inventory plus cash.

Difficulty: 2 Page-Reference: 635

Question ID: 20-1-30 Skill: Knowledge

Objective: 20.2

31. Large companies typically devote ____ cents of every sales dollar to working capital.

a. 5

b. 15

c. 20

d. 30

e. 45

Difficulty: 2 Page-Reference: 635

Question ID: 20-1-31 Skill: Knowledge

Objective: 20.2

32. A “gentlemen’s agreement” to pay for products purchased is known as

a. commercial paper.

b. open–book credit.

c. a promissory note.

d. a trade draft.

e. trade credit.

Difficulty: 1 Page-Reference: 635

Question ID: 20-1-32 Skill: Knowledge

Objective: 20.3

33. Which term is used to identify the granting of credit by one firm to another?

a. A line of credit

b. A commitment fee

c. Trade credit

d. A secured loan

e. An inter-firm understanding of commercial intent

Difficulty: 1 Page-Reference: 635

Business, Eighth Canadian Edition Griffin, Ebert, Starke, Dracopoulos, Lang

Chapter 20—Financial Decisions and Risk Management

Question ID: 20-1-33 Skill: Knowledge

Objective: 20.3

34. The most common form of trade credit is

a. the trade acceptance.

b. the trade draft.

c. the promissory note.

d. open–book credit.

e. none of these.

Difficulty: 1 Page-Reference: 635

Question ID: 20-1-34 Skill: Knowledge

Objective: 20.3

35. Sources of short-term funds include all of the following except

a. factoring accounts receivable.

b. secured loans.

c. bonds.

d. unsecured loans.

e. trade credit.

Difficulty: 1 Page-Reference: 635-636

Question ID: 20-1-35 Skill: Comprehension

Objective: 20.3

36. Jeremy has recently received merchandise along with invoices stating credit terms. Jeremy has

most likely been given a(n)

a. trade acceptance.

b. line of credit.

c. revolving credit agreement.

d. promissory note.

e. open–book credit.

Difficulty: 2 Page-Reference: 635

Question ID: 20-1-36 Skill: Comprehension

Objective: 20.3

37. Mega Computers has just shipped one of its products to Compucell on faith that they will pay the

invoice. This is a(n)

a. trade acceptance.

b. revolving credit agreement.

c. line of credit.

d. open–book credit.

e. promissory note.

Difficulty: 1 Page-Reference: 635

Question ID: 20-1-37 Skill: Comprehension

Objective: 20.3

Business, Eighth Canadian Edition Griffin, Ebert, Starke, Dracopoulos, Lang

Chapter 20—Financial Decisions and Risk Management

38. What is a promissory note?

a. A “gentleman’s agreement” to pay for products that were shipped on faith that the payment would

be forthcoming.

b. A short-term loan which uses accounts receivable as collateral for a loan.

c. An agreement signed by the buyer stating when and how much money will be paid to the seller in

return for immediate credit.

d. The requirement for a firm to maintain a certain amount of funds on deposit with the lending bank.

e. The right given to a bank to seize certain assets if payment is not made when due.

Difficulty: 2 Page-Reference: 635

Question ID: 20-1-38 Skill: Knowledge

Objective: 20.3

39. Before shipping a computer, Mega Computers insists that the buyer sign a document that states

when and how much money will be paid. This is a(n)

a. line of credit.

b. revolving credit agreement.

c. open-book credit.

d. trade acceptance.

e. promissory note.

Difficulty: 1 Page-Reference: 635

Question ID: 20-1-39 Skill: Comprehension

Objective: 20.3

40. What is a trade draft?

a. A type of secured loan with trade products serving as collateral.

b. A means of pledging accounts receivable.

c. An agreement to meet certain terms, which are attached to the shipment, and which must be

signed before the goods are delivered to the buyer.

d. A legal agreement promising to pay for the goods, which is signed by the buyer before the seller

will ship the goods.

e. A standing agreement between a bank and a firm.

Difficulty: 2 Page-Reference: 635

Question ID: 20-1-40 Skill: Knowledge

Objective: 20.3

41. A form of trade credit that is particularly useful for international transactions is a(n)

a. trade acceptance.

b. line of credit.

c. revolving credit agreement.

d. open–book credit.

e. promissory notes.

Difficulty: 1 Page-Reference: 635

Question ID: 20-1-41 Skill: Knowledge

Objective: 20.3

Business, Eighth Canadian Edition Griffin, Ebert, Starke, Dracopoulos, Lang

Chapter 20—Financial Decisions and Risk Management

42. Along with a computer, Mega Computers has sent a document that states the promised payment

date and amount. The buyer must sign it before taking the computer. This is a(n)

a. open-book credit.

b. trade draft.

c. revolving credit agreement.

d. promissory note.

e. line of credit.

Difficulty: 1 Page-Reference: 635

Question ID: 20-1-42 Skill: Comprehension

Objective: 20.3

43. Which of the following would a bank most likely offer?

a. Commercial paper

b. Trade credit

c. Trade drafts

d. Short-term bonds

e. Secured loans

Difficulty: 1 Page-Reference: 636

Question ID: 20-1-43 Skill: Knowledge

Objective: 20.3

44. Secured, short-term loans are usually secured by

a. deposits with the bank.

b. fixed assets.

c. inventories.

d. commercial paper.

e. trade credit.

Difficulty: 1 Page-Reference: 636

Question ID: 20-1-44 Skill: Knowledge

Objective: 20.3

45. For a specific firm, which of the following is most likely to carry the lowest interest rate?

a. Loan secured by fixed assets

b. Commercial paper

c. Loan secured by finished goods

d. Unsecured loan

e. Loan secured by raw materials

Difficulty: 3 Page-Reference: 636

Question ID: 20-1-45 Skill: Comprehension

Objective: 20.3

Business, Eighth Canadian Edition Griffin, Ebert, Starke, Dracopoulos, Lang

Chapter 20—Financial Decisions and Risk Management

46. Which of the following is usually associated with unsecured short-term loans?

a. Trade drafts

b. Compensating balances

c. Collateral

d. Trade acceptances

e. Factoring

Difficulty: 1 Page-Reference: 636

Question ID: 20-1-46 Skill: Knowledge

Objective: 20.3

47. How may a firm obtain an unsecured short-term bank loan?

a. Obtain open-book credit

b. Provide a fixed asset as a guarantee of payment

c. Pledge accounts receivable

d. Obtain a line of credit agreement

e. Obtain an inventory loan

Difficulty: 2 Page-Reference: 637

Question ID: 20-1-47 Skill: Knowledge

Objective: 20.3

48. When is a commitment fee required of the borrower by a lending institution?

a. When using a revolving credit agreement in which the bank holds an open line of credit for a

borrower

b. When issuing commercial paper

c. A commitment fee is never required because it is illegal for lending institutions to charge a

commitment fee

d. When using collateral to secure a bank loan

e. When using trade credit

Difficulty: 2 Page-Reference: 637

Question ID: 20-1-48 Skill: Comprehension

Objective: 20.3

49. Which of the following guarantees that funds will be available?

a. Trade credit

b. Pledging assets

c. Trade draft

d. Line of credit

e. Revolving credit agreement

Difficulty: 1 Page-Reference: 637

Question ID: 20-1-49 Skill: Knowledge

Objective: 20.3

Business, Eighth Canadian Edition Griffin, Ebert, Starke, Dracopoulos, Lang

Chapter 20—Financial Decisions and Risk Management

50. Which of the following is backed solely by the firm’s promise to pay?

a. Trade credit

b. Factoring accounts receivable

c. Promissory note

d. Commercial paper

e. Pledging accounts receivable

Difficulty: 1 Page-Reference: 637

Question ID: 20-1-50 Skill: Knowledge

Objective: 20.3

51. What is the difference between factoring accounts receivable and pledging accounts receivable

as collateral for a short-term loan?

a. Factoring is the collateral used when issuing commercial paper.

b. Factoring involves selling the accounts receivable instead of using them to obtain a loan.

c. Factoring accounts receivable is accomplished through a finance company whereas using pledging

accounts receivable as collateral is arranged with a bank.

d. Factoring involves agreeing to repurchase accounts receivable at a future date instead of using

them as collateral to obtain a loan.

e. There is no difference between factory accounts receivable and pledging accounts receivable.

Difficulty: 3 Page-Reference: 636

Question ID: 20-1-51 Skill: Comprehension

Objective: 20.3

52. John bought $40 000 worth of receivables for 60 percent of that sum ($24 000). He will profit if the

money he eventually collects exceeds the amount he paid for the receivables. John is involved in

a. pledging accounts receivable.

b. leveraging goods-in-process inventory.

c. collateralizing inventory.

d. factoring accounts receivable.

e. hedging.

Difficulty: 3 Page-Reference: 636

Question ID: 20-1-52 Skill: Comprehension

Objective: 20.3

53. Which of the following is a short-term source of funds for an organization?

a. Issuing corporate bonds

b. Factoring accounts receivable

c. Issuing common stock

d. Issuing preferred stock

e. Obtaining financial help from a venture capitalist

Difficulty: 1 Page-Reference: 636

Question ID: 20-1-53 Skill: Knowledge

Objective: 20.3

Business, Eighth Canadian Edition Griffin, Ebert, Starke, Dracopoulos, Lang

Chapter 20—Financial Decisions and Risk Management

54. Sallyanne is selling merchandise to a retailer using the terms of a trade draft. As a new employee

of Sallyanne’s, you discover that a trade draft is

a. a means of pledging accounts receivable.

b. an agreement to meet certain terms, which is attached to the shipment and which must be signed

before the goods are delivered to the buyer.

c. a legal agreement promising to pay for the goods, which is signed by the buyer before the seller will

ship the goods.

d. a type of secured loan with trade products serving as collateral.

e. the seller ships products on faith that payment will be forthcoming.

Difficulty: 2 Page-Reference: 635

Question ID: 20-1-54 Skill: Comprehension

Objective: 20.3

55. Sallyanne is selling merchandise to Jack’s Machine Shop. Sallyanne felt secure in receiving

payment because she had Jack sign a promissory note, which is

a. an agreement signed by the buyer stating when and how much money will be paid to the seller in

return for immediate credit.

b. the requirement for a firm to maintain a certain amount of funds on deposit with the lending bank.

c. a “gentleman’s agreement” to pay for products which were shipped on faith that the payment would

be forthcoming.

d. the right given to a bank to seize certain assets if payment is not made when due.

e. basically the same thing as a trade acceptance.

Difficulty: 1 Page-Reference: 635

Question ID: 20-1-55 Skill: Comprehension

Objective: 20.3

56. Why is it necessary for a business firm to put up collateral when it takes out a bank loan?

a. So that the bank can keep a portion as advance payment on the loan

b. To show the bank that the business is big enough to require the loan

c. So that banks can seize the assets if loan payments are not made as promised

d. So the financial managers know dates of payment

e. So that the accounting people can generate accurate financial statements

Difficulty: 3 Page-Reference: 636

Question ID: 20-1-56 Skill: Comprehension

Objective: 20.3

57. Jack is setting up a global operation. The form of trade credit that is particularly useful for Jack’s

international transactions would be

a. revolving credit agreement.

b. promissory notes.

c. trade acceptance.

d. line of credit.

e. open–book credit.

Difficulty: 1 Page-Reference: 635

Question ID: 20-1-57 Skill: Comprehension

Objective: 20.3

Business, Eighth Canadian Edition Griffin, Ebert, Starke, Dracopoulos, Lang

Chapter 20—Financial Decisions and Risk Management

58. Collateral is

a. any asset that a lender has the right to seize if a borrower does not repay a secured loan.

b. when you use your forecasted sales to secure a loan.

c. the use of someone’s signature in order to secure a loan.

d. when you use liquidated assets to pay off a loan.

e. any of these can be collateral.

Difficulty: 2 Page-Reference: 636

Question ID: 20-1-58 Skill: Knowledge

Objective: 20.3

59. Jack is borrowing money which requires him to put up collateral. What type of credit is he using?

a. Line of credit

b. Unsecured loans

c. Trade credit

d. Commercial paper

e. Secured loans

Difficulty: 2 Page-Reference: 636

Question ID: 20-1-59 Skill: Comprehension

Objective: 20.3

60. The process of using accounts receivable as collateral is called ___________; the specific means

by which the money is raised is called ___________.

a. commercial paper; factoring

b. factoring; commercial paper

c. pledging accounts receivable; factoring

d. equity financing; debt financing

e. short-term credit; long-term credit

Difficulty: 2 Page-Reference: 636

Question ID: 20-1-60 Skill: Knowledge

Objective: 20.3

61. You are managing a company that needs a quick injection of cash. Two ways of raising secured

funds quickly are

a. bank loans and lines of credit.

b. inventory loans and factoring accounts receivable.

c. inventory loans and accessing accounts receivable.

d. accounts receivable and trade credit.

e. lines of credit and commercial paper.

Difficulty: 1 Page-Reference: 636

Question ID: 20-1-61 Skill: Comprehension

Objective: 20.3

Business, Eighth Canadian Edition Griffin, Ebert, Starke, Dracopoulos, Lang

Chapter 20—Financial Decisions and Risk Management

62. Clarence is a factor who has just bought $40 000 worth of finished goods for $24 000. The profit

that he will make on this transaction depends on

a. the quality of the receivables, the cost of collecting them, and interest rates.

b. the cash he has available, and the trade credit he is able to get.

c. the availability of government loans, the quality of the receivables, and the interest rate.

d. the interest rate, the cost of collecting the receivables, and the maturity date of bonds of his

company.

e. the general state of the economy, the number of firms who might be interested in the receivables,

and the amount of money those firms have available.

Difficulty: 2 Page-Reference: 636

Question ID: 20-1-62 Skill: Comprehension

Objective: 20.3

63. What is the difference between a line of credit and a revolving credit agreement?

a. A line of credit is normally used by charitable and public-sector organizations, while a revolving

credit agreement is usually used by private-sector business firms.

b. More money can be borrowed with a line of credit than with a revolving credit agreement.

c. There is no guarantee that the money will be available when it is requested in a line of credit, but

there is an agreement that it will be available when requested in a revolving credit agreement.

d. A line of credit is only obtainable from a credit union, while a revolving credit agreement is only

obtainable from a bank.

e. All of these.

Difficulty: 3 Page-Reference: 637

Question ID: 20-1-63 Skill: Comprehension

Objective: 20.3

64. Manicure Ltd. is a large lawn care company with hundreds of clients. The company needs some

short-term financing to meet a cash flow gap while it makes immediate capital expenditures. If the

following facts are known, which one would suggest that the company use a credit card for this purpose?

a. The company owners’ family members have considerable liquid assets.

b. The company doesn’t know when it will be able to repay the money.

c. The company thinks it can repay the money next month.

d. The company needs to obtain a line of credit without interest.

e. The company is able to provide collateral for a secured loan.

Difficulty: 3 Page-Reference: 636

Question ID: 20-1-64 Skill: Analysis

Objective: 20.3

Business, Eighth Canadian Edition Griffin, Ebert, Starke, Dracopoulos, Lang

Chapter 20—Financial Decisions and Risk Management

65. Fresh Foods needs some quick cash to pay some overdue bills. If the following facts were known,

which one would support the idea of factoring to obtain the cash?

a. Factoring can be a costly way to obtain cash.

b. The company would not have to liquidate any of its core assets if it chooses factoring.

c. The company’s customers might be unhappy if they hear that their account has been turned over to

a factor.

d. The company would incur additional accounting expenses because they would have to keep track

of the factored customer accounts.

e. Factoring companies usually aren’t interested in receivables more than 90 days old.

Difficulty: 3 Page-Reference: 636

Question ID: 20-1-65 Skill: Analysis

Objective: 20.3

66. Monolith Corp.’s credit rating is so high that it is able to issue ________, which is backed solely by

the firm’s promise to pay.

a. accounts receivable

b. commercial paper

c. promissory notes

d. trade credit

e. debentures

Difficulty: 2 Page-Reference: 637

Question ID: 20-1-66 Skill: Knowledge

Objective: 20.3

67. Why does a business firm require long-term sources of funds?

a. To finance long-term expenditures for fixed assets

b. A long-term source of funds replaces the need for insurance

c. To obtain funds for purchasing inventories

d. To eliminate the need for frequently seeking short-term financing

e. To finance annual bonus payments for employees

Difficulty: 2 Page-Reference: 638

Question ID: 20-1-67 Skill: Comprehension

Objective: 20.4

68. The two primary sources of long-term debt funds are

a. lines of credit and revolving credit agreements.

b. common stock and preferred stock.

c. trade credit and commercial paper.

d. commercial paper and bank loans.

e. long-term loans and the sale of bonds.

Difficulty: 2 Page-Reference: 638

Question ID: 20-1-68 Skill: Knowledge

Objective: 20.4

Business, Eighth Canadian Edition Griffin, Ebert, Starke, Dracopoulos, Lang

Chapter 20—Financial Decisions and Risk Management

69. Which of the following is a restriction that may be placed on a borrowing firm for a long-term loan?

a. The borrower must pledge a certain amount of inventory.

b. The borrower must pledge future sales.

c. The borrower must factor accounts receivable.

d. The borrower must pledge long-term assets as collateral.

e. The borrower must pledge accounts receivable.

Difficulty: 2 Page-Reference: 638

Question ID: 20-1-69 Skill: Comprehension

Objective: 20.4

70. What is the major source of long-term debt financing for most corporations?

a. Corporate bonds

b. Long-term loans

c. Trade credit

d. Equity financing

e. Retained earnings

Difficulty: 1 Page-Reference: 638

Question ID: 20-1-70 Skill: Knowledge

Objective: 20.4

71. Mega Computer needs a large amount of long-term financing for a long period of time. The best

choice is most likely

a. loans.

b. preferred stock.

c. common stock.

d. commercial paper.

e. bonds.

Difficulty: 3 Page-Reference: 638

Question ID: 20-1-71 Skill: Comprehension

Objective: 20.4

72. Which of the following would require General Motors to publicly disclose the purpose for which

funds are being sought?

a. Long-term loan

b. Sale of preferred stock

c. Short-term loan

d. Sale of common stock

e. Sale of bonds

Difficulty: 2 Page-Reference: 638

Question ID: 20-1-72 Skill: Comprehension

Objective: 20.4

Business, Eighth Canadian Edition Griffin, Ebert, Starke, Dracopoulos, Lang

Chapter 20—Financial Decisions and Risk Management

73. Manitoba Hydro has relatively steady, predictable profits and cash–flow patterns. Its best choice

for long-term funding is most likely

a. factoring accounts receivable.

b. common stock.

c. either common or preferred stock but not bonds.

d. preferred stock.

e. bonds.

Difficulty: 2 Page-Reference: 638

Question ID: 20-1-73 Skill: Comprehension

Objective: 20.4

74. In most cases, equity financing takes two forms:

a. revolving credit agreements and lines of credit.

b. bank loans and commercial paper.

c. issuing common stock and retaining the firm’s earnings.

d. issuing common stock and lines of credit.

e. commercial paper and retaining the firm’s earnings.

Difficulty: 2 Page-Reference: 640

Question ID: 20-1-74 Skill: Knowledge

Objective: 20.4

75. Rosella is financial manager who is comparing the effects of debt and equity financing. She finds

that

a. debt financing affects management control, whereas equity financing does not.

b. debt financing makes a regular claim on income, whereas equity financing does not.

c. debt financing involves no fixed deadlines, whereas equity financing does.

d. debt financing does not affect management’s flexibility, whereas equity financing does.

e. neither debt financing nor equity financing is tax deductible.

Difficulty: 2 Page-Reference: 641

Question ID: 20-1-75 Skill: Comprehension

Objective: 20.4

76. The mix of debt and equity funding that a firm uses is called its

a. long-term funding mix.

b. financial mix.

c. corporate capital mix.

d. capital structure.

e. debt–to–equity ratio.

Difficulty: 1 Page-Reference: 641

Question ID: 20-1-76 Skill: Knowledge

Objective: 20.4

Business, Eighth Canadian Edition Griffin, Ebert, Starke, Dracopoulos, Lang

Chapter 20—Financial Decisions and Risk Management

77. Which of the following is the most conservative mix of long-term funding?

a. 25% debt, 75% equity

b. 75% debt, 25% equity

c. 100% equity

d. 100% debt

e. 50% debt, 50% equity

Difficulty: 2 Page-Reference: 641

Question ID: 20-1-77 Skill: Knowledge

Objective: 20.4

78. Which of the following is the riskiest mix of long-term funding?

a. 25% debt, 75% equity

b. 100% equity

c. 50% debt, 50% equity

d. 75% debt, 25% equity

e. 100% debt

Difficulty: 2 Page-Reference: 641

Question ID: 20-1-78 Skill: Knowledge

Objective: 20.4

79. Laura is analyzing several investment possibilities. She finds that some options have a good

chance of a payback (but the paybacks are small), while other options have a not–so-good chance of

payback (but the payback is large). She has discovered the

a. cash flow trade-off.

b. cash flow decision.

c. risk-return relationship.

d. safety factor.

e. risk principle.

Difficulty: 1 Page-Reference: 642

Question ID: 20-1-79 Skill: Comprehension

Objective: 20.4

80. Bonds that have the highest default rate and the highest yield rate are ________ bonds.

a. high grade

b. investment grade

c. mixed grade

d. income grade

e. junk

Difficulty: 1 Page-Reference: 642

Question ID: 20-1-80 Skill: Knowledge

Objective: 20.4