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101. Backstreet Books is seeking financing to fund the opening of two more locations in a
major university town. There is no need to consider debt financing for this project. It will require a
sizeable investment in equity funds.
102. Financial managers devote the majority of their time obtaining long-term financing to fund
the firm's capital expenditures.
103. Small businesses rely heavily on long-term financing.
104. Much of a financial manager's day-to-day activities involve managing the short-term
financial needs of the firm.
105. The most widely used source of short-term funding is trade credit.
106. Trade credit represents one of the most expensive forms of short-term financing.
107. Trade credit is the practice of buying goods now and paying for them later.
108. The terms "2/10, net 30" indicate that the seller is offering a 20% discount for early
payment.
109. Trade credit means the seller will sell and deliver products and/or services to the buyer,
with the understanding that the buyer will pay for these products and/or services at a later date.
110. Suppliers prefer to offer trade credit to customers with poor credit ratings or no credit
history.
111. A promissory note is a written contract between a supplier and a business customer, with
a promise that customer will pay supplier a specified amount by a certain date.
112. Family and friends represent
problem-free
sources of financing for most small
businesses.
113. A revolving credit agreement is designed to reduce the risk of lending money.
114. Inventory financing represents the selling of accounts receivables as collateral for a loan.
115. A secured loan means the borrower has the security of knowing repayment is not due for
several years.
116. An unsecured loan does not require a borrower to provide collateral to secure a loan.
117. A line of credit represents a guarantee from a bank to lend a firm a given amount of
money.
118. A revolving credit agreement represents a line of credit that is guaranteed.
119. Commercial finance companies normally charge lower rates on short-term loans than
those charged by commercial banks.
120. Factoring refers to the process of selling accounts receivable for cash.
121. Factoring refers to the process of selling inventory to generate short-term funds.
122. Factoring represents the least expensive way for a firm to raise short-term funds.
123. A tool that provides lots of convenience, credit cards are a source of a readily available
line of credit for a small business because they provide convenience.
124. Commercial paper is unsecured short-term debt.
125. Financially stable firms are able to sell commercial paper to raise short-term funds.
126. 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 giving up
approximately 36%.
127. 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 30 days of the billing date.
128. A line of credit from a bank guarantees a firm that a specified amount of financing will be
available when it is needed.
129. According to the box,
Adapting to Change
, it is impossible for small businesses to bring in
venture capital from investors.
130. Bill is a financial manager for Great View Eye Care, a local chain of Milwaukee 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 Great View Eye Care's capital expenditures.
131. 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 its
claim.
132. 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.
133. Tri-State Concrete Construction Company relies on factoring to meet its short-term
financing needs. This means that Tri-State borrows money from a finance company and pledges
its accounts receivable as collateral.
134. Big Ticket Technologies holds commercial paper issued by Prude Insurance Corporation
that matures in 180 days. However, shortly after Big Ticket purchased the commercial paper,
Prude Insurance went out of business. The finance manager for Big Ticket is not worried because
his loan to the corporation is secured by collateral that he can now claim.
135. Most companies require long-term capital to purchase fixed assets such as plant and
equipment, to develop new products and services, or to finance an expansion.
136. Equity financing refers to the money a firm receives from the sale of bonds.
137. When using equity financing, firms incur a legal obligation to repay the amount of money
invested.
138. A term-loan agreement requires the borrower to repay the loan in one lump sum at the
end of the loan period.
139. The interest paid for debt financing is a tax-deductible expense for the firm.
140. According to the risk/return trade-off, the higher the risk, the lower the interest rate
charged by the lender.
141. A share of stock represents a company-issued IOU including a promise to repay on a
certain date.
142. A bond represents a long-term debt obligation of a corporation or government.
143. An unsecured corporate bond is known as a debenture bond.
144. A debenture bond is backed only by the reputation of the issuer.
145. The types of organizations which can issue bonds are privately and publicly held
corporations, exclusively.
146. The
indenture terms
refer to the agreements of a bond issue, such as how much interest it
promises to pay and when it promises to repay the issue.
147. Funds obtained from venture capitalists are considered equity financing.
148. Retained earnings represent a source of equity financing.
149. The first time a company offers to sell its stock to the general public is called an initial
private label (IPL).
150. Corporations must comply with the Securities and Exchange Commission (SEC)
requirements in order to sell their stock publicly.
151. Venture capital is money that is invested in new or emerging companies that are perceived
as having great profit potential.
152. Venture capitalists expect lower than average returns on their investment since they are
exposed to little risk.
153. Most companies have the ready cash available to make large purchases.
154. Acquiring funds through equity financing requires the firm to pay annual dividends.
155. Acquiring funds through debt financing actually decreases the overall risk of the firm.
156. Acquiring funds through debt financing enhances the firm's ability to increase profits.
