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Exam 18: Financial Management

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Question 61

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If a firm earns 10% return on funds they borrowed at 15% interest, the owners of the firm realize a benefit from using leverage.

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Question 62

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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.

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Question 63

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Since commercial finance companies offer loans to higher-risk customers than commercial banks, the interest rates they charge are usually ________ than rates charged by banks.

If a company wants to predict how much money it can make this coming year, it would benefit from developing a

Commercial finance companies normally charge lower rates on short-term loans than those charged by commercial banks.

Mini-Case Tishian's Funeral Home has been in business for over 80 years. Throughout its history, the firm has been a family-run operation. Today, the business is managed by Mort Tishian, a grandson of the founder. Unfortunately, Mort Tishian's tenure has been plagued with problems neither his father nor grandfather before him experienced. The reason is simple: the funeral business is undergoing rapid change. Small, family-owned funeral homes are losing ground to a new type of competitor, a large national network service that resembles a franchise system. More and more families "in their time of need" are choosing the new, highly promoted competitors instead of the traditional small family-operated funeral homes. This trend has required a response from organizations like Tishian's Funeral Home. Bigger and better facilities are needed to remain competitive. All of this puts more pressure on the family owners to be more active in the financial side of the business. Mort summed it up best when he said, "Grandpa told people, 'You pay me when you can, I ain't goin' nowheres.'" His creditors did the same with him. Today, it's a different game. Cash flow is key, and obtaining funds is no simple task. Additionally, creditors want their money now, not later. Banks are also more demanding. "Heck, Grandpa knew all the bankers he dealt with personally. I see new faces every time I go to the bank. If things don't get better, I suspect after eighty years of service, Tishian's Funeral Home will have its own funeral." -Mort approached the chief lending officer at First Virginia Bank about obtaining a $75,000 loan. The banker said she would approve the loan provided that the funeral home's building was pledged as collateral. The banker was offering a(n)

A(n) ________ job includes forecasting, budgeting, cash flow analysis, cost control, taxes, and credit management.

Gavin, a financial manager of a small firm, needs to determine how much his company will have to borrow in the coming months. He also needs to establish when the borrowed funds will be needed. The preparation of the cash budget will help.

One of the most common ways for a firm to fail financially is poor control over cash flow.

A promissory note that requires the borrower to repay the loan in specified installments is called a(n)

As a financial manager at Marshall Manufacturing, Chase is exploring sources of long-term funds to finance the construction of Marshall's newest plant. Chase would prefer a funding source that does not require interest payments or involve major underwriting fees. Chase will consider using retained earnings to fund the construction project.

An operating budget analyzes the firm's spending plans for long-lasting assets that require large sums of money.

Financial managers are responsible for buying merchandise on credit and collecting payment from accounts receivable.

Successful use of financial leverage requires a firm to

The managers of Comfort Clothing regularly compare actual profits with the firm's projected profits. When deviations occur, the managers use the feedback to take corrective action when necessary. The management of Comfort Clothing is exercising financial

What are two major forms of debt financing? Describe and differentiate between the two types.

Seedling Plant Science invented a drought resistant grass seed that only needs watering three times each year. In order to expand distribution worldwide, the company whose product produces lush green foliage needs a large amount of funding-fast! The handful of seed scientists that own the company decide to offer shares of stock to general investors. This first-time offering is a(n)

Ezra is the manager of Outdoor Adventure Sporting Goods. During the past six months, his cash expenditures have exceeded his cash receipts. Outdoor Adventure is suffering from a(n) ________ problem.

As the chief financial officer (CFO) for a medium-sized service company, Cora 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 Cora's concern would be to arrange a revolving credit agreement with the bank.

Financial managers are responsible for controlling cash flows.