Financial Management

Question 1

Financial mangement function that is concerned with raising capital to support hte firm’s operations and investemnt programs

Answer 1

Financing function

Question 2

Financial management function that is concerned with selecting the best projects in which to invest firm resources, based on a consideration of risks and returns

Answer 2

Capital budgeting function

Question 3

Financial management function concerned iwth manging the firm’s internal cash flows and its capital structure to minimize the financing costs and ensure that the firm can pay its obligations when due

Answer 3

Financial mangement function

Question 4

Fnancial mangement function concerned with developing an ownership and corporate governance system for theifrm that will ensure htat mangers act ethically and in the best interst of stakeholders

Answer 4

Corporate governance function

Question 5

Financial mangagement function concerned with managing the firm’s exposure to all types of risks

Answer 5

Risk-management function

Question 6

Managing and financing the current assets and current liabilities of a firm; primarily with inventories and receivables

Answer 6

Working capital management

Question 7

The lenght of time between when a firm makes payments and it receives cash inflows =Inventory Conversion Period + Receivables Conversion Period - Payables deferral Period

Answer 7

Cash conversion cycle

Question 8

The average time required to convert materials into finished goods and sell those goods =Average inventory/(`COGS/day)

Answer 8

Inventory conversion period

Question 9

The average time required to collect accounts receivable =Average receivables balance/(credit sales/day)

Answer 9

Receivables collection period (days sales outstanding)

Question 10

The average lenght of time between the purchase of materials and labor and the payment of cash for them =Average payables /Purchases per day

Answer 10

Payables deferral period

Question 11

Required minimum level of deposit based on a loan agreement

Answer 11

Compensating balances

Question 12

Discounts, especially offered by suppliers, for early payment of accounts–a motivation to always have cash on hand

Answer 12

Cash discounts

Question 13

Cash balances used to take advantage of favorable business opportunities (like business acquisitions)

Answer 13

Speculative balances

Question 14

Cash balances used for emergencies

Answer 14

Precautionary balances

Question 15

The time hat elaposes relating to mailing, processing, and clearing checks –want to extend for cash disbursements and shorten for cash receipts

Answer 15

Float

Question 16

Maintaining a regional bank account to which just enough funds are bransferred daily to pay the checks presented

Answer 16

Zero-balance accounts

Question 17

System in which customer payments are sent ot a post office box that is maintained by a bank–bank personnel retrive the payments and deposit htem into the firm’s bank account

Answer 17

Lockbox system

Question 18

A way to speed up collection from customers (and reduce float) in which payments from customers are routed to local branch offices rather than firm headquarters

Answer 18

Concentration banking

Question 19

A system in which funds are moved electronicaly between accounts without hte use of a check–takes the float out of both the receipts and disbursement processes

Answer 19

Electronic Funds Transfer (EFT)

Question 20

The risk to the principal portion of a marketable security

Answer 20

Safety

Question 21

The speed at which an investment can be liquiddated

Answer 21

Marketability/liquidity

Question 22

Short-term obligations of hte federal government–active market ensures liquidity

Answer 22

Treasury bills (T-bills)

Question 23

Government obligations with maturities from 1-10 years Appropriate for the investment of short-to intermediate term funds

Answer 23

Treasury notes

Question 24

Government obligations that pay interest that equates to real rate of return specified by the US Treasur, plys principal at maturity that is adjusted for inflation Useful if a firm wants to minimize interest rate risk

Answer 24

Treasury Inflation Protected Securities (TIPS)

Question 25

Offerings of government agencies, such as the Federal Home Loan Bank that offer security, liquidity, and pay slightly higher yields than treasury issues

Answer 25

Federal agency securities

Question 26

Savings deposits at financial institutions

Answer 26

Certificates of Deposit (CD)

Question 27

Large, unsecured short-term promissory notes issued to the public by large creditworthy corporations (usually held to term because no active secondary market)

Answer 27

Commercial paper

Question 28

A draft drawn on a bank for payment when presented to the bank

Answer 28

Banker's acceptance

Question 29

US dollars held on deposit by foreign banks and in turn lent by the banks to anyone seeking dollars--pay higher yields than treasury bills

Answer 29

Eurodollar certificate of deposit

Question 30

Shares in a fund that purchases higher-yielding bank CDs, commercial paper, and other large-denomination, higher-yielding securities; largely risk free

Answer 30

Money market funds

Question 31

Similar to savings accounts, individual or business investors deposit idle funds in the accounts and the funds are used to invest in higher-yielding CDs, commerical paper, etc.

Answer 31

Money market accounts

Question 32

Investments in publicly traded stocks and bonds of corporations; can reduce risk by diversifying away unsystematic risk in portfolios

Answer 32

Equity and debt securities

Question 33

An inventory technique that minimizes the sum of inventory ordering and carrying costs

Answer 33

Economic Order Quanitity (EOQ)

Question 34

A computerized system that manufactures finished goods based ondemand forecasts which are used to develop bills of materials and a master production schedule

Answer 34

Materials Requirement Planning (MRP)

Question 35

The amont of current assets required to operate the business in even the slowest periods of hte year; should be financed iwth long-term financing such as stock s or bonds

Answer 35

Permanent current assets

Question 36

Current assets accumulated during periods of high production and sales--appropriately financed with short-term financing

Answer 36

Temporary current assets

Question 37

An approach to finaniing assets that involves matching asset and laibility matruities--a headging approach that minimizes the risk that the firm will be unable to pay its maturing obligations

Answer 37

Maturity matching approach

Question 38

The rate a bank charges its most creditworthy customers--increases if a customer is more risky

Answer 38

Prime rate

Question 39

A line of credit in which the bank is formally committed to lend the firm a specified maximum amount

Answer 39

Revolving Credit agreements

Question 40

The sale of receivables to a finance company

Answer 40

Factoring

Question 41

Floating public offerings of debt collateralized by the firm's accounts receivables

Answer 41

Asset-backed public offerings

Question 42

Financing by using inventory as collateral

Answer 42

Inventory financing

Question 43

Inventory financing in whi8ch the inventory is held in a public warehouse under the lendor's control

Answer 43

Warehousing

Question 44

Long-term debt; either in the form of loans from ifnancial institutions or private placement of unregistered bonds sold directly to accredited investors; less expensive to issue than public debt

Answer 44

Private debt

Question 45

Long-term debt that invovles selling SEC registered bonds idrectly to investors--the bond agreement specifies the par value, coupon rate, and maturity date

Answer 45

Public long-term debt

Question 46

restrictions on private and public debt agreements aht allow investors to monitor and contorl the activities of hte firm

Answer 46

Debt convenants

Question 47

A bond secured with the pledge of specific property

Answer 47

Mortgage bond

Question 48

A bond secured by financial assets of the firm

Answer 48

Collateral trust bond

Question 49

A bond that is not secured by the pledge of specific property, but is a general obl.igaition of the firm --can only be issued by firms with the highest credit rating and typically have higher yields because of the default risk

Answer 49

Debenture

Question 50

A bond with claims subordinated to other general creditors in the event of bankruptcy of hte firm --Bondholders receive distributions only after general creditors and senior debt holders have been paid--so offer higher yields

Answer 50

subordinated debenture

Question 51

A bond with interest payments that are contingent on the firm's earnings--high yields because of high degree of risk --often associated with firms undergoing restructuring

Answer 51

Income bond

Question 52

bonds paid off in installments over hte life of the issue--desirable b/c bondholders can choose their maturity date

Answer 52

Serial payments/serial bonds

Question 53

Bonds in which the firm makes payments into a sinking fund which is used ot retire bonds by purchase

Answer 53

Sinking fund provisions

Question 54

Bonds that may be convertible into common stock

Answer 54

Convertible bonds

Question 55

Bonds in which the bondholder may have hte right to redeem the bonds for cash under certain circumstances

Answer 55

Redeemable bonds

Question 56

Bonds that may have a call provision allowing hte firm to force the bondholders to redeem the bonds before maturity for some premium

Answer 56

Call provisions

Question 57

Bonds that do not pay interest, but sell at a deep discount from theface or maturity value, and the return to hte investor is the difference between the cost and the bond's maturity value

Answer 57

Zero-coupon rate bonds

Question 58

Bonds where the rate of interest paid floats with changes in the market rate---Therefore, the market price of hte bond does not fluctuate as widely

Answer 58

Floating rate bonds

Question 59

Bonds whose rates pay a higher rate of interest when other interest rates fall and a lower rate when other rates rise --riskier than normal bonds

Answer 59

Reverse floaters

Question 60

Bonds registered in the name of hte bondholder, and interest payments are sent directly to the registered owners

Answer 60

Registered bonds

Question 61

Bonds that carry very high-risk premiums, usually as a result of leveraged buyouts or firms in trouble

Answer 61

Junk bonds

Question 62

International bonds that are denominated in the currency of hte nation which they are sold (Diff. from Eurobonds which are denominated in US $)--can sure as an effective hedge for a firm that is heavily invested in assets in the foreign country

Answer 62

Foreign bonds

Question 63

A transaction in which the owner of he property sells the property to another and simultaneously leases it back

Answer 63

Sale-leaseback

Question 64

an option to buy common stock at a fixed price for some period of time---increases the marketability of bonds issued

Answer 64

Stock Warrants

Question 65

A hybrid securities in which the shareholders are entitled ot receive a stimupulated dividend and have priority over common stockholders in the event of liquidation of the firm

Answer 65

Preferred Stock

Question 66

A bond/share of preferred stock that can be converted, at the option of the holder, into common stock Attractive b/c investors require lower yield b/c of potential prospects of conversion But, dilutes the ownership of other common shareholders

Answer 66

Convertible security

Question 67

Occurs wehn a public diversified firm separates one of its subsidiaries, distributing hte shares on a pro rata basis to hte existing shareholders

Answer 67

Spin-offs

Question 68

A specialized equity offering that is based on the operations and cash flows of a wholly owned subsidiary of a diversified firm

Answer 68

Tracking Stocks

Question 69

A pool of funds that is used to make actively managed direct eequity investments in rapidly growing private companiese

Answer 69

Venture capital

Question 70

plans designed to motivate management to focus on shareholder value by rewarding management and key employees with stock or stock options as part of their compensation

Answer 70

Employee Stock Ownership Plans (ESOPs)

Question 71

Measures the degree to which a firm builds fixed costs into its operations

Answer 71

Operating leverage

Question 72

Measures the extent to which the firm uses debt financing

Answer 72

Financial leverage

Question 73

The weighted-average cost of its debt and equity financing components

Answer 73

Cost of capital

Question 74

= the interest rate of the loan adjusted for the fact that interest is deductible =i x (1-marginal tax rate)

Answer 74

Cost of debt

Question 75

Measures the correlation between the price volatility of the stock market and the price volatility of an individual firm's stock higher= more volatility and more risk

Answer 75

beta coefficient

Question 76

The avilibty of a firm to raise capital on reasonable terms under adverse conditions

Answer 76

financial flexibility

Question 77

payments to existing stockholders of a dividend in the form of the ifrm's own stock

Answer 77

stock dividneds

Question 78

Similar to stock dividends, but are generally designed to reduce the stock's price to a target level that will attract more investors

Answer 78

Stock splits

Question 79

Markets in which newly issued securities are sold

Answer 79

Primary markets

Question 80

Markets in which previously issued securities are sold

Answer 80

Secondary markets

Question 81

A rising market

Answer 81

Bull market

Question 82

A declining/lethargic market

Answer 82

Bear market

Question 83

commissioned agents of buyers/sellers

Answer 83

Brokers

Question 84

Take positions in assets and buy and sell their own inventory --similar to brokers in that they match buyers and sellers

Answer 84

Dealers

Question 85

Banks that assist in the initial sale of newly issued securities by providing advice, underwrting, and sales assitance

Answer 85

Investment banks

Question 86

Financial instituions htat borrow one form of finanicla asset and distribute hte asset in another form

Answer 86

Financial Intermediaries

Question 87

When a firm combines with another in the same line of business

Answer 87

Horizontal merge

Question 88

When a firm combines with another firm in the supply chain

Answer 88

Vertical merger

Question 89

When the merging firms are somewhat related but not enough ti make it a vertical or horizontal merger

Answer 89

Congeneric merger

Question 90

When the firms are completely unrelated; provicdes the greatest degree of diversification

Answer 90

Conglomerate merger