Unit 1

Question 1

Individuals and families consume goods and services for their own survivorship and welfare.

Answer 1

True

Question 2

Individuals and families will have to _____________ in exchange for goods and services. They will have to decide how to _________ and how to ___________ that money to maximize their welfare.

Answer 2

pay money
obtain that money
spend

Question 3

Business organizations and individual entrepreneurs produce and sell products and services.

Answer 3

True

Question 4

Business organizations and individual entrepreneurs need money to acquire the infrastructure and to pay for the costs that are necessary to produce their goods and services.

Answer 4

True

Question 5

Business organizations and individual entrepreneurs will get money in exchange for those goods and services. Therefore, they are also concerned about __________ and _______________.

Answer 5

how to get money

how to spend it

Question 6

Governments and public administration entities produce products and services for the citizens.

Answer 6

True

Question 7

Governments and public administration entities need ________ to pay for the costs of those services. They get that money mainly through _________.

Answer 7

money

taxes

Question 8

Governments have to make decisions about ___________ and ___________.

Answer 8

how to get money

how to spend it

Question 9

People, organizations, and governments will eventually have to take decisions on how to get money and how to spend that money.

Answer 9

True

Question 10

Finance is the science of ___________.

Answer 10

managing money

Question 11

Finance deals with two kinds of problems:

Answer 11

1. how to spend money (investment decisions)

2. how to get money (financing decisions).

Question 12

Investment decisions are …

Answer 12

decisions about how to spend money.

decisions related to how many and what types of assets a firm needs to acquire

how to allocate available funds

Question 13

Financing decisions are …

Answer 13

decisions about how to get money

decisions on how to fund investments

how to get the money necessary to undertake the selected investments

Question 14

An investment can be defined as the renouncement of a current satisfaction in exchange of the promise of future satisfactions.

Answer 14

True

Question 15

From a financial perspective, “satisfactions” can be measured in monetary terms.

Answer 15

True

Question 16

From a financial perspective, “satisfactions” can be measured in monetary terms. Therefore, financially speaking, an investment is …

Answer 16

the renouncement of a current possession of an amount of money in exchange of the promise of receiving one or various amounts of money in the future.

Question 17

The two types of investment decisions are:

Answer 17

1. To decide if a given investment opportunity is or not acceptable
2. To decide which investment opportunity (or combination of investments) are preferable, when there are various opportunities.

Question 18

Finance decisions are related with the procurement of funds necessary for the undertaking of the investments

Answer 18

True

Question 19

Any entity which wants to undertake an investment project will need the money required to make the initial payment.

Answer 19

True

Question 20

If an entity does not possess the money to undertake an investment, other people or entities can provide the necessary funds. In exchange, the entity binds itself to pay back the amounts received, plus a compensation for the money borrowed.

Answer 20

True

Question 21

In a finance operation, the subject receives an amount of money now, in exchange of a payment or a stream of payments in the future.

Answer 21

True

Question 22

The sign of the cash-flows of a finance operation are opposite to the expected signs of the cash-flows of an investment

Answer 22

True

Question 23

Financing decisions consist of the selection of the most convenient financing sources. To decide if a financing source is convenient or not, we must take into account basically two key features:

Answer 23

1. When is the money available

2. The compensation to the fund’s providers

Question 24

According to the former definitions, the undertaking of an investment project begins with _____________. In exchange, the entity receives ____________. This definition is equivalent to the accounting definition of __________.

Answer 24

the payment of amounts of money

goods, rights or other resources that are expected to generate cash-flows in the future

Assets

Question 25

Assets = Investments

Answer 25

True

Question 26

The accounting definition of assets is ....

Answer 26

goods, rights or other resources that are expected to generate cash-flows in the future

Question 27

To acquire assets, an entity can employ its own funds.

Answer 27

True

Question 28

If an entity does not want to employ its own funds to acquire assets or if their funds are not enough to undertake the investment, it may have to raise money from other people or entities in exchange of a promise of future payments.

Answer 28

True

Question 29

An investment may be financed by two types of funds:

Answer 29

1. those belonging to the entity’s owners (equity) | 2. those that have been raised in exchange of the promise of future payments (liabilities).

Question 30

Equity is ...

Answer 30

funds that belong to an entity's owners

Question 31

Liabilities are ...

Answer 31

funds that have been raised in exchange for the promise of future payments payment promises

Question 32

Assets generate cash-flow; cash flows are used to finance new investments or pay back the fund's providers;

Answer 32

True

Question 33

Finance structures comprises:

Answer 33

1. Equity | 2. Liabilities

Question 34

An entity's balance sheet comprises:

Answer 34

1. Assets | 2. Finance structure (equities and liabilities)

Question 35

In the particular case of businesses, stockholders and debtholders proportion the funds the company requires for its investments.

Answer 35

True

Question 36

When a company collects the cash-flows from an investment, it must use at least a portion of that money to remunerate stockholders and debtholders for their funds, and to pay-back those funds.

Answer 36

True

Question 37

A company receives funds from the stockholders and debtholders now, and it must pay them back in the future.

Answer 37

True

Question 38

From the point of view of the company, a financing operation is ...

Answer 38

When a company receives funds from the stockholders and debtholders now, and it must pay them back in the future.

Question 39

Stockholders and debtholders, pay an amount of money now because they expect that the company will reward them in the future.

Answer 39

True

Question 40

From the point of view of stockholders and debtholders, an investment is ...

Answer 40

When stockholders and debtholders, pay an amount of money now because they expect that the company will reward them in the future.

Question 41

The investments in the financial structure of an entity are called _____________. The investments in other real assets are called ____________.

Answer 41

financial investments real investments

Question 42

The financial system is the system that allows the transfer of money from those people or entities that have money available for investing (net savers) and those people or entities that demand money (borrowers).

Answer 42

True

Question 43

Net savers are

Answer 43

those people or entities that have money available for investing ``` ej. Households Companies Government Non-residents ```

Question 44

Borrowers are ...

Answer 44

those people or entities that demand money ``` ej. Households Companies Government Non-residents ```

Question 45

Financial markets and financial intermediaries facilitate the transfer of funds from net savers to borrowers

Answer 45

True

Question 46

Borrowers transfer funds for real investments and receive real assets

Answer 46

True

Question 47

The 3 major areas of finance are:

Answer 47

1. Business finance 2. Investments 3. Financial markets and institutions

Question 48

Business finance, also known as ________ or ____________, deals with decisions related to how many and what types of _______ a firm needs to acquire (investment decisions), and how ________ those investments (financing decisions).

Answer 48

corporate finance financial management assets to fund

Question 49

In the area of investments, we study the financial instruments used in the capital markets, their characteristics and their value.

Answer 49

True

Question 50

In the area of financial markets and institutions, we study ______________ and ______________, as well as the characteristics and functions of the different financial institutions (financial intermediaries and public financial agencies).

Answer 50

how the financial markets work | how they are supposed to work

Question 51

Financial institutions are ...

Answer 51

financial intermediaries and public financial agencies

Question 52

Although business finance concepts and techniques can be applied to individual investors and to other entities different from companies, it is most commonly applied to companies.

Answer 52

True

Question 53

Business finance deals, in broad terms, with the decisions related to _________ (investing decisions) and ________________ (financing decisions).

Answer 53

how to allocate the available funds how to get the money necessary to undertake the selected investments

Question 54

In financial management, we study if an investment is worth undertaking or not, and how it should be financed.

Answer 54

True

Question 55

To determine if an investment is worth undertaking or not, we must first establish a decision criterion.

Answer 55

True

Question 56

A decision criterion is a rule that indicates to us if a given investment is or not acceptable, or if an investment is preferable to another.

Answer 56

True

Question 57

A decision criterion is the goal of business finance.

Answer 57

True

Question 58

The commonly accepted goal of business finance is ______ or, equivalent, the maximization of the market value of an owners’ equity.

Answer 58

wealth maximization

Question 59

The commonly accepted goal of business finance is

Answer 59

to maximize the value that an interested buyer would pay for the equity of a company.

Question 60

Value depends on two things:

Answer 60

1. the expected cash-flows from an asset (the money we expect the asset to generate in the future). 2. Risk

Question 61

Expected cash-flows are ...

Answer 61

the money we expect an asset to generate in the future.

Question 62

The higher those cash-flows, the higher the value of the asset.

Answer 62

True

Question 63

Risk can be defined as

Answer 63

the possibility that we receive something different from expected

Question 64

In finance, we assume that the agents are __________ (that is, they do not like risk). Therefore, the __________ the risk associated to an asset, the _________ the value of that asset.

Answer 64

risk-averse higher lower

Question 65

The goal of business finance is to maximize value

Answer 65

True

Question 66

Expected cash-flows ________ value, and risk associated with future cash-flows ________ value.

Answer 66

increase decrease

Question 67

An investment project will be worth undertaking if, and only if, it contributes to increase the value of the company (to increase the investor’s wealth).

Answer 67

True

Question 68

An investment project will not be worth undertaking if

Answer 68

it contributes to reduce the value of the company (reduce the investor’s wealth).

Question 69

If we have to select one investment from a set of available opportunities, the best one will be ___________

Answer 69

the one that produces the highest increase in the value of the company (investor’s wealth).

Question 70

Finance operations produce _________, so these operations would reduce the wealth of the investor (the value of equity). Consequently, finance operations that produce a smaller reduction in the investors’ wealth (the company’s equity) are __________ to those finance operations that produce __________.

Answer 70

future cash-outflows preferable a bigger reduction.

Question 71

Finance is interrelated with all the functions in the company, because all the functions (marketing, production, R&D, etc.) requires __________, both tangible (machinery, factories, office…) and intangible (technical expertise, patents, trademarks…) to properly work, and all these assets must be paid for.

Answer 71

real assets

Question 72

It is the responsibility of the finance manager to guarantee that the funds are optimally distributed among the different functions.

Answer 72

True

Question 73

The major decisions a finance manager has to make are:

Answer 73

1. Capital budgeting decisions 2. Capital structure decisions 3. Working capital decisions

Question 74

Capital budgeting decisions are...

Answer 74

decisions that concern the firm’s long-term investments.

Question 75

To make capital budgeting decisions, the finance manager must evaluate the size of the investment, the expected future cash-flows that the investment will produce, when those cash-flows will be produced and the risk associated to those cash-flows.

Answer 75

True 1. size of investment 2. expected future cash-flows 3. when cash flows will be produce 4. risk associated with cash-flows

Question 76

Capital structure decisions are ...

Answer 76

decisions about how the cash required for an investment should be raised.

Question 77

The finance manager must decide the right proportion of debt and equity and to select the least expensive sources of funds for the company.

Answer 77

True This is the idea behind capital structure decisions.

Question 78

Working capital decisions are ...

Answer 78

decisions that concern the short-term assets and liabilities of the company.

Question 79

Working capital decisions try to give answers to questions like the amount of cash and inventories the company must keep, the credit conditions for clients, or the short-term financing.

Answer 79

True 1. amt of $ and inventories 2. credit conditions of clients 3. short-term financing

Question 80

The CFO is the main person responsible for the finance operations of a company. He/she controls and coordinates the activities of the treasurer and the controller.

Answer 80

True

Question 81

The main responsibility of the treasurer is ___________. He/she must forecast the funds that will be needed for each section of the company and take the necessary actions to assure that those funds are provided.

Answer 81

financial planning

Question 82

The controller is in charge of _________. He/she must design and implement an efficient information system that produces information about the performance and the financial situation of the company. He/she must also control the funds that are expended as planned, ensure that the investments are producing the expected cash-flows, and investigate the causes of the deviations.

Answer 82

the financial control of the company