Ch15

Question 1

finance

Answer 1

business function involving decisions about a firm’s long-term investments and obtaining the funds to pay for those investments

Question 2

objectives of the financial manager

Answer 2

increase a firm’s value and stockholders’ wealth

Question 3

responsibilities of financial manager

Answer 3

cash-flow management (managing pattern in which cash flows into the firm and out of the firm), financial control (process of checking actual performance against plans), financial plan (description of how a business will reach some financial position it seeks in the future)

Question 4

credit policy

Answer 4

rules governing a firm’s extension of credit to customers

Question 5

inventory

Answer 5

materials and goods currently held by the company that will be sold within the year

Question 6

three types of inventory a firm buys in its production process

Answer 6

1. raw-materials inventory (portion of a firm’s inventory consisting of basic supplies used to manufacture products for sale)
2. work-in-process inventory (that portion of a firm’s inventory
3. finished-goods inventory (portion of a firm’s inventory consisting of completed goods ready for sale)

Question 7

sources of short-term funds

Answer 7

trade credit, open-book credit, promissory note, trade draft, trade acceptance

Question 8

trade credit

Answer 8

granting of credit by a selling firm to a buying firm

Question 9

open-book credit

Answer 9

form of trade credit in which sellers ship merchandise on faith that payment will be forthcoming

Question 10

promissory note

Answer 10

form of trade credit in which buyers sign promise-to-pay agreements before merchandise is shipped

Question 11

trade draft

Answer 11

form of trade credit in which buyers must sign statements of payment terms attached to merchandise by sellers

Question 12

trade acceptance

Answer 12

trade draft that has been signed by the buyer

Question 13

corporate bond

Answer 13

promise by the issuing company to pay the holder a certain amount of money on a specified date, with stated interest payments in the interim; a form of long-term debt financing

Question 14

bond indenture

Answer 14

indicates the key terms of a bond (amount, interest rate, maturity date)

Question 15

market index

Answer 15

measure of the market value of stocks (provides a summary of price trends in a specific industry or of the stock market as a whole

Question 16

bull market/bear market

Answer 16

bull: period of rising stock prices
bear: period of falling stock prices

Question 17

examples of common market indexes

Answer 17

Dow Jones Industrial Average, S&P/TSX index

Question 18

market order

Answer 18

order to a broker to buy or sell a certain security at the current market price

Question 19

limit order

Answer 19

an order to a broker to buy a certain security only if its price is less than or equal to a given limit

Question 20

stop order

Answer 20

an order to a broker to sell a certain security if its price falls to a certain level or below

Question 21

round lot

Answer 21

purchase or sale of stock in units of 100 shares

Question 22

odd lot

Answer 22

purchase or sale of stock in units of other than 100 shares

Question 23

risk retention and transfer

Answer 23

retention: covering of a firm’s unavoidable losses with its own funds
transfer: transfer of risk to another individual or firm, often by contract

Question 24

risk management

Answer 24

conserving a firm or individuals’ financial power or assets by minimizing the financial effect of accidental losses

Question 25

two types of risk

Answer 25

speculative (chance for either gain or loss) and pure (no possibility of gain)

Question 26

risk

Answer 26

uncertainty about future events

Question 27

blue-sky laws

Answer 27

laws regulating how corporations must back up securities

Question 28

prospectus

Answer 28

detailed registration statement about a new stock filed with a provicinal securities exchange

Question 29

hedge fund

Answer 29

private pool of money that tries to give investors a positive return regardless of stock-market performance

Question 30

types of mutual funds

Answer 30

no-loaded fund: investors are not charged a sales commission when they buy into or sell out of fund
load fund: investors are charged a sales commission when they buy into or sell out of the fund

Question 31

ethical fund

Answer 31

mutual funds that stress socially responsible investing

Question 32

stock option, call option, put option

Answer 32

stock option: purchased right to buy or sell a stock
call option: purchased right to buy a particular stock at a certain price until a specified date
put option: purchased right to sell a particular stock at a certain price until a specified date