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MGM101 > Chapter 13 > Flashcards

Chapter 13 Flashcards

1
Q

What defines corporate bonds?

A

A 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. It is a form of long-term debt financing.

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2
Q

What describes an exchange-traded fund?

A

A collection of stocks or bonds all in the same index that helps track the overall movement of a market

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3
Q

How do we describe a period of rising stock prices in which there is a general belief from investors that stocks will continue to rise?

A

Bull market

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4
Q

Which collection of stocks or bonds is all in the same index and helps track the overall movement of a market?

A

Exchange-traded funds

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5
Q

Rachel has carefully analyzed the financials and the prospects of a large dairy company. She decides to sell borrowed shares of that stock with the expectation that the price will fall before she must replace those shares. Rachel is using a _______ technique.

A

short sale

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6
Q

Claims by investors against issuers can be in the form of stock, bonds, and mutual funds, and collectively are known as ______.

A

securities

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7
Q

What is the definition of a load fund?

A

A mutual fund in which investors are charged sales commissions when they buy in or sell out

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8
Q

What is price appreciation?

A

How much value an investment gains over time

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9
Q

When will the seller have to repay the purchase price of the bond?

A

On the maturity date

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10
Q

What is the market in which new stocks and bonds are bought and sold by firms and governments?

A

The primary securities market

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11
Q

What is responsible for matching buyers and sellers of stock?

A

Stockbrokers

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12
Q

When a bond is issued, the amount a firm must pay the buyer at the end of the debt cycle is the ______.

A

face value .

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13
Q

Although debt financing often has strong appeal, _______ —looking inside the company for long-term funding—is sometimes preferable.

A

equity financing

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14
Q

The rate of return an investor makes on dividends paid on stock is referred to as the _______.

A

current dividend yield

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15
Q

Common stock values are expressed in three ways. One of those ways is _____ value, which is set by the issuing company’s board of directors.

A

par

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16
Q

A _______ is a company that pools cash investments from individuals and organizations to purchase a portfolio of stocks, bonds, and other securities.

A

mutual fund

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17
Q

What is the principle that says safer investments tend to offer lower returns whereas riskier investments tend to offer higher returns?

A

Risk–return relationship

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18
Q

When a firm wishes to sell stock for the first time, or “go public,” it starts the sale of the stock as ______.

A

an initial public offering (IPO)

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19
Q

What is a portfolio?

A

The combined holdings of an investor

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20
Q

What do investment banks specialize in?

A

Issuing and selling securities

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21
Q

What is secured loans?

A

A loan supported by some type of collateral in the event of nonrepayment

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22
Q

What is raw material? What is the finished good?

A

The basic supplies a firm buys to use in its production process are its raw-materials inventory.
sale (completed blue jeans ready for shipment to Levi’s dealers).

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23
Q

What is asset allocation?

A

The process of determining the percentage of wealth to invest in each investment alternative

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24
Q

________ is the current price of a share of stock in the stock market.

A

Market value

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25
Q

What is compound growth?

A

The cumulative growth from interest paid to the investor over given time periods

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26
Q

When the bank does not request collateral for borrowing money, what are they offering the borrower?

A

An unsecured loan

27
Q 
Ensuring a business always has enough money on hand to pay bills and maintain human resources is called​ \_\_\_\_\_\_\_\_.
A.
financial management
B.
money management
C.
cash flow management
D.
expenditure management
E.
financial planning
A

cash flow management

28
Q 
A(n) \_\_\_\_\_\_\_\_ is a guaranteed line of credit for which the firm pays the bank interest on funds borrowed as well as a fee for extending the line of credit.
A.
interest loan
B.
revolving credit agreement
C.
income tax loan
D.
sin loan
E.
secured loan
A

revolving credit agreement

29
Q 
\_\_\_\_\_\_\_\_\_ refers to the use of another individual​ or firm, such as an​ insurance company, to​ carry risk.
A.
Demand transfer
B.
Supply transfer
C.
Risk transfer
D.
Inventory transfer
E.
Risk avoidance
A

Risk transfer

30
Q 
One way businesses incentivize employees outside salary and benefits is​ \_\_\_\_\_.
A.
equity loans
B.
bonds
C.
capital shares
D.
licensing
E.
company shares
A

company shares

31
Q 
Currently, three Canadian accounting professions exist that could be merged into a single Canadian Chartered Professional​ Accounting (CPA) designation; these are the​ CM, CG, and​ \_\_\_\_\_\_\_\_ professions.
A.
CA
B.
CSA
C.
GA
D.
PA
E.
CFA
A

CA

32
Q 
Which of the following is like a​ "snapshot" because it shows the financial condition of a company at one point in​ time?
A.
​Owners' equity
B.
Statement of cash flows
C.
Balance sheet
D.
Income statement
E.
Liquidity
A

Balance sheet

33
Q

Which is the correct order for the earnings​ cycle?
A.
Delivered​ product, completed​ sale, sale price​ collected/collectible, revenue recognition
B.
Completed​ sale, delivered​ product, sale price​ collected/collectible, revenue recognition
C.
Completed​ sale, sale price​ collected/collectible, revenue​ recognition, delivered product
D.
Sale price​ collected/collectible, delivered​ product, completed​ sale, revenue recognition
E.
Delivered​ product, sale price​ collected/collectible, completed​ sale, revenue recognition

A

Completed​ sale, delivered​ product, sale price​ collected/collectible, revenue recognition

34
Q 
Julia is considering investing in several companies and would like to determine which does a better job of utilizing its resources. What will provide Julia with this​ information?
A.
Solvency ratios
B.
Activity ratios
C.
Profitability ratios
D.
Leverage
E.
Goodwill
A

Activity ratios

35
Q 
The accounting scandals at Xerox were largely a result of dishonest​ \_\_\_\_\_\_\_\_\_\_\_\_ accounting practices.
A.
bookkeeper
B.
chartered
C.
managerial
D.
financial
A

financial

36
Q

Newly issued stocks and bonds are sold by corporations and governments in the​ _____ securities market.

A.
primary
B.
secondary
C.
venture
D.
financial
E.
leverage
A

primary

37
Q

what does financial manager do? what is the objective of the financial manager?

A

Financial managers plan and control the acquisition and distribution of the company’s financial assets.
- The objective of financial manager
○ Increase a firm’s value and stockholders’ wealth

38
Q

what is the difference between a financial manager and accountants

A 
- Specific things that financial managers do to increase a firm's value:
		○ Collect funds
		○ Pay debts
		○ Establish trade credit
		○ Obtain loans
		○ Control cash balances
		○ Plan for future financial needs
	- Whereas accountants create data to reflect a firm's financial status, financial managers make decisions for improving that status
39
Q

The various responsibilities of the financial manager in increasing a firm’s wealth fall into three broad categories:.

A

○ cash-flow management
§ Managing the pattern in which cash flows into the firm in the form of revenues and out of the firm in the form of debt payments
§ Requires careful planning.
□ If excess cash balances sit idle instead of being invested, a firm loses the interest that it could have earned.
○ financial control
§ The process of checking actual performance against plans to ensure that the desired financial status is achieved
§ Control involves monitoring revenue inflows and making appropriate financial adjustments.
§ Budgets are important in financial control and provide the “measuring stick” against which performance is evaluated.
§ Discrepancies indicate the need for financial adjustments so that resources are used to the best advantage
○ financial planning
§ A description of how a business will reach some financial position it seeks for the future; includes projections for sources and uses of funds
§ When constructing a financial plan, several questions must be answered
□ What funds are needed to meet immediate plans?
□ When will the firm need more funds?
□ Where can the firm get the funds to meet both its short and its long-term needs?

40
Q

How to distinguish short-term expenditure and long-term expenditure?

A

The time frame for short-term expenditure is typically less than one year,
whereas for long-term expenditures, the time frame is greater than one year.

41
Q

What are accounts payable, accounts receivable, and inventories?

A

Accounts payable
Unpaid bills owed to suppliers plus wages and taxes due within a year
Accounts receivable
Funds due from customers who have bought on credit
Inventories
Materials and goods currently held by the company that will be sold within the year.

42
Q

how are long term(capital) expenditure differ from short term outlays.

A
  • Unlike inventories and other short-term assets, they are not normally sold or converted to cash
  • Their acquisition requires a very large investment
  • They represent a binding commitment of company funds that continues long into the future
    • Companies need funds to cover long-term expenditures for fixed assets such as land, buildings and machinery
    • Long term expenditure are more carefully planned than short-term outlays because the former poses special problems
43
Q

What are some sources of short term funds?

A

Firms can call on many sources for the funds they need to finance day-to-day operations and to implement short-term plans: These sources include trade credit, secured short-term loans, and unsecured short-term loans

44
Q

What is trade credit? What are the several form of trade credit?

A
  • Trade credit can take several forms
    ○ Open-book credit
    § Most common form
    § Essentially a “gentlemen’s agreement.”
    § Buyer receive merchandise along with invoices stating credit terms. Seller ship products on faith that payment will be forthcoming.
    ○ Promissory notes
    § When sellers want more reassurance, they may insists that buyers sign legally binding promissory notes before merchandise is shipped. The agreement states when and how much money will be paid to the seller
    ○ Trade draft
    § Attached to the merchandise shipment by the seller and states the promised date and amount of payment due.
    § Once signed by the buyer, the document becomes a trade acceptance.
    § Trade draft and trade acceptances are useful forms of credit in international transactions
45
Q

What is secured short term loans?

A

Secured Short-Term Loans
- Secured loans
○ A short-term loan in which the borrower is not required to put up collateral(担保品) - to give the bank the right to seize certain assets if payments are not made
○ Bank loans are a vital source of short-term funding.
○ Inventories, accounts receivable, and other assets (e.g., stocks and bonds) may served as collateral for a secured loan.
○ Secured loans allow borrowers to get funds when they might not qualify for unsecured credit.
§ They generally carry lower interest rates than unsecured loans.
- Inventory as collateral
○ When a loan is made with inventory as a collateral asset, the lender lends the borrower some portion of the state value of the inventory.
○ Inventory is more attractive as collateral when it can be readily converted into cash.
- Accounts receivable as collateral
○ When accounts receivable are used as collateral, the process is called pledging accounts receivable.
○ In the event of non-payment, the lender may seize the receivables（funds owed the borrower by its customers).
○ This option is important to service companies such as accounting firms and law offices.
§ Because they do not maintain inventories, accounts receivable are their main source of collateral.
○ Factoring accounts receivable
§ A firm can also raise funds by factoring （i.e., selling) its accounts receivable.

46
Q

What is unsecure short term loans? What are the tree types of unsecured loans?

A
  • Unsecured loan
    ○ A short-term loan in which the borrower is not required to put up collateral
    • The terms of an unsecured loan - amount, duration, interest rate, and payment schedule- are negotiated.
    • 3 types of unsecured loans
      ○ Lines of credit
      § A standing agreement between a bank and a firm in which the bank and a firm in which the bank specifics the maximum amount it will make available to the borrower for a short-term unsecured loan; the borrower can then draw on those funds, when available.
      § With a line of credit, the firm knows its maximum amount it will be allowed to borrow
      ○ Revolving credit agreements
      § A guaranteed line of credit for which the firm pays the bank interest on funds borrowed, as well as a fee for extending the line of credit
      ○ Commercial paper
      § A method of short-run fundraising in which a firm sells unsecured notes for less than the face value and then repurchases them at the face value within 270 days; buyer’ profits are the difference between the original price paid and the face value.
47
Q

3 Sources of Long-term Funds

A
  • Firms need long term funding to finance expenditures on fixed assets such as the buildings and equipment that is necessary for conducting business
    • They may seek long term funds through
      ○ Debt financing
      ○ Equity financing
      ○ Hybrid financing
48
Q

2 primary sources of debt financing?

A

long-term loans and the sale of bonds

49
Q

advantage and disadvantage of long-term loans

A

§ Long term loans are usually matched with long-term assets.
§ Interest rates for the loan are negotiated between the borrower and the lender
§ Advantage
□ Can be arranged quickly
□ The duration of the loan is easily matched to the borrower’s needs
□ If the firm’s needs change, the loan usually contains clauses making it possible to change the terms
§ Disadvantage
□ Large borrowers may have trouble finding lenders to supply enough fuds.
□ Long-term borrowers may also have restrictions placed on them as conditions of the loan.
□ They may have to pledge long-term assets as collateral.
□ They may not agree not to take on any more debt until the borrowed funds are repaid

50
Q

What are the different types of bonds?

A

§ Corporate bond
□ A 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.
□ The bond indenture
® spells out the terms of the bond, including the interest rate that will be paid, the maturity date of the bond, and which of the firm’s assets, if any, are pledged as collateral.
§ Bonds are the major source of long-term debt financing for most large corporations.
□ Bonds are attractive when companies need large amounts of funds for long period of time.
§ Bonds involve expensive administrative and selling costs, and they may also require high interest payments if the issuing company has a poor credit rating.
□ If a company fails to make a bond payment, it is in default.
§ Registered bonds
□ Register the names of holders with the company, which then mails out cheques to the bondholders.
§ Bearer bonds (or coupon bonds)
□ Require bondholders to clip coupons from certificates and send them to the issuer to receive payment.
□ Coupons can be redeemed by anyone, regardless of ownership.
§ Secured bonds
□ Bonds issued by borrowers who pledge assets as collateral in the event of non payment.
□ With secured bonds, borrowers can reduce the risk of their bonds by pledging assets to bondholders in the event of default.
§ Regarding maturity dates, there are three types of bonds:
□ Callable bonds
® The issuer of callable bonds may called them in and pay them off before the maturity date at a price stipulated in the indenture.
® Issuer usually call in existing bonds when prevailing interest rates are lower than the rate being paid on the bond
® The issuer must still pay a call price to call in bond.
◊ The call price usually gives a premium to the bondholder.
} The premium is merely the difference between the face value and call price.
□ Serial
® Some corporations issue serial or convertible bonds.
® With a serial bond, the firm retires portions of the bond issue in a series of different preset dates.
□ Convertible
® Convertible bonds can be converted into the common stock of the issuing company
§ Bonds differ from one another in terms of their level of risk

51
Q

What is equity financing?

A
  • Equity financing
    ○ Raising money to meet long-term expenditures by issuing common stock or by retaining earnings
    ○ Both issuing common stock or by retaining earnings involve putting the owners’ capital to work
52
Q

What is issuing common stock

A

○ By selling shares of common stock, the company obtains the funds it needs to buy land, buildings, and equipment.
Individuals and companies buy a firm’s stock, hoping that it will increase in value(a capital gain) and/or will provide dividend income.

53
Q

Common stock values are expressed in three ways

A

§ Par value
□ The arbitrary value of a stock set by the issuing company’s board of directors and stated on stock certificates; used by accountants buy of little significance to investors.
§ Book value
□ The value of common stock expressed as total stockholders’ equity divided by the number of shares of stock
§ Market value
□ The current price of one share of a stock in the secondary securities market; the real value of a stock.
□ For successful companies, the market value is usually greater than its book value.

54
Q

what is retaining the firm’s earning>

A

○ These earnings represent profits not paid out in dividends.
Using retained earning means the firm will not have to borrow money and pay interest on loans or bonds.

55
Q

what is hybrid financing? What are some of the advanatges?

A
  • Preferred stock is a hybrid because it has some of the features of corporate bonds and some features of common stock
    • Like bonds, payments on preferred stock are for fixed amounts
    • Unlike bonds, preferred stock never matures
      ○ It can be held indefinitely, like common stock
    • Advantage
      ○ The major advantage of preferred stock to the issuing corporation is its flexibility
      ○ It secures funds for the firm without relinquishing control
      ○ It does not require payment of principal or the payment of dividends in lean times
    • Preferred stock is usually issued with a stated par value, such as $100.
      ○ Dividends paid on preferred stock are usually expressed a percentage of the par value.
    • Some preferred stock is callable.
      ○ Means that the issuing firm can require preferred stockholders to surrender their shares in exchange for a cash payment
      § The call price
      □ The amount of this cash payment
      □ It is specified n the agreement between the preferred stockholders and the firm
56
Q

how to choose between debt and equity financing?

A
  • Financial planning involves striking a balance between debt and equity financing to meet the firm’s long0term need for funds.
    • Capital structure
      ○ Relative mix of a firm’s debt and equity financing
    • The most conservative strategy is to use all equity financing and no debt, because a company has no formal obligations for financial payouts.
      ○ But equity is very expensive source of capital
    • The riskiest strategy would be to use all debt financing
57
Q

what is the risk return relationship?

A
  • Every investor has a personal preference for safety vs risk
    • Investors generally expect only modest returns for secure investments but expect higher returns of riskier investments
    • Risk-Return Relationship
      Shows the amount of risk and the likely rate of return on various financial instruments
58
Q

what is diversification? What is assets allocation

A
  • Managing Risk With Diversification And Asset Allocation
    ○ Investor seldom take an extreme approach(total risk or total risk avoidance) when selecting their investments
    ○ Diversification
    § Buying several kinds investments rather than just one kind
    § This reduces the risk of loss because, although any one stock may tumble, the chances are slim that all of them will decline at the same time.
    ○ Asset allocation
    § The proportion of funds invested in each of the investment alternatives
59
Q

what are securities

A

Stocks, bonds, and mutual funds representing secured or asset-based, claims by investors against issuers.

60
Q

What is the primary and secondary securities markets

A
  • Primary securities markets
    ○ Holds the buying and selling of new shares (initial public offerings or IPOs) of stocks and bonds by firms or governments
    • The secondary securities markets
      ○ The market for existing stocks and bonds
      ○ Is handled by organizations
61
Q

the aspects of securities markets

A 
- The aspects of securities markets
		○ Investment banking
		○ Stock exchanges
		○ Buying and selling securities
		○ Financing securities purchases
62
Q

what is investment banking? Who are investment bankers?

A
  • Investment bankers

Financial specialists in issuing new securities

63
Q

What is stock exchange? Who are stockbroker?

A
  • Stock exchange
    ○ A voluntary organization(most non-profit) of individuals formed to provide an institutional setting where members can buy and sell stock for them selves and their clients in accordance with the exchange’s rules
    ○ Composed of individuals (stockbrokers) and organizations (investment banks) that provide a setting in which shares of stock can be bought and sold
    • Stockbroker
      ○ An individual licensed to buy and sell securities for customers in the secondary market; may also provide other financial services
      ○ Brokerage assistance can be purchased either at
      § Full-service
      □ Full-service broker offer services to clients who either are not very well informed about investment possibilities or are simply not interested in the details of investing.
      □ Can identify investments that clients might not otherwise notice in the large amount of online financial data that is available
      § Discount price
      □ Offer well-informed individual investors a fast, low cost way to participate in the market
      □ Cost less because sales personnel receive fees or salaries, not commissions
      □ Do not offer investment advice or person to person consultations
      □ Do offer automated online services: stock research, industry analysis, and screening for specific types of stocks.

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