Chapter 15

Question 1

Reasons a firm fails financially

Answer 1

undercapitlization
poor control over cash flow
inadequate expense control

Question 2

Optimize profit steps

Answer 2

1. forecast long and short term goals
2. develop a budget
3. establish financial controls

Question 3

cash flow forecast

Answer 3

predicts cash inflows and outflows throughout small periods

Question 4

budget

Answer 4

sets expectations for revenues and, on the basis of those expectations, allocates the use of specific resources throughout the firm.

Question 5

capital budget

Answer 5

forecasts a firms’s spending plans for major asset purchases that often require large sums of money, property and equipment

Question 6

cash budget

Answer 6

estimates cash in/out flows. anticipates borrowing needs/ debt repayment/ operating expenses and short term expenses

Question 7

operating budget (master)

Answer 7

aggregate of firm’s other budgets and summarizes proposed financial activities

Question 8

Financial control

Answer 8

process in which a firm periodically compares its actual revenues, costs and expenses

Question 9

Where do get funds?

Answer 9

debt financing and equity financing

Question 10

debt financing

Answer 10

refers to funds raised via borrowing

Question 11

equity financing

Answer 11

money raised from within a firm from operations or sale of stock

Question 12

trade credit

Answer 12

buying goods/ service and paying later. Business invoices can contain: 2/10 (2% discount for paying within 30 days) or net 30 (due in 30 days)

Question 13

commercial banks can lend ___

Answer 13

short terms loans to large businesses

Question 14

Capital expenditures

Answer 14

are major investments in either tangible long-term assets such as land, buildings, and equipment, or intangible assets such as patents, trademarks, and copyrights.

Question 15

secured loans

Answer 15

are backed my collateral

Question 16

unsecured loans

Answer 16

are made for high regarded business

Question 17

factoring

Answer 17

process of selling accounts receivable w/ cash

Question 18

a factor

Answer 18

is a market intermediary (institution/ company) that agrees to buy account receivables at a discount

Question 19

term-loan agreement

Answer 19

is a promissory note that requires the borrower to repay the loan with interst in specified monthly/annual installments. Tax deductible

Question 20

risk/ return trade off

Answer 20

the principle that the greater the risk a lender makes in making a loan, the higher the interest rate required

Question 21

bond

Answer 21

is a corporate certificate indicating that an investor has lent money to a firm/govt. it is a promise to repay amount borrowed with interst on a certian date (maturity date)

Question 22

Types of organizations that issue bonds

Answer 22

federal
local govt
state
foreign govt. 
corporations

Question 23

advantages of bonds

Answer 23

bondholders are creditors
business expense and tax deductible
temp source of funding 
repayed early = callable 
converted to common stock

Question 24

Disadvantages of bonds

Answer 24

increase debt, legal obligation, cause cash flow problems

Question 25

debenture bond (unsecured)

Answer 25

back only by the reputation of the issuer. investors simply trust that the organization issuing the bond will make good on its financial commitments

Question 26

venture capital

Answer 26

money invested in new/ emerging companies

Question 27

leverage

Answer 27

raising funds via borrowing in increase rate of return

Question 28

cost of capital

Answer 28

rate of return a company must earn in order to meet demands of lenders of equity holders