CHAPTER 16

Question 1

Financial Management

Answer 1

Planning for a firm’s money needs and managing the allocation and spending of funds.

Question 2

Risk/Return Trade-off

Answer 2

The balance of potential risks against potential rewards.

Question 3

Financial Plan

Answer 3

A document that outlines the funds needed for a certain period of time, along with the sources and intended uses of those funds.

Question 4

Accounts Receivable

Answer 4

Amounts that are currently owed to a firm.

Question 5

Accounts Payable

Answer 5

Amounts that a firm currently owes to other parties.

Question 6

Budget

Answer 6

A planning and control tool that reflects expected revenues, operating expenses, and cash receipts and outlays.

Question 7

Zero-Based Budgeting

Answer 7

A budgeting approach in which each department starts from zero every year and must justify every item in the budget, rather than simply adjusting the previous year’s budget amounts.

Question 8

Debt Financing

Answer 8

Arranging funding by borrowing money.

Question 9

Equity Financing

Answer 9

Arranging funding by selling ownership shares in the company, publicly or privately.

Question 10

Capital Structure

Answer 10

A firm’s mix of debt and equity financing

Question 11

Short-Term Financing

Answer 11

Financing used to cover current expenses (generally repaid within a year).

Question 12

Long-Term Financing

Answer 12

Financing used to cover long- term expenses such as assets (generally repaid over a period of more than one year).

Question 13

Cost of Capital

Answer 13

The average rate of interest a firm pays on its combination of debt and equity.

Question 14

Leverage

Answer 14

The technique of increasing the rate of return on an investment by financing it with borrowed funds

Question 15

Trade Credit

Answer 15

Credit obtained by a purchaser directly from a supplier.

Question 16

Secured Loans

Answer 16

Loans backed up with assets that the lender can claim in case of default, such as a piece of property.

Question 17

Collateral

Answer 17

A tangible asset a lender can claim if a borrower defaults on a loan.

Question 18

Unsecured Loans

Answer 18

Loans that require a good credit rating but no collateral.

Question 19

Line on Credit

Answer 19

An arrangement in which a financial institution makes money available for use at any time after the loan has been approved.

Question 20

Commercial Paper

Answer 20

Short-term promissory notes, or contractual agreements, to repay a borrowed amount by a specified time with a specified interest rate.

Question 21

Factoring

Answer 21

Obtaining funding by selling accounts receivable.

Question 22

Lease

Answer 22

An agreement to use an asset in exchange for regular payment; similar to renting.

Question 23

Bonds

Answer 23

A method of funding in which the issuer borrows from an investor and provides a writ- ten promise to make regular interest payments and repay the borrowed amount in the future.

Question 24

Private Equity

Answer 24

Ownership assets that aren’t publicly traded; includes venture capital.

Question 25

Stock Exchanges

Answer 25

Organizations that facilitate the buying and selling of stock.

Question 26

Bond Market

Answer 26

The collective buying and selling of bonds; most bond trading is done over the counter, rather than in organized exchanges.

Question 27

Money Market

Answer 27

An over-the-counter market place for short-term debt instruments such as Treasury bills and commercial paper.

Question 28

Derivatives

Answer 28

Contracts whose value is derived from some other entity (usually an asset of some kind, but not necessarily); used to hedge against or speculate on risk.

Question 29

Derivatives Market

Answer 29

A market that includes exchange trading (for futures and some options) and over-the-counter trading (for all other derivatives, at least currently).

Question 30

Rate of Return

Answer 30

The gain (or loss) of an investment over time, expressed as a percentage.

Question 31

Bull Market

Answer 31

A market situation in which most stocks are increasing in value.

Question 32

Bear Market

Answer 32

A market situation in which most stocks are decreasing in value.

Question 33

Investment Portfolios

Answer 33

Collections of various types of investments.

Question 34

Asset Allocation

Answer 34

Management of a portfolio to balance potential returns with an acceptable level of risk.

Question 35

Broker

Answer 35

A certified expert who is legally registered to buy and sell securities on behalf of individual and institutional investors.

Question 36

Smart Contract

Answer 36

Digital agreement in a distributed ledger such as blockchain that automatically executes when its criteria are fulfilled by incoming data.