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

zero-based budgeting

Answer 6

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 7

budget

Answer 7

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

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

secured loans

Answer 14

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

Question 14

trade credit

Answer 14

Credit obtained by a purchaser directly from a supplier.

Question 14

leverage

Answer 14

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

Question 15

collateral

Answer 15

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

Question 16

unsecured loans

Answer 16

Loans that require a good credit rating but no collateral.

Question 17

line of credit

Answer 17

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

Question 18

commercial paper

Answer 18

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

Question 19

factoring

Answer 19

Obtaining funding by selling accounts receivable.

Question 20

lease

Answer 20

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

Question 21

bonds

Answer 21

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

Question 22

private equity

Answer 22

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

Question 23

bond market

Answer 23

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

Question 24

money market

Answer 24

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

Question 25

derivatives

Answer 25

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 26

stock exchanges

Answer 26

Organizations that facilitate the buying and selling of stock.

Question 27

rate of return

Answer 27

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

Question 28

derivatives market

Answer 28

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

Question 29

bull market

Answer 29

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

Question 30

bear market

Answer 30

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

Question 31

investment portfolios

Answer 31

Collections of various types of investments.

Question 31

asset allocation

Answer 31

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

Question 32

broker

Answer 32

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

Question 33

smart contracts

Answer 33

Digital agreements in a distributed ledger such as blockchain that automatically execute when their criteria are fulfilled by incoming data.

Question 34

3 fundamental concepts

Answer 34

Balancing short-term and long-term demands, Risk/return trade-off, balancing leverage and flexibility

Question 35

Business lifecycle stages

Answer 35

Startup, growth, maturity, decline or exit

Question 36

Budgeting challenges

Answer 36

Limited amount of money to spend, Revenues and costs are difficult to predict, Not clear how much to spend

Question 37

Main players in OPI’s

Answer 37

underwriters (investment banks), legal experts, accounting firms (auditors)

Question 38

Hedging

Answer 38

Protecting against cost increases with contracts that allow a company buy supplies in the future at designated prices