Chapter 18 VOCAB

Question 1

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

Answer 1

financial management

Question 2

the balance of potential risks against potential rewards

Answer 2

risk-return trade-off

Question 3

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

Answer 3

financial plan

Question 4

amounts that are currently owed to a firm

Answer 4

account receivable

Question 5

amounts that a firm currently owns to other parties

Answer 5

accounts payable

Question 6

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

Answer 6

budget

Question 7

the process of analyzing and adjusting the basic financial plan to correct for deviations from forecasted events

Answer 7

financial control

Question 8

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

Answer 8

hedging

Question 9

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

Answer 9

zero-based budgeting

Question 10

budget that identifies the money a new company will need to spend to launch operations

Answer 10

start-up budget

Question 11

budget that identifies all sources of revenue and coordinates the spending of those funds throughout the coming year

Answer 11

operating budget; also known as the master budget

Question 12

budget that outlines expenditures for real estate, new facilities, major equipment, and other capital investments

Answer 12

capital budget

Question 13

money paid to acquire something of permanent value in a business

Answer 13

capital investments

Question 14

budget that identifies the costs needs to accomplish a particular project

Answer 14

project budget

Question 15

arranging funding by borrowing money

Answer 15

debt financing

Question 16

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

Answer 16

equity financing

Question 17

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

Answer 17

short-term financing

Question 18

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

Answer 18

long-term financing

Question 19

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

Answer 19

cost of capital

Question 20

lowest rate of interest charged by banks for short-term loans to their most creditworthy customers

Answer 20

prime interest rate

Question 21

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

Answer 21

leverage

Question 22

a firm’s mix of debt and equity financing

Answer 22

capital structure

Question 23

credit obtained by the purchaser directly from the supplier

Answer 23

trade credit

Question 24

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

Answer 24

secured loans

Question 25

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

Answer 25

collateral

Question 26

loans requiring no collateral but a good credit rating

Answer 26

unsecured loans

Question 27

portion of an unsecured loan that is kept on deposit at the lending institution to protect the lender and increase the lender’s return

Answer 27

compensating balance

Question 28

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

Answer 28

line of credit

Question 29

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

Answer 29

commercial paper

Question 30

obtaining funding by selling accounts receivable

Answer 30

factoring

Question 31

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

Answer 31

lease

Question 32

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

Answer 32

bonds

Question 33

bonds backed by specific assets that will be given to bondholders if the borrowed amount is not repaid

Answer 33

secured bonds

Question 34

corporate bonds backed only by the reputation of the issuer

Answer 34

debentures

Question 35

corporate bonds than can be exchanged at the owner’s discretion into common stock of the issuing company

Answer 35

convertible bonds

Question 36

account into which a company makes annual payments for use in redeeming its bonds in the future

Answer 36

sinking fund

Question 37

ownership assets that aren’t publicly traded; includes venture capital

Answer 37

private equity

Question 38

a specialized type of bank that buys the shares from the company preparing an IPO and sells them to investors

Answer 38

underwriter

Question 39

SEC-required document that discloses required information about the company, its finances, and its plans for using the money it hopes to raise

Answer 39

prospectus