Week 3 Ch. 16: Financial Management within Organizations

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 Management: 3 Fundamental Concepts

Answer 3

1. Balancing short-term and long-term demands
2. Balancing potential risks and potential rewards
3. Balancing leverage and flexibility

Question 4

Balancing short-term and long-term demands

Answer 4

• must have ready cash to pay salaries, bills, and taxes
• needs a financial cushion to ride out rough times
• may need money for acquisitions of other extraordinary expenses

Question 5

Balancing potential risks and potential rewards

Answer 5

• every decision involves a risk/reward trade-off
• higher risks may yield higher rewards
• the safest choices aren’t always the best choices

Question 6

Balancing leverage and flexibility

Answer 6

• can use debt strategically and sometimes out of necessity
• debt can be a tool, but it can also be a trap
• highly leveraged companies have far less ability to maneuver and are more vulnerable to setbacks

Question 7

Financial plan

Answer 7

• a document that outlines the funds needed for a certain period of time, along with the sources and intended uses of those funds
• strategic plan, company’s financial statements, external financial environment

Question 8

Accounts receivable

Answer 8

amounts that are currently owed to a firm

Question 9

Accounts payable

Answer 9

amounts that a firm currently owes to other parties

Question 10

Budget

Answer 10

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

Question 11

Financial control

Answer 11

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

Question 12

Budgeting Challenges

Answer 12

1. Every company has a limited amount of money to spend
2. Revenues and costs are often difficult to predict
3. It’s not always clear how much should be spent

Question 13

Every company has a limited amount of money to spend

Answer 13

• projects and departments are often in competition for resources
• managers need to make tough choices, occasionally taking money from one group and giving it to another

Question 14

Revenues and costs are often difficult to predict

Answer 14

• sales forecasts are never certain, particularly for new products or for sales into new markets
• fixed costs are easy to predict, but variable costs can be hard to predict, particularly more than a few months out

Question 15

It’s not always clear how much should be spent

Answer 15

• with some expenses, such as advertising, managers aren’t always sure how much is enough
• uncertainty leads to budgeting based on past expenditure, which might be out of line with current strategic needs

Question 16

Zero-based budgeting

Answer 16

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

Question 17

Debt financing

Answer 17

arranging funding by borrowing money

Question 18

Equity financing

Answer 18

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

Question 19

Capital structure

Answer 19

a firm’s mix of debt and equity financing

Question 20

Debt financing: Maturity

Answer 20

a contract specifies a date by which debt must be repaid

Question 21

Equity financing: Maturity

Answer 21

does not need to be repaid

Question 22

Debt financing: Claims on Assets

Answer 22

lenders have priority claims on assets

Question 23

Equity financing: Claims on Assets

Answer 23

shareholders have claims only after the firm satisfies claims of lenders

Question 24

Debt financing: Tax consequences

Answer 24

Debt payments reduce taxable income, lowering obligations

Question 25

Equity financing: Tax consequences

Answer 25

Dividend payment are not tax deductible

Question 26

Short-term financing

Answer 26

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

Question 27

Long-term financing

Answer 27

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

Question 28

Cost of Capital

Answer 28

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

Question 29

Financial leverage

Answer 29

the strategic attempt of borrowing money to invest in assets

Question 30

Private equity

Answer 30

• ownership assets that aren’t publicly traded
• includes venture capital
• public stock offerings

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

Thriving in the Digital Enterprise: Smart Contracts

Answer 36

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