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Exam 18: Financial Management

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Question 51

True/False

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Acquiring funds through equity financing requires the firm to pay annual dividends.

A) True
B) False

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Question 52

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According to the risk/return tradeoff, the higher the risk, the lower the interest rate charged by the lender.

A) True
B) False

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Question 53

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offer short-term secured loans to high-risk borrowers. These loans usually require collateral.

Mini-Case Tishian's Funeral Home has been in business for over eighty years. Throughout its history, the firm has been a family-run operation. Today, the business is managed by Mort Tishian, a grandson of the founder. Unfortunately, Mort Tishian's tenure has been plagued with problems neither his father nor grandfather before him experienced. The reason is simple: the funeral business is undergoing rapid change. Small, family-owned funeral homes are losing ground to a new type of competitor, a large national network service that resembles a franchise system. More and more families "in their time of need" are choosing the new, highly promoted competitors instead of the traditional small familyoperated funeral homes. This trend has required a response from organizations like Tishian's Funeral Home. Bigger and better facilities are needed to remain competitive. All of this puts more pressure on the family-owners to be more active in the financial side of the business. Mort summed it up best when he said, "Grandpa told people, 'you pay me when you can, I ain't goin' nowheres.'" His creditors did the same with him. Today, it's a different game. Cash flow is key, and obtaining funds is no simple task. Additionally, creditors want their money now, not later. Banks are also more demanding. "Heck, Grandpa knew all the bankers he dealt with personally. I see new faces every time I go to the bank. If things don't get better, I suspect after eighty years of service, Tishian's Funeral Home will have its own funeral." -After much searching, Mort located an old banking friend of his father's. The banker offered Mort up to $25,000 in unsecured funds, which Mort's firm could borrow any time within a year, as long as the bank has the money available. Mort was offered a(n) :

According to the Spotlight on Small Business box included in Chapter 18, the recession has caused small business customers to take longer to pay. This has placed added burden on the small business owner.

Big Ticket Technologies holds commercial paper issued by Prude Insurance Corporation that matures in 180 days. However, shortly after Big Ticket purchased the commercial paper, Prude Insurance went out of business. The finance manager for Big Ticket is not worried because his loan to the corporation is secured by collateral that he can now claim.

Charging interest on past due customer accounts reflects that:

Mini-Case Tishian's Funeral Home has been in business for over eighty years. Throughout its history, the firm has been a family-run operation. Today, the business is managed by Mort Tishian, a grandson of the founder. Unfortunately, Mort Tishian's tenure has been plagued with problems neither his father nor grandfather before him experienced. The reason is simple: the funeral business is undergoing rapid change. Small, family-owned funeral homes are losing ground to a new type of competitor, a large national network service that resembles a franchise system. More and more families "in their time of need" are choosing the new, highly promoted competitors instead of the traditional small familyoperated funeral homes. This trend has required a response from organizations like Tishian's Funeral Home. Bigger and better facilities are needed to remain competitive. All of this puts more pressure on the family-owners to be more active in the financial side of the business. Mort summed it up best when he said, "Grandpa told people, 'you pay me when you can, I ain't goin' nowheres.'" His creditors did the same with him. Today, it's a different game. Cash flow is key, and obtaining funds is no simple task. Additionally, creditors want their money now, not later. Banks are also more demanding. "Heck, Grandpa knew all the bankers he dealt with personally. I see new faces every time I go to the bank. If things don't get better, I suspect after eighty years of service, Tishian's Funeral Home will have its own funeral." -To raise the funds for the major improvements needed at the funeral home, Mort has talked to two investors about incorporating his business and selling them shares of stock in the company. Mort is considering the use of:

A forecast predicts the future cash inflows and outflows in future periods.

A term-loan agreement requires the borrower to repay the loan in one lump sum at the end of the loan period.

After thoroughly studying the feasibility for expansion, Preferred Pet Care Inc, a mobile pet care company that operates in the greater Chicago area, plans to offer a similar service in the Indianapolis metropolitan area. This endeavor will require a large capital expenditure. Due to the nature of this project, the firm will only consider equity financing.

The effective management of accounts receivable requires financial managers to:

As a financial manager of a small firm, Jerry needs to determine how much his company will have to borrow in the coming months, and when the borrowed funds will be needed. The preparation of the cash budget will help.

The overall objective of financial planning is to:

The most widely used source of short-term funding is trade credit.

A cash budget helps managers anticipate borrowing, debt repayment, operating expenses, and short-term investment opportunities.

represent a favorable source of meeting long-term financing needs because there are no interest payments, dividends, or underwriting fees required when using this source.

To secure financing for a planned expansion, Ohio Electronics borrowed $400,000 from King Finance. The loan agreement requires that Ohio Electronics provide the title to their factory as collateral.

Most small businesses are unable to secure long-term financing.

Small businesses rely heavily on long-term financing.