Chap016

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Chap016

  1. 1. Chapter 16 - Financial Management and Securities Markets Chapter 16 Financial Management and Securities Markets True / False Questions 1. (p. 489) One aspect of financial management involves managing funds for a business. TRUE AACSB: Reflective Thinking Bloom's Taxonomy: Knowledge Difficulty: Easy Learning Objective: 1 2. (p. 491) A lockbox is a technique for getting cash into a business's account faster. TRUE AACSB: Technology Bloom's Taxonomy: Knowledge Difficulty: Medium Learning Objective: 1 3. (p. 491) A marketable security is a temporary investment of cash. TRUE AACSB: Reflective Thinking Bloom's Taxonomy: Knowledge Difficulty: Easy Learning Objective: 1 4. (p. 491) Commercial paper is issued by large companies and backed by collateral. FALSE AACSB: Reflective Thinking Bloom's Taxonomy: Knowledge Difficulty: Easy Learning Objective: 1 16-1
  2. 2. Chapter 16 - Financial Management and Securities Markets 5. (p. 492) Eurodollar deposits can only be made at banks located in London. FALSE AACSB: Technology Bloom's Taxonomy: Knowledge Difficulty: Easy Learning Objective: 1 Multiple Choice Questions 6. (p. 489) Overall, financial management primarily involves acquiring and managing A. equity. B. funds. C. liabilities. D. inventory. E. employees. AACSB: Reflective Thinking Bloom's Taxonomy: Knowledge Difficulty: Easy Learning Objective: 1 7. (p. 489) In the area of short-term assets and liabilities, a word that is synonymous with "short term" is A. minimal. B. current. C. small. D. least. E. fiat. AACSB: Reflective Thinking Bloom's Taxonomy: Knowledge Difficulty: Medium Learning Objective: 1 16-2
  3. 3. Chapter 16 - Financial Management and Securities Markets 8. (p. 489) Cash, investments, accounts receivable, and inventory are also known as A. current assets. B. current liabilities. C. long-term assets. D. long-term liabilities. E. fixed assets. AACSB: Reflective Thinking Bloom's Taxonomy: Knowledge Difficulty: Easy Learning Objective: 1 9. (p. 489) Current assets include all of the following except A. accounts receivable. B. accounts payable. C. investments. D. inventory. E. cash. AACSB: Reflective Thinking Bloom's Taxonomy: Knowledge Difficulty: Medium Learning Objective: 1 10. (p. 489) Short-term debt obligations that must be repaid within a year are A. long-term assets. B. long-term liabilities. C. current liabilities. D. current assets. E. fixed liabilities. AACSB: Reflective Thinking Bloom's Taxonomy: Knowledge Difficulty: Medium Learning Objective: 1 16-3
  4. 4. Chapter 16 - Financial Management and Securities Markets 11. (p. 489) All of the following are current liabilities except A. accrued taxes. B. short-term bank loans. C. accounts payable. D. marketable securities. E. accrued salaries. AACSB: Reflective Thinking Bloom's Taxonomy: Knowledge Difficulty: Medium Learning Objective: 1 12. (p. 489) If a financial manager focuses on monitoring and influencing the company's current assets and liabilities, he or she is involved with A. working capital. B. current accounts. C. long-term financing. D. debt resolution. E. savings enhancement. AACSB: Reflective Thinking Bloom's Taxonomy: Comprehension Difficulty: Medium Learning Objective: 1 13. (p. 489) A firm may increase its return to the business through improved management of A. cash. B. temporary investments. C. inventory. D. accounts receivable. E. all of the above. AACSB: Reflective Thinking Bloom's Taxonomy: Knowledge Difficulty: Medium Learning Objective: 1 16-4
  5. 5. Chapter 16 - Financial Management and Securities Markets 14. (p. 489) The goal of financial managers who focus on current assets is to A. maximize returns on short-term assets. B. minimize returns on short-term liabilities. C. minimize returns on short-term assets. D. decrease return on working capital. E. none of the above. AACSB: Reflective Thinking Bloom's Taxonomy: Knowledge Difficulty: Medium Learning Objective: 1 Scrambling: Lokced 15. (p. 490) Good financial managers minimize the amount of cash available to pay bills in A. marketable securities. B. transaction balances. C. inventory. D. the float. E. banker's acceptances. AACSB: Reflective Thinking Bloom's Taxonomy: Knowledge Difficulty: Hard Learning Objective: 1 16. (p. 491) Because having idle cash on hand is undesirable, a manager may choose to invest in A. credit cards. B. debit cards. C. working capital. D. marketable securities. E. capital outlay. AACSB: Reflective Thinking Bloom's Taxonomy: Knowledge Difficulty: Easy Learning Objective: 1 16-5
  6. 6. Chapter 16 - Financial Management and Securities Markets 17. (p. 490) Managing working capital by having a bank pick up payments and immediately record them is known as A. electronic funds transfer. B. playing the float. C. lockbox collections. D. a transaction balance. E. economic order quantity. AACSB: Reflective Thinking Bloom's Taxonomy: Knowledge Difficulty: Medium Learning Objective: 1 18. (p. 491) To raise money for its operating expenses, the U.S. government may issue short- term debt obligations called A. commercial paper. B. certificates of deposit. C. banker's acceptances. D. Treasury bills. E. stock certificates. AACSB: Reflective Thinking Bloom's Taxonomy: Knowledge Difficulty: Medium Learning Objective: 1 19. (p. 491-492) All of the following are ways to invest idle cash for the short term except A. certificates of deposit. B. Eurodollars. C. Treasury bills. D. commercial paper. E. unsecured loans. AACSB: Reflective Thinking Bloom's Taxonomy: Knowledge Difficulty: Medium Learning Objective: 1 16-6
  7. 7. Chapter 16 - Financial Management and Securities Markets 20. (p. 493) Which of the following can serve as a short-term source of funds during a cash shortfall? A. Inventory B. Certificates of deposit C. Accounts Receivable D. Suppliers E. Cutting workers' salaries AACSB: Reflective Thinking Bloom's Taxonomy: Knowledge Difficulty: Medium Learning Objective: 1 21. (p. 493) If a firm tries to produce goods just in time to meet sales demand, its level of inventory will tend to be A. relatively low. B. very high. C. relatively high. D. excessive. E. wasteful. AACSB: Reflective Thinking Bloom's Taxonomy: Knowledge Difficulty: Medium Learning Objective: 1 22. (p. 493) Companies often keep a close watch on the amount of inventory on hand to minimize costs. If a company produces inventory in a constant, level pattern, when sales go down, its inventory level will A. remain constant. B. increase. C. decrease. D. be optimal. E. be just right. AACSB: Reflective Thinking Bloom's Taxonomy: Knowledge Difficulty: Hard Learning Objective: 1 16-7
  8. 8. Chapter 16 - Financial Management and Securities Markets Essay Questions 23. (p. 491-492) Why would a firm want to invest its idle cash? Cash ties up business funds just as investments in inventory or plants and equipment do. Unused or idle cash earns no money so financial managers try to minimize the amount of cash kept on hand to pay bills. Most businesses invest any cash not needed for such transactions in marketable securities or use it to reduce debt. AACSB: Reflective Thinking Bloom's Taxonomy: Comprehension Difficulty: Medium Learning Objective: 1 True / False Questions 24. (p. 494) Trade credit is the most widely used source of short-term financing. TRUE AACSB: Reflective Thinking Bloom's Taxonomy: Knowledge Difficulty: Easy Learning Objective: 2 25. (p. 494) Principal is the amount of money a business pays to use a bank's funds. FALSE AACSB: Reflective Thinking Bloom's Taxonomy: Knowledge Difficulty: Easy Learning Objective: 2 16-8
  9. 9. Chapter 16 - Financial Management and Securities Markets 26. (p. 494) Lenders first evaluate a borrower's history of borrowing and repaying loans by looking at the borrower's past credit history. TRUE AACSB: Reflective Thinking Bloom's Taxonomy: Knowledge Difficulty: Easy Learning Objective: 2 27. (p. 494) Unsecured loans are backed by collateral that the lender can claim if the borrower does not repay the loan. FALSE AACSB: Reflective Thinking Bloom's Taxonomy: Knowledge Difficulty: Medium Learning Objective: 2 28. (p. 494) Interest is a percentage of the principal that the bank charges for use of its money. TRUE AACSB: Reflective Thinking Bloom's Taxonomy: Knowledge Difficulty: Easy Learning Objective: 2 Multiple Choice Questions 16-9
  10. 10. Chapter 16 - Financial Management and Securities Markets 29. (p. 494) Dan bought three new trucks with money borrowed from the First National Bank. If he fails to repay the loan, the bank will repossess the trucks. The trucks are A. bought with an unsecured loan. B. bought with a line of credit. C. collateral. D. interest. E. principal. AACSB: Reflective Thinking Bloom's Taxonomy: Comprehension Difficulty: Medium Learning Objective: 2 30. (p. 493) If a boat manufacturer orders 50 units of fiberglass material and promises to pay the supplier at a later date, the manufacturer will record the amount to be paid as a(n) A. account receivable. B. current asset. C. long-term liability. D. account payable. E. equity account. AACSB: Reflective Thinking Bloom's Taxonomy: Comprehension Difficulty: Hard Learning Objective: 2 31. (p. 494) The most widely used source of short-term financing is A. trade credit. B. bank loans. C. commercial paper. D. mothers and fathers. E. finance companies. AACSB: Reflective Thinking Bloom's Taxonomy: Knowledge Difficulty: Medium Learning Objective: 2 16-10
  11. 11. Chapter 16 - Financial Management and Securities Markets 32. (p. 494) Sherry arranged for her business to borrow up to $10,000 whenever it was needed by writing a check on its account with the First National Bank. This is a(n) A. secured loan. B. line of credit. C. collateral loan. D. commercial paper. E. unsecured loan. AACSB: Reflective Thinking Bloom's Taxonomy: Comprehension Difficulty: Medium Learning Objective: 2 33. (p. 494) If a real estate developer borrows $100,000 from a bank and ends up paying back $120,000, the $100,000 represents the A. collateral. B. interest. C. down payment. D. principal. E. security. AACSB: Reflective Thinking Bloom's Taxonomy: Comprehension Difficulty: Easy Learning Objective: 2 34. (p. 494) If Linda Wilson borrows $20,000 to buy a car and ends up paying the lender a total of $24,000, the $4,000 difference represents the A. principal. B. collateral. C. security. D. discount. E. interest. AACSB: Reflective Thinking Bloom's Taxonomy: Comprehension Difficulty: Easy Learning Objective: 2 16-11
  12. 12. Chapter 16 - Financial Management and Securities Markets 35. (p. 494) If the interest rate on a loan changes according to the daily average of the prime rate over the life of the loan, the interest rate is said to be A. floating. B. non-variable. C. fixed. D. sporadic. E. flexible. AACSB: Reflective Thinking Bloom's Taxonomy: Knowledge Difficulty: Hard Learning Objective: 2 36. (p. 495) A finance company to whom businesses sell their accounts receivable, usually for a percentage of the total face value, is known as a(n) A. factor. B. secured lender. C. trade creditor. D. line creditor. E. trade lender. AACSB: Reflective Thinking Bloom's Taxonomy: Knowledge Difficulty: Easy Learning Objective: 2 Essay Questions 37. (p. 495) Are banks the only sources of short-term funds for businesses? No. In fact, virtually all financial institutions, including insurance companies, pension funds, money market funds, and finance companies make short-term loans to organizations. Large U.S. companies also engage in borrowing from the Eurodollar and commercial paper markets. AACSB: Reflective Thinking Bloom's Taxonomy: Knowledge Difficulty: Hard Learning Objective: 2 16-12
  13. 13. Chapter 16 - Financial Management and Securities Markets True / False Questions 38. (p. 495) Most business failures are the result of poor long-term financial planning. FALSE AACSB: Reflective Thinking Bloom's Taxonomy: Knowledge Difficulty: Hard Learning Objective: 3 39. (p. 495) Short-term financing is often required for long-term assets. FALSE AACSB: Reflective Thinking Bloom's Taxonomy: Knowledge Difficulty: Hard Learning Objective: 3 40. (p. 495) Fixed assets, such as production facilities, are expected to last for many years. TRUE AACSB: Reflective Thinking Bloom's Taxonomy: Knowledge Difficulty: Easy Learning Objective: 3 41. (p. 495) Businesses must reinvest in new equipment to stay competitive. TRUE AACSB: Reflective Thinking Bloom's Taxonomy: Knowledge Difficulty: Medium Learning Objective: 3 16-13
  14. 14. Chapter 16 - Financial Management and Securities Markets 42. (p. 496) Capital budgeting is the process of analyzing business needs and the selection of assets that will maximize the value of the business. TRUE AACSB: Reflective Thinking Bloom's Taxonomy: Knowledge Difficulty: Easy Learning Objective: 3 Multiple Choice Questions 43. (p. 495) Plants, offices, and equipment are considered A. long-term assets. B. short-term assets. C. relatively inexpensive items. D. liabilities. E. factors. AACSB: Reflective Thinking Bloom's Taxonomy: Knowledge Difficulty: Easy Learning Objective: 3 44. (p. 495) The financial arrangements required for investment in fixed assets can be A. quite easily arranged. B. challenging for even the most profitable organization. C. trivial. D. short-term. E. inexpensive. AACSB: Reflective Thinking Bloom's Taxonomy: Knowledge Difficulty: Medium Learning Objective: 3 16-14
  15. 15. Chapter 16 - Financial Management and Securities Markets 45. (p. 495) Of the following, which would not be a fixed asset for the Tops Manufacturing Company? A. A 10,000-square-foot factory B. Plastic extruding equipment with a 15-year lifespan C. $10,000 in T-bills D. Molds for plastic with lifespan of five years E. Furniture AACSB: Reflective Thinking Bloom's Taxonomy: Comprehension Difficulty: Hard Learning Objective: 3 46. (p. 495) Long-term assets are also called which type of asset? A. Current B. Lengthy C. Comprehensive D. Fixed E. Relevant AACSB: Reflective Thinking Bloom's Taxonomy: Knowledge Difficulty: Medium Learning Objective: 3 47. (p. 495) Long-term assets are A. easily made liquid. B. convertible to cash in less than six months. C. expected to last for many years. D. liabilities. E. dividends. AACSB: Reflective Thinking Bloom's Taxonomy: Knowledge Difficulty: Medium Learning Objective: 3 16-15
  16. 16. Chapter 16 - Financial Management and Securities Markets 48. (p. 495) Unless fixed assets are improved and modernized, A. businesses lose their competitive edge. B. companies must pay back earnings. C. equity increases. D. retained earnings grow. E. labor costs increase. AACSB: Reflective Thinking Bloom's Taxonomy: Knowledge Difficulty: Hard Learning Objective: 3 49. (p. 495) Purchasing new technologically improved equipment A. is usually too costly. B. is necessary to a firm's continued productivity. C. increases labor costs. D. creates problems with OSHA. E. reduces retained earnings. AACSB: Reflective Thinking Bloom's Taxonomy: Knowledge Difficulty: Medium Learning Objective: 3 50. (p. 496) The amount of money budgeted for the purchase of long-term assets is called the A. master budget. B. year's budget. C. current budget. D. fixed budget. E. capital budget. AACSB: Reflective Thinking Bloom's Taxonomy: Knowledge Difficulty: Medium Learning Objective: 3 16-16
  17. 17. Chapter 16 - Financial Management and Securities Markets 51. (p. 496) When a company invests a lot of money in a particular project, it is concerned about the amount of risk involved. In general, the longer the expected life of a project or asset, the potential risk is A. lesser. B. constant. C. greater. D. unchanged. E. nonexistent. AACSB: Reflective Thinking Bloom's Taxonomy: Knowledge Difficulty: Hard Learning Objective: 3 52. (p. 496) Which of the following is the most risky? A. Adding to a product line B. Introducing a new product in a foreign market C. Introducing a new product in a familiar market D. Buying new equipment for an established market E. All of the above carry the same risk. AACSB: Reflective Thinking Bloom's Taxonomy: Comprehension Difficulty: Medium Learning Objective: 3 Essay Questions 16-17
  18. 18. Chapter 16 - Financial Management and Securities Markets 53. (p. 496-497) Explain the risk factors a firm must assess when considering an investment in a new asset. When considering the risk associated with a prospective asset or project, financial managers must consider several things. If the investment is foreign, risk assessments must include the political climate and economic stability of the region. Time is another factor to assess when considering a new asset. The longer an asset is expected to last, the greater is its potential risk. Other factors are the stability and competitive nature of the marketplace. AACSB: Reflective Thinking Bloom's Taxonomy: Knowledge Difficulty: Hard Learning Objective: 3 True / False Questions 54. (p. 499) Liabilities may take many different forms, some of which are not considered debt. FALSE AACSB: Reflective Thinking Bloom's Taxonomy: Knowledge Difficulty: Easy Learning Objective: 4 55. (p. 499) A bond can be transferred from one owner to another. TRUE AACSB: Reflective Thinking Bloom's Taxonomy: Knowledge Difficulty: Medium Learning Objective: 4 56. (p. 499) A bond contract is also known as an indenture. TRUE AACSB: Reflective Thinking Bloom's Taxonomy: Knowledge Difficulty: Hard Learning Objective: 4 16-18
  19. 19. Chapter 16 - Financial Management and Securities Markets 57. (p. 500) The par value is the interest rate on a bond. FALSE AACSB: Reflective Thinking Bloom's Taxonomy: Knowledge Difficulty: Hard Learning Objective: 4 58. (p. 499) Bonds can be issued not only by corporations but also by governments and nonprofit organizations. TRUE AACSB: Reflective Thinking Bloom's Taxonomy: Knowledge Difficulty: Hard Learning Objective: 4 Multiple Choice Questions 59. (p. 499) Which of the following is an example of a long-term liability? A. Stock B. Bond C. Revenue D. Discount E. Equity AACSB: Reflective Thinking Bloom's Taxonomy: Knowledge Difficulty: Medium Learning Objective: 4 16-19
  20. 20. Chapter 16 - Financial Management and Securities Markets 60. (p. 499-500) A method of long-term financing that requires repaying funds with interest is A. issuing bonds. B. using retained earnings. C. issuing stocks. D. buying insurance. E. all of the above. AACSB: Reflective Thinking Bloom's Taxonomy: Knowledge Difficulty: Hard Learning Objective: 4 61. (p. 499) Long-term liabilities are A. debts that are due in less than six months. B. debts that will be repaid over a number of years. C. assets. D. equity. E. retained earnings. AACSB: Reflective Thinking Bloom's Taxonomy: Knowledge Difficulty: Easy Learning Objective: 4 62. (p. 499) Items such as a bond's value, date, and rate are specified in the A. indenture. B. prospectus. C. equity preface. D. ledger. E. T-account. AACSB: Reflective Thinking Bloom's Taxonomy: Knowledge Difficulty: Medium Learning Objective: 4 16-20
  21. 21. Chapter 16 - Financial Management and Securities Markets 63. (p. 500) A bond A. must be repaid according to the terms set in its indenture. B. may be defaulted without penalty. C. is the same as a stock. D. is a fixed asset. E. is a current liability. AACSB: Reflective Thinking Bloom's Taxonomy: Knowledge Difficulty: Medium Learning Objective: 4 64. (p. 498) What is the sign of a successful capital budgeting program? A. lower than normal costs and decreasing stock price B. higher than normal profits and increasing sales C. higher employee satisfaction D. decreased production times E. increased customer satisfaction AACSB: Reflective Thinking Bloom's Taxonomy: Knowledge Difficulty: Hard Learning Objective: 4 65. (p. 500) Which of the following is a sequence of small bond issues of progressively longer maturity? A. Secured bonds B. Serial bonds C. Progressive bonds D. Junk bonds E. Sequence bonds AACSB: Reflective Thinking Bloom's Taxonomy: Knowledge Difficulty: Medium Learning Objective: 4 Essay Questions 16-21
  22. 22. Chapter 16 - Financial Management and Securities Markets 66. (p. 499-501) Other than bank loans and short-term loans, discuss how firms raise long-term capital using liabilities. Many corporations can raise capital by issuing bonds, which are long-term debt securities that a company sells to raise long-term funds. A bond represents a loan from the purchaser to the issuer of the bonds, and it must be repaid with interest by the date specified. AACSB: Reflective Thinking Bloom's Taxonomy: Knowledge Difficulty: Hard Learning Objective: 4 True / False Questions 67. (p. 502) The market value of common stock is the price at which it is currently trading. TRUE AACSB: Reflective Thinking Bloom's Taxonomy: Knowledge Difficulty: Easy Learning Objective: 5 68. (p. 502) The par value is the dollar amount printed on a stock certificate. TRUE AACSB: Reflective Thinking Bloom's Taxonomy: Knowledge Difficulty: Medium Learning Objective: 5 69. (p. 502) Retained earnings may be used to finance long-term assets. TRUE AACSB: Reflective Thinking Bloom's Taxonomy: Knowledge Difficulty: Easy Learning Objective: 5 16-22
  23. 23. Chapter 16 - Financial Management and Securities Markets 70. (p. 502) Common stock is a safer investment than preferred. FALSE AACSB: Reflective Thinking Bloom's Taxonomy: Knowledge Difficulty: Medium Learning Objective: 5 71. (p. 503) An investment banker sells securities for corporations. TRUE AACSB: Reflective Thinking Bloom's Taxonomy: Knowledge Difficulty: Easy Learning Objective: 5 Multiple Choice Questions 72. (p. 502) The last in line for the payment of profits are the A. bondholders. B. common stockholders. C. preferred stockholders. D. government. E. customers. AACSB: Reflective Thinking Bloom's Taxonomy: Knowledge Difficulty: Hard Learning Objective: 5 16-23
  24. 24. Chapter 16 - Financial Management and Securities Markets 73. (p. 502) Stockholders who may receive dividends but cannot vote are called A. common stockholders. B. uncommon stockholders. C. standard stockholders. D. majority stockholders. E. preferred stockholders. AACSB: Reflective Thinking Bloom's Taxonomy: Knowledge Difficulty: Hard Learning Objective: 5 74. (p. 502) When a stock quote includes the stock symbol followed by the letters "pf," it indicates A. price fixing. B. pretty farfetched. C. common stock. D. preferred stock. E. poorly financed. AACSB: Reflective Thinking Bloom's Taxonomy: Knowledge Difficulty: Hard Learning Objective: 5 75. (p. 502) The 52-week high and low are the highest and lowest prices, respectively, paid for a stock in the last A. month. B. year. C. decade. D. week. E. earnings period. AACSB: Reflective Thinking Bloom's Taxonomy: Knowledge Difficulty: Easy Learning Objective: 5 16-24
  25. 25. Chapter 16 - Financial Management and Securities Markets 76. (p. 502) The only long-term funds that a company can generate internally are A. dividend yields. B. unretained earnings. C. retained earnings. D. payout earnings. E. earnings paid out. AACSB: Reflective Thinking Bloom's Taxonomy: Comprehension Difficulty: Hard Learning Objective: 5 77. (p. 503) If a company retains all of its earnings, then it will not pay A. dividends. B. taxes. C. expenses. D. bills. E. suppliers. AACSB: Reflective Thinking Bloom's Taxonomy: Knowledge Difficulty: Medium Learning Objective: 5 78. (p. 503) Corporations usually employ an investment banking firm to help sell their securities in A. the primary market. B. secondary markets. C. tertiary markets. D. singular markets. E. multiple markets. AACSB: Reflective Thinking Bloom's Taxonomy: Knowledge Difficulty: Hard Learning Objective: 5 Essay Questions 16-25
  26. 26. Chapter 16 - Financial Management and Securities Markets 79. (p. 502) Explain the difference between common and preferred stock. Preferred stock is corporate ownership that grants the owner preference in the distribution of the company's profits but not the voting rights given to common stockholders. Preferred stockholders receive dividends before common stockholders and are given preference over common stockholders in the liquidation process. Consequently, preferred stock is a safer investment than common stock. AACSB: Reflective Thinking Bloom's Taxonomy: Comprehension Difficulty: Hard Learning Objective: 5 True / False Questions 80. (p. 504-505) Securities markets provide liquidity. TRUE AACSB: Reflective Thinking Bloom's Taxonomy: Knowledge Difficulty: Hard Learning Objective: 6 81. (p. 505) Secondary markets exist for the trading of publicly owned securities. TRUE AACSB: Reflective Thinking Bloom's Taxonomy: Knowledge Difficulty: Hard Learning Objective: 6 82. (p. 505) On organized exchanges, investors buy and sell only for their own accounts. FALSE AACSB: Reflective Thinking Bloom's Taxonomy: Knowledge Difficulty: Hard Learning Objective: 6 16-26
  27. 27. Chapter 16 - Financial Management and Securities Markets 83. (p. 505-506) The over-the-counter markets do not have a central location for trading. TRUE AACSB: Reflective Thinking Bloom's Taxonomy: Knowledge Difficulty: Medium Learning Objective: 6 Multiple Choice Questions 84. (p. 504) Securities markets provide A. a mechanism for buying and selling stocks and bonds. B. the primary market where firms raise capital. C. a secondary market. D. liquidity. E. all of the above. AACSB: Reflective Thinking Bloom's Taxonomy: Knowledge Difficulty: Medium Learning Objective: 6 85. (p. 505) Once a corporation's stock is publicly owned, owners can trade it in A. the singular market. B. tertiary markets. C. multiple markets. D. secondary markets. E. the primary market. AACSB: Reflective Thinking Bloom's Taxonomy: Knowledge Difficulty: Hard Learning Objective: 6 16-27
  28. 28. Chapter 16 - Financial Management and Securities Markets 86. (p. 505) The two biggest stock markets in the United States are A. American Stock Exchange and New York Stock Exchange. B. Chicago Stock Exchange and NASDAQ. C. New York Stock Exchange and NASDAQ. D. Southeast Regional Stock Exchange and New York Stock Exchange. E. Tokyo Stock Exchange and NASDAQ. AACSB: Reflective Thinking Bloom's Taxonomy: Knowledge Difficulty: Medium Learning Objective: 6 87. (p. 507) Which of the following compares current stock prices with those in a specified base period? A. Average B. Index C. Dow Jones Industrial Average D. Dividend yield E. Current yield AACSB: Reflective Thinking Bloom's Taxonomy: Knowledge Difficulty: Medium Learning Objective: 6 88. (p. 506) The over-the-counter market A. trades most corporate bonds and all U.S. government securities. B. is only for small companies just getting started. C. isn't as current in its quotes as the NYSE. D. is located in Philadelphia. E. is located in Chicago. AACSB: Reflective Thinking Bloom's Taxonomy: Knowledge Difficulty: Medium Learning Objective: 6 16-28
  29. 29. Chapter 16 - Financial Management and Securities Markets 89. (p. 508) Which of the following is a sluggish, retreating market with declining stock prices? A. Lion market B. Deer market C. Bull market D. Bear market E. Horse market AACSB: Reflective Thinking Bloom's Taxonomy: Knowledge Difficulty: Easy Learning Objective: 6 Essay Questions 90. (p. 505-506) Explain how the over-the-counter markets differ from other exchanges. The over-the-counter market is a network of dealers all over the country linked by computers, telephones, and teletype machines. Unlike the other exchanges, it does not have a central location. Also, the dealers own the securities they trade, and they buy and sell their own inventories of securities. So, the dealers must balance their supply of securities by changing the prices they charge to buy and sell. AACSB: Reflective Thinking Bloom's Taxonomy: Comprehension Difficulty: Medium Learning Objective: 6 16-29
  30. 30. Chapter 16 - Financial Management and Securities Markets 91. (p. 513) Normally, rapidly increasing sales is a good thing. What seems to be the problem here? A rule of thumb in finance is to always match short- and long-run investments with short- and long-term financing, respectively. Organizations experiencing a temporary surge in sales may use short-term loans to finance the increased sales (added costs from overtime, extra raw materials, and so forth). However, short-term funds come at a premium, which is why they should be used only for short-run investments (such as a temporary increase in sales). If sales are expected to increase from year to year (and assuming the firm is already operating at or near capacity), operation expansion is the best alternative—a long-run investment that is best financed through long-term loans. The main problem with Glasspray is that each year it finances the increased sales with short-term financing (excessive current liabilities). Over time, this method of capitalizing the organization has produced an undesirable capital structure—excessive current liabilities relative to current assets. AACSB: Reflective Thinking Bloom's Taxonomy: Analysis Difficulty: Hard Learning Objective: 7 92. (p. 513) List the important components of a firm's working capital. Include both current assets and current liabilities. The current assets associated with working capital include cash, investments, accounts receivable, and inventory. The current liabilities associated with working capital include accounts payable, accrued salaries, accrued taxes, and short-term bank loans. AACSB: Reflective Thinking Bloom's Taxonomy: Knowledge Difficulty: Medium Learning Objective: 7 16-30
  31. 31. Chapter 16 - Financial Management and Securities Markets 93. (p. 513) What are some management techniques applied to current liabilities that Glasspray might use to improve its working capital position? Students' answers may vary, but each should get at reducing current liabilities. For example, Glasspray could begin by replacing some of the short-term debt with long-term financing or equity (the debt used to finance the increased sales), and it could take advantage of any trade credit its suppliers offer. AACSB: Reflective Thinking Bloom's Taxonomy: Knowledge Difficulty: Medium Learning Objective: 7 16-31

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