2. Learning Outcomes
1. How do finance and the financial manager affect a firm’s overall strategy?
2. What types of short-term and long-term expenditures does a firm make?
3. What are the main sources and costs of unsecured and secured short-term
financing?
4. What are the key differences between debt and equity, and what are the
major types and features of long-term debt?
5. When and how do firms issue equity, and what are the costs?
6. How do securities markets help firms raise funding, and what securities trade
in the capital markets?
7. Where can investors buy and sell securities, and how are securities markets
regulated?
8. What are the current developments in financial management and the
securities markets?
3. Financial
Manager
How much money is needed and when
How best to use the available funds
How to get the required financing
Responsibilities
Financial planning,
Investing (spending money),
Financing (raising money)
5. Risk/Return Tradeoff
• After watching the video,
which provided a real-life
illustration from the 2008
financial crisis, what might
you think would be some
similar examples that could
be made from the negative
economic consequences of
the global COVID-19
pandemic?
6. _____ management is the art and science used to
determine the most effective ways to acquire and use
funds to achieve the firm's goals.
A. Operations
B. Financial
C. Accounting
D. Corporate
E. Money
Financial managers constantly strive for a balance
between:
A. the opportunity for profit and the potential for loss
B. cash and marketable securities
C. economic responsibility and social responsibility
D. common and preferred stock
E. dividends paid out and interest payments
The primary goal of the financial manager is to:
A. maximize the value of the firm to its owners
B. concentrate on short-term growth strategies
C. develop new goods and services for the company
D. make sure all employees get paid on a regular
schedule
E. pay off all debt as quickly as possible
Financial managers focus on _____, the inflow and
outflow of cash.
A. financial flows
B. sales revenues
C. cash flows
D. revenue streams
E. profit and loss patterns
7. In finance, _____ is the potential for loss.
A. leverage
B. risk
C. factoring
D. business chance
E. probability
In finance, the opportunity for profit is called:
A. return
B. potential
C. risk
D. value
E. maximization
In seeking a balance between the opportunity for profit
and the potential for loss, a financial manager is dealing
with the concept of _____ trade-off.
A. potential profit
B. risk-return
C. profit-loss
D. sales-profit
E. profit-budget
8. 1. How do finance and the financial manager affect
a firm’s overall strategy?
• CONCEPT CHECK
1. What is the role of financial management in a
firm?
2. How do the three key activities of the financial
manager relate?
3. What is the main goal of the financial
manager? How does the risk-return trade-off
relate to the financial manager’s main goal?
9. Short Term Expenses
Operating Expenses
Support current selling and
production activities
Accounts Receivable &
Current Assets
• Converted to Cash
Cash Management Managing Accounts Receivable Managing Inventory
Make sure enough cash is on
hand to pay bills
Sales that have not been paid Purchase price
Set Credit Terms Ordering, handling, storage, interest,
and insurance costs
Long Term Expenses
Capital Expenditures
Land, buildings, machinery,
equipment, and information
systems
10. Inventory Management Concepts and Amazon's
Inventory
As stated in Section
16.2, the cost of
inventory includes its
purchase price, plus
ordering, handling,
storage, interest, and
insurance costs. Watch
the first video for a
brief summary of the
various components of
the inventory
management process. .
11. Inventory Management Concepts and Amazon's
Inventory
Next, view the second video
which showcases one of
Amazon’s warehouses.
Although this video is a
few years old, it does
display a balance of both
human and non-human
touchpoints along the way
to getting a package out
the door. One fascinating
aspect of the “SLAM” line
described in the video is
the ability of Amazon’s
computerized labeling
and shipping apparatus to
know the anticipated
package weight, and thus
detect the likelihood of
pulling the wrong item
since the package
apparently had an
incorrect weight.
12. Inventory Management Concepts
and Amazon's Inventory
1. Which processes do you think must be manual, or
could this warehouse become 100% automated at
some point?
2. Was there anything else about Amazon’s inventory
and shipping procedure that seemed interesting or
unusual to you?
13. Making sure that enough cash is on hand to
pay bills as they come due and to meet
unexpected expenses is called cash:
A. maintenance
B. capitalization
C. targeting
D. management
E. administration
_____ is a short-term unsecured debt issued
by a financially strong corporation.
A. A treasury bill
B. A certificate of deposit
C. A money market deposit
D. Commercial paper
E. Investment credit
Financial managers often shift temporary
funds from checking accounts to _____
securities to earn higher interest returns.
A. commercial
B. marketable
C. administrative
D. strategic
E. operational
Grainger Distribution Company sold Long
Electronics ten circuit breakers for $179.00
each. Long Electronics will be allowed thirty
days to pay the bill. Grainger will carry the
$1790.00 on its books as a(n):
A. account payable
B. current liability
C. account receivable
D. fixed liability
E. marketable security
14. _____ are specific repayment conditions as to
how long customers have to pay bills and the
amount of cash discount allowed.
A. Credit credentials
B. Credit terms
C. Revolving accounts
D. Liability procedures
E. Sales terms
Funds invested in long-lived assets, such as
land, buildings, machinery, and equipment,
are called:
A. manufacturing expenses
B. operating expenses
C. capital expenditures
D. production costs
E. material costs
The cost of inventory to the firm includes all
of the following EXCEPT:
A. ordering costs
B. handling costs
C. purchase price
D. selling costs
E. insurance costs
_____ is the process of selecting the capital
expenditures that offer the best returns and
meet the goal of maximizing the firm's value.
A. Capital evaluation
B. Capital allocation
C. Budget analysis
D. Capital budgeting
E. Budget allocation
15. 2. What types of short-term and long-term
expenditures does a firm make?
• CONCEPT CHECK
1. Distinguish between short- and long-term
expenses.
2. What is the financial manager’s goal in cash
management? List the three key cash
management strategies.
3. Describe a firm’s main motives in making
capital expenditures.
17. Trade Credit
• Accounts Payable
Bank Loans
• Line of Credit
• Revolving Credit
Commercial Paper - IOU
Pledge Assets or Collateral
Factoring
• Firm sells accounts
receivable to another
financial institution
• Acquires cash
• Don’t wait for loan
18. The three main types of unsecured short-term
loans are:
A. treasury bills, certificates of deposit, and
accounts payable
B. accounts payable, notes payable, and loans
payable
C. trade credit, accounts payable, and bank loans
D. trade credit, bank loans, and commercial paper
E. commercial paper, accounts payable, and trade
credit
A(n) _____ is a type of loan often used to
finance buildup of inventory for seasonal
(cyclical) businesses just before their
strongest sales period.
A. secured bank loan
B. trade credit
C. unsecured bank loan
D. collateral loan
E. commercial paper loan
An IOU is most similar to which type of bank
loan?
A. revolving credit
B. collateralized credit
C. commercial paper
D. business trade credit
E. a line of credit
Gerald Cooksie owns a restaurant in Panama Beach,
Florida. He has arranged a business loan with the
bank where he has his business account. The terms
of the loan allow him to borrow up to $13,500
within the next year if the bank has funds available
to lend; he must pay interest only on the unpaid
loan balance. Cooksie has arranged a:
A. collateralized loan
*B. line of credit
C. secured loan
D. mortgage loan
E. credit-line loan
19. A secured loan requires that the borrower
pledge specific assets to secure the loan.
These assets are called:
A. collateral
B. pledges
C. intangible assets
D. negotiable assets
E. asset requirements
A loan that requires the borrower to pledge
specific assets as collateral is called a(n)
_____ loan.
A. promissory
B. commercialized
C. unsecured
D. amortized
E. secured
A company sells its accounts receivable to a
financial institution that is in the business of
buying accounts receivable at a discount. This
sale is called:
A. bartering
B. collateralizing
C. factoring
D. countertrading
E. buying on the short
Secured short-term loans are usually secured
by:
A. accounts payable and accounts receivable
B. buildings and equipment
C. equipment and inventory
D. inventory and raw material
E. accounts receivable and inventory
20. 3. What are the main sources and costs of unsecured
and secured short-term financing?
• CONCEPT CHECK
1. Distinguish between unsecured and secured
short-term loans.
2. Briefly describe the three main types of
unsecured short-term loans.
3. Discuss the two ways that accounts
receivable can be used to obtain short-term
financing.
21. Understanding Debt and Equity Financing
Business ventures of course
need capital to get them
open and rolling, and
often later to help the
enterprise stay in business
if incoming revenue is
insufficient. Additionally,
opportunities to expand
the business may need
financing at some level to
fund this growth. The two
main ways to finance are
debt and equity. View the
video and consider taking
notes so that you may
confidently explain the
key pros and cons for
management to use debt
versus equity to obtain
financing.
23. Term loan
• Maturity of more than one year.
• 5 to 12 years and can be
unsecured or secured.
• Commercial banks, insurance
companies, pension funds,
commercial finance companies,
and manufacturers’ financing
subsidiaries.
Bonds
• Long-term debt obligations
(liabilities) of corporations and
governments
• Principal
• Interest
Mortgage loan
• long-term loan made against real estate as
collateral.
• The lender takes a mortgage on the property,
which lets the lender seize the property, sell it,
and use the proceeds to pay off the loan if the
borrower fails to make the scheduled payments.
24. The major advantage of debt financing is the:
A. number of different sources from which it
is available
B. lack of dependence on collateral
C. absence of factoring
D. deductibility of interest expenses
E. amortization benefits
Three important forms of long-term (capital)
expenditures are:
A. accounts payable, notes payable, and commercial
paper
B. treasury bills, certificates of deposit, and
accounts payable
C. trade credit, accounts payable, and bank loans
D. trade credit, bank loans, and commercial paper
E. term loans, mortgage loans, and bonds
Term loans:
A. are available from commercial banks, insurance
companies, pension funds, commercial finance
companies, and manufacturer’s financing
subsidiaries
B. may be repaid on a quarterly, semiannual, or
annual schedule
C. are capital expenditure loans with a maturity of
more than one year
D. can be secured or unsecured
E. are accurately described by all of the above
Long-term debts (liabilities) for corporations
and governments are called:
A. preferred stock
B. common stock
C. bonds
D. equity funds
E. lines of credit
25. A(n) _____ loan is a long-term loan using real
estate or other assets as collateral.
A. unsecured
B. line of credit
C. prime
D. discount
E. mortgage
Business loans available from commercial
banks with terms generally five to twelve
years and secured or unsecured are called
_____ loans.
A. collateral
B. mortgage
C. line of credit
D. term
E. prime
Long-term debt would be used to:
A. pay employees’ salaries
B. buy new tablecloths for a restaurant
C. replace broken glass in a window
D. provide customer with a cash discount
E. do none of the above
26. 4. What are the key differences between debt and
equity, and what are the major types and features of
long-term debt?
• CONCEPT CHECK
1. Distinguish between debt and equity.
2. Identify the major types and features of
long-term debt.
27. Equity
Owners’ investment in the business
Preferred and common stockholders are the owners
Dividends – payment of more stock
Retained Earnings – reinvested in the firm
A firm obtains equity financing
• Selling new ownership shares (external financing),
• Retaining earnings (internal financing)
Small and growing
• Typically high-tech, companies, through venture capital (external
financing).
28.
29.
30. Common stock Security that represents an ownership interest in a
corporation
Initial Public Offering (IPO) Company’s first sale of stock to the public
Dividends Payments to stockholders from a corporation’s profits.
• Paid in cash or in stock.
Stock dividends Payments in form of more stock.
Retained earnings Profits reinvested in firm
Preferred stock Dividend amount that is set at the time the stock is issued.
• Must be paid before the company can pay any
dividends to common stockholders.
• Firm goes bankrupt and sells its assets, preferred
stockholders get their money back before common
stockholders do.
• Increases the firm’s financial risk because it obligates
the firm to make a fixed payment.
Venture capitalists Invest in new businesses in return for part of the
ownership
• As much as 60 percent.
• New businesses with high growth potential, and they
expect
• High investment return within 5 to 10 years.
Angel investors Wealthy private investors focused on financing small
business ventures in exchange for equity
31. _____ stock is a security that represents an
ownership interest in a corporation and has voting
rights.
A. Preferred
B. Common
C. Par value
D. Treasury
E. Equity
Payments in the form of more stock to existing
stockholders are called:
A. warrants
B. rights offerings
C. stock dividends
D. stock offerings
E. IPOs
When a firm goes public, it must reveal such
information as:
A. financing plans
B. product details
C. financial data
D. operating data
E. all of the above
Dividends are:
A. annual payments on bonds
B. the earnings of the corporation
C. payments to the shareholders from company
earnings
D. guaranteed payments to the common
shareholders
E. loans made to the shareholders
32. The funds that are reinvested in the firm out of
profits and after dividends are paid are called:
A. retained earnings
B. stock equity
C. investor earnings
D. secondary earnings
E. convertible bonds
_____ invest in new businesses in return for part of
the ownership, sometimes as much as 60 percent.
A. Intrapreneurs
B. Multipreneurs
C. Venture capitalists
D. Leveraged capitalists
E. Business opportunists
Which of the following statements about
preferred stock is true?
A. Preferred stock carries voting rights.
B. Preferred stockholders receive dividends before
bondholders receive interest.
C. Preferred stock can be owned only by upper
management.
D. Preferred stockholders receive dividends after
common stockholders.
E. Preferred stock produces a fixed-amount dividend.
Private individual investors who sometimes
provide venture capital to small firms in need of
equity capital are called:
A. opportunists
B. entrepreneur backers
C. benefactors
D. angel investors
E. equity developers
33. 5. When and how do firms issue equity, and what are
the costs?
• CONCEPT CHECK
1. Compare the advantages and disadvantages
of debt and equity financing.
2. Discuss the costs involved in issuing
common stock.
3. Briefly describe these sources of equity:
retained earnings, preferred stock, venture
capital.
34. Types of Markets
Primary Secondary
New
securities
sold to public
Bought &
sold or
traded
among
investors
Roles
Investment
Banker
Stockbroker
• Help companies
raise long-term
financing
Buys & sells
securities on
behalf of clients
• Underwriting
Buys securities
from corporations
& resells to public
35.
36.
37.
38. Stocks vs. Bonds
Can you explain the
distinctions between a
primary and a
secondary market for
stocks? (Hint: primary
= new, as in an Initial
Public Offering (IPO),
and secondary = used,
or already
issued). Remember:
stocks are also called
equities because the
buyer receives a part
ownership in that
company.
39. Stocks vs. Bonds
1. Are you able to identify the key features of bonds that distinguish
their investment potential from equities (stocks)?
2. What about the different kinds of bonds, such as corporate,
municipal and particularly government bonds?
3. U.S. government bonds are considered to probably have the
lowest risk of most bonds, whereas “junk” bonds would have the
highest. What would be some of the reasons why companies
would issue “junk” bonds, and what would also be the main
motivating factor for buyers to consider purchasing them, despite
the higher risk?
41. Trading Places
In this video Winthorpe and
Valentine use information
from a stolen report that
will cause the price of
orange juice to fall, and
replace it with a report
that says OJ prices will
rise. They do this because
they know their enemies,
the Duke brothers, will
trade on the phony
report. Moving to the big
scene, the Duke brothers,
through their trader, starts
buying OJ futures. Then
everyone buys. The value
skyrockets. Once the price
gets to a high point, and
the whole market thinks
the price will only go up,
Winthorpe calls out a
promise to sell OJ at that
high price in the future.
Essentially he is making a
bet that the price will fall.
(He knows it will because
he’s read the report.)
42. Trading Places
1. What are the ethical considerations of using
"inside information" for the Duke brothers and for
Winthorpe and Valentine?
2. Should individual investors consider investing in
speculative commodity futures?
43. _____ are investment certificates that
represent either ownership of a corporation
or a loan to the corporation.
A. Capital funds
B. Securities
C. Deposits
D. Contracts
E. Liquid assets
_____ are investment professionals who are
paid to manage other people’s money.
A. Account managers
B. Category managers
C. Fiduciary experts
D. Institutional investors
E. Fiscal managers
The primary activity of _____ is underwriting.
A. Securities and Exchange Commission (SEC)
B. the New York Stock Exchange
C. The Wall Street Journal
D. stockbrokers
E. investment bankers
Blackwell Investments specializes in acting as
an intermediary in taking companies public.
This financial middleman is an example of
a(n):
A. stockbroker
B. investment banker
C. transfer agent
D. commercial banker
E. public distributor
44. _____ are the link between public companies
and the investors interested in buying their
stock.
A. Underwriters
B. Stockbrokers
C. Investment bankers
D. Account managers
E. Securities expert
Another name for a stockbroker is a(n):
A. underwriter
B. fiscal manager
C. investment banker
D. account executive
E. fiduciary expert
Dalrymple Bay Coal Terminal, a coal-handling facility and export terminal in Queensland,
Australia, has issued triple-A rated bonds for $680 million in Australian dollars. The bonds will
be used to refinance existing bank debt caused by the acquisition of eases from the
Queensland government in 2002. The Commonwealth Bank of Australia acted as investment
bankers to the transaction. This means the Commonwealth Bank of Australia:
A. engaged in factoring the sale
B. bought the bonds from Dalrymple and sold them to the public
C. operates in the secondary securities market
D. was responsible for co-insurance of the bond premium
E. would be responsible for paying the dividend if Dalrymple were unable to
45. 6. How do securities markets help firms raise
funding, and what securities trade in the capital
markets?
• CONCEPT CHECK
1. Distinguish between primary and secondary
securities markets. How does an investment banker
work with companies to issue securities?
2. Describe the types of bonds available to investors
and the advantages and disadvantages they offer.
3. Why do mutual funds and exchange-traded funds
appeal to investors? Discuss why futures contracts
and options are risky investments.
48. Political Unrest
Relevant & Reliable
Information
Liquidity Risk
Unable to sell shares
quickly without a
loss
What risks are unique to investing in emerging or foreign markets?
49. Banned Insider Trading
Register all offered securities with
the Securities and Exchange
Commission (SEC)
Circuit Breakers stop trading for a short
cooling-off period to limit the amount the
market can drop in one day
Regulation FD (for “fair disclosure”) in October 2000.
Regulation FD requires public companies to share
information with all investors at the same time, leveling
the information playing field.
50. Organized stock exchanges operate like a(n):
A. indirect distribution channel
B. retailer
C. auction company
D. wholesaler
E. warehouse company
Securities that are not traded on the organized stock
exchanges are traded in the:
A. primary market
B. futures market
C. over-the-counter market
D. dealers market
E. open market operation
The _____ system is the first electronic-based stock
market and the largest over-the-counter market.
A. AMEX
B. NASDAQ
C. AMC
D. NASA
E. NYSE
Because of the different ways each calculates its index,
there is no competition between the NYSE and the
NASDAQ.
B. The NYSE lists significantly more stock that NASDAQ.
C. Neither NASDAQ nor NYSE is feeling any competitive
pressure from ECNs.
D. ECNs are computerized indexes that are limited to
high-tech companies.
E. Electronic communications networks (ECNs) allow
institutional traders to make direct transactions in
what is called the fourth market
51. The Securities Act of 1933:
A. requires all companies to comply with IRS rules
B. requires full disclosure of information about new
securities issues
C. deals with rules for operating the stock exchanges
D. controls all mutual fund offerings
E. has complete control over the commodities traded
through futures contracts
The Securities Exchange Act of 1934 gave the SEC the
power to:
A. control the organized exchanges
B. police all security transactions
C. deal with commodities as well as stocks
D. oversee real estate exchanges
E. control speculation in the stock market
The Securities Investor Protection Corporation (SIPC):
A. protects stock brokers from bad-risk investors
B. is a mutual fund that invests in only profitable securities
C. is like an insurance company for online stock exchanges
that sometimes experience technological difficulties beyond
their control
D. protects investors up to $10,000 in the event of a bear
market
E. insures the accounts of customers of brokerage firms for up
to $500,000 against a firm failure
What is the name of the SEC regulation that requires
public companies to share information with all
investors at the same time?
A. Regulation FD
B. the Investment Company Act of 1940
C. the Sarbanes-Oxley Act
D. the Investment Advisors Act of 1940
E. the Securities and Exchange Act of 1934
52. Regulation FD was designed to eliminate:
A. embezzlement by investment bankers
B. short circuiting
C. factoring
D. insider trading
E. the sale of securities without proper SEC registration
The _____ is a law that requires full disclosure of
information on new issues and registration statements
of financial information.
A. Securities Exchange Act of 1934
B. Securities Industry Act of 1936
C. National Securities Dealers Act of 1934
D. Securities Act of 1933
E. Investment Company Act of 1940
53. 7. Where can investors buy and sell securities, and
how are securities markets regulated?
• CONCEPT CHECK
1. How do the broker markets differ from dealer markets,
and what organizations compose each of these two
markets?
2. Why is the globalization of the securities markets
important to U.S. investors? What are some of the other
exchanges where U.S companies can list their securities?
3. Briefly describe the key provisions of the main federal
laws designed to protect securities investors.
4. What is insider trading, and how can it be harmful? How
does the securities industry regulate itself?
