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Chapter 19,20,21,22 Assesment Questions

Chapter 19,20,21,22 Assesment Questions



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Published by: Steven Sanderson on Oct 24, 2007
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 Name: Steven P Sanderson IIDate: 7/14/06Class: Intro to Business BA11 5040Professor: McNamaraChapter 19Questions from page 588 Name three finance functions important to the firms overall operations and performance.The three functions important to the firms overall operations health would be forecastingfinancial needs, working with the budget process and establishing controls. Forecastingfinancial needs deals with short term and long term forecasting as well as cash flowforecasting. Short term forecasting predicts revenues, costs and expenses for a period of one year or less. This forecast is the foundation for most other financial plans, so itsaccuracy is critical, cash flow forecasts does exactly what it sounds like it does, forecastsfuture inflows and out flows of cash. Long term forecast predicts revenues, costs andexpenses for a period longer than 1 year and sometimes as far as 5 or 10 years into thefuture. This plays a crucial role as you would imagine in the companies long term goals.What are the three primary financial problems that cause firms to fail?The three problems that cause firms to fail are undercapitalization, poor control over cashflow and inadequate expense control. Undercapitalization is when a firm does not haveenough funds to adequately start the business.In what ways do short term and long term financial forecasts differ?Short term forecasts deal with issues a company may have no more than 1 year out. Along term forecast would deal with thing that could go out as far as 5 to 10 years andwould deal with issues such as what technology should they invest in, where should they be in 5 years, should they buy a new plant and so forth.What is the organizations purpose in preparing budgets? Can you identify three differenttypes of budgets?The organizations purpose in preparing budgets is to establish a viable financial plan thatsets forth managements expectations and on the basis of those expectations allocates theuse of specific resources throughout the firm. Without a budget in place a firm would go belly up in no time. A capital budget estimates a firms projected cash inflows andoutflows that the firm can use to plan for any cash shortages or surpluses during a given period (e.g. monthly, quarterly). Cash budgets are important guidelines that assistmanagers in anticipating borrowing, debt repayment, operating expenses, and short terminvestments. The operating budget or master budget as it is sometimes called tiestogether all the firms other budgets and summarizes the business’s proposed financialactivities. It can be defined more formally as the projection of dollar allocations tovarious costs and expenses needed to run or operate a business, given projected revenues.Finally a capital budget highlights a firms spending plans for major asset purchases thatoften require large sums of money. The capital budget primarily concerns itself with the purchase of such assets as property, buildings, and equipment.
Questions from page 592Money is said to have a time value. What does this mean?The time value of money (TVM) or the discounted present value is one of the basicconcepts of finance, developed by Leonardo Fibonacci in 1202. The time value of moneyis based on the premise that person prefers to receive a certain amount of money today,rather than the same amount in the future, all else equal. As a result, he demands interestwhen depositing money in a bank account or making any similar investment. Moneyreceived today is more valuable than money received in the future by the amount of interest the money can earn. If $90 today will accumulate to $100 a year from now, thenthe present value of $100 to be received one year from now is $90. TVM also takes intoaccount risk aversion - both default risk and inflation risk. 100 monetary units today is asure thing and can be enjoyed now. In 5 years that money could be worthless or notreturned to the investor. There is a residual time value of money, beyond compensationfor default and inflation risk that represents simply the preference for consumption nowversus later. Inflation-indexed bonds notably carry no inflation risk. In the United Statesfor instance, Treasury Inflation-Protected Securities carry neither inflation nor defaultrisk, but pay interest. Three formulas are used to adjust for this time value: The presentvalue formula is used to discount future money streams: that is, to convert future amountsto their equivalent present day amounts. The future value formula is used to compoundtoday's money into the equivalent amount at some time in the future (i.e., to compoundmoney...either a lump sum or streams of payments). The present value of an annuityformula is used to discount a series of periodic payments of equal amounts to the presentday. Variations of this formula can find the future value of the annuity, or solve for theannuity given the present value (for example, finding monthly mortgage payments) or find the annuity given the future value (for example finding a monthly payment needed toreach a retirement savings goal).Why are accounts receivable a financial concern to the firm?On a company’s balance sheet accounts receivable is the amount of money customersowe the firm, they are sometimes called trade receivables and are recorded on acompany’s balance sheet as current assets. These can become quite important if they arenot paid because they can affect the cash flow of a firm. If they are not paid the can besold off to banks or other investors this is called factoring.What’s the primary reason an organization spends a good deal of its available funds oninventory and capital expenditures?A primary reason a firm will spend great amounts of available funds on capitalexpenditures are that these expenditures can help the firm to enter into markets bycreating them or by obtaining them. Firms must also spend a great deal of money oninventory to satisfy customers since they intend to recapture their investment in inventorythrough sales to customers.What’s the difference between debt and equity financing?
Debt is that which is owed; usually referencing assets owed, but the term can cover other obligations. In the case of assets, debt is a means of using future purchasing power in the present before a summation has been earned. Some companies and corporations use debtas a part of their overall corporate finance strategy. A debt is created when a creditor agrees to loan a sum of assets to a debtor. In modern society, debt is usually granted withexpected repayment; in many cases, plus interest. Historically, debt was responsible for the creation of indentured servants. Equity financing is money raised form within thefirm (form operations) or through the sale of ownership in the firm (e.g. sale of stock).Questions from page 597What does the term 2/10, net 30 mean?This means that the firm buying the product or service may receive a discount of 2% if the balance is paid within 10 days of receipt of bill. If they choose not to pay in 10 daysthey must pay the bill within 30 days of receipt. If a firm is able to pay by the 2/10 termsthey would greatly save money on their financing of the products since there are 18, 20 periods in a year that would be an effective savings of 36% on the financing.What’s the difference between trade credit and a line of credit at a bank?Trade credit is the practice of buying goods and services now and paying for them later.A line of credit comes from a bank and gives a firm an amount of unsecured short termfunds, so a firm can have funds readily available for when it is needed.What’s the difference between a secured loan and an unsecured loan?A secured loan is one where collateral is put up. Collateral is an asset such as a home.When you get a home mortgage the house is the collateral. If you do not pay your mortgage the bank may foreclose on your home and sell it to repay the mortgage you borrowed. And unsecured loan is one that is usually only given to clients that are longstanding and are know to be able to repay the loan.What is factoring? What are some of the considerations involved in establishing adiscount rate in factoring?Factoring is the process of selling accounts receivable for cash. Some considerations inestablishing a discount rate in factoring would be how large the accounts receivable youare selling, the history of the customer by way of late pays. Firms can reduce the rate byassuming the risk of slow and non-pay customers.What are two major forms of debt financing available to a firm?Two ways a firm may obtain debt financing is through a tradition institutional lender or through issuing bonds. Firms that develop and establish a rapport with a bank, insurancecompany, pension fund, or commercial finance company are often able to secure a longterm loan. Long-term loans are usually repaid within 3 to 7 years and may extend to 15to 20 years. For such loans a firm must sign what is called a term-loan agreement, this isa promissory note. The higher the risk a lender takes the higher the rate of interest alender requires in making the loan. This principal is known as risk/return trade-off.Another form of debt financing is through issuing bonds. If an organization is unable to

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