Business Essentials 6th Canadian Edition by Ebert – Test Bank

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Business Essentials 6th Canadian Edition by Ebert – Test Bank

CHAPTER 2

THE ENVIRONMENTS OF BUSINESS

 

MULTIPLE CHOICE QUESTIONS.  Choose the one alternative that best completes the statement or answers the question.

 

1)Which of the following points are made in the opening case entitled “Air Canada’s Challenging Environment: Competition, Economic Crisis, Fuel Prices, Volcanoes and More”?

A)Skytrax named as Air Canada as the worst airline in North America in 2010

B)Air Canada continues to control the lion’s share of the domestic market

C)Most airlines purchase new planes on relatively short notice to get good deals on prices

D)In 2009, the global commercial airline industry only broke even because of the recession

E)All of these are correct

Answer: B

Diff: 3

Skill: Recall

Objective: 2.1

A-Heading: Organizational Boundaries and Environments

 

2)In terms of organizational boundaries and environments, which is correct?

A)Large business firms are heavily influenced by events in the external environment, but small business firms are much less influenced

B)No single firm can control the environment

C)Most organizations have a single environment, but some have multiple environments they must cope with

D)The major elements of the external environment are marketing, finance, production, and human resources

E)The most important features of the external environment are the political and social aspects

Answer: B

Diff: 2

Skill: Recall

Objective: 2.1

A-Heading: Organizational Boundaries and Environments

 

3)Distributors who are in a grocery store restocking shelves are normally considered part of the ________ rather than the ________.

A)environment; culture

B)organization; environment

C)culture; store

D)environment; organization

E)none of these are correct

Answer: D

Diff: 2

Skill: Application

Objective: 2.1

A-Heading: Organizational Boundaries and Environments

 

4)The ________ consists of everything outside of an organization’s boundaries that might affect it.

A)gross domestic product

B)enterprise resource

C)annual deficit

D)national debt

E)external environment

Answer: E

Diff: 2

Skill: Recall

Objective: 2.1

A-Heading: Organizational Boundaries and Environments

 

5)A(n) ________ separates the organization from its environment.

A)organizational boundary

B)process  boundary

C)enterprise resource

D)aggregate output

E)integration

Answer:  A

Diff: 1

Skill: Recall

Objective: 2.1

A-Heading: Organizational Boundaries and Environments

 

6)How might moderate unemployment levels in the general economy affect a company like McDonald’s?

A)Most people will be able to afford to eat out and McDonald’s will be able to pay lower wages and still attract employees

B)Very few people will be able to afford to eat out, but McDonald’s will be able to pay workers less than minimum wage

C)Few people will be able to afford to eat out and McDonald’s will have to pay higher wages to attract employees

D)Few people will be able to afford to eat out and McDonald’s will be able to pay lower wages and still attract employees

E)Most people will be able to afford to eat out, but McDonald’s will have to pay higher wages to attract employees

Answer:  E

Diff: 3

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

7)How might low inflation levels in the general economy affect a company like McDonald’s?

A)McDonald’s will pay much higher prices for supplies and will charge customers more for its products

B)McDonald’s will pay higher prices for supplies and will charge customers more for its products

C)McDonald’s will pay relatively constant prices for supplies, but will be unable to increase the price paid by customers

D)McDonald’s will pay relatively constant prices for supplies and will charge customers more for its products

E)McDonald’s will pay higher prices for supplies, but will be unable to increase the price paid by customers

Answer:  C

Diff: 3

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

8)Agriculture efficiency has resulted in

A)Canadians contributing more resources to farms.

B)an increase in the number of people employed in the industry.

C)Canadians needing more farms.

D)a decrease in the number of people employed in the industry.

E)none of these.

Answer: D

Diff: 2

Skill: Application

Objective: 2.2

A-Heading: The Economic Environment

 

9)Since the increase in unemployment in a small Atlantic Canadian town, retailers have noticed that sales have decreased.  The retailers are being affected by which element of the external environment?

A)Socio-cultural

B)Economic

C)Environmental

D)Global

E)Political-legal

Answer: B

Diff: 2

Skill: Application

Objective: 2.2

A-Heading: The Economic Environment

 

10)At one time, about ________ of the population of Canada was involved in producing the food that we needed; today less than ________ percent of the population works in agriculture.

A)half; 0.5

B)half; 2.5

C)one-third; 5

D)three-quarters; 2.5

E)four-fifths; 3

Answer: B

Diff: 3

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

11)Agricultural production has ________ because ________.

A)grown; we have increased total output in that sector

B)increased; Canada imports more agricultural products

C)declined; fewer Canadians are working in agriculture

D)remained unchanged; there have been relatively few changes in agricultural technology

E)increased; more people are involved in farming

Answer: A

Diff: 2

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

12)The main measure of growth in an economic system is

A)the business cycle.

B)standard of living.

C)gross national product.

D)gross domestic product.

E)aggregate output.

Answer: E

Diff: 1

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

13)The main measure of growth in the economy is

A)standard of living.

B)aggregate output

C)net output

D)the business cycle

E)industrial efficiency

Answer: B

Diff: 2

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

14)Which of the following best defines the term aggregate output?

A)The total quantity and quality of goods and services that a country’s citizens can purchase with the currency used in their economic system

B)The measure of economic growth that compares how much a system produces with the resources needed to produce it

C)The pattern of short-term ups and downs in an economy

D)The total quantity of goods and services produced by an economic system during a given period

E)The conditions of the economic system in which an organization operates

Answer:  D

Diff: 2

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

15)________ refers to the total quality and quantity of goods and services that a country’s citizens can purchase with the currency used in their economic system.

A)Aggregate output

B)The national debt

C)Standard of living

D)The business cycle

E)The consumer price index

Answer:  C

Diff: 1

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

16)Which of the following best describes the term standard of living?

A)Total quantity of goods and services produced by an economic system

B)Total value of all goods and services produced by a national economy within a given period, regardless of where the factors of production are located

C)Total value of all goods and services produced within a given period by a national economy through domestic factors of production

D)Conditions of the economic system in which an organization operates

E)Total quantity and quality of goods and services that a country’s citizens can purchase with the currency used in their economic system

Answer:  E

Diff: 2

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

17)The pattern of short-term ups and downs in the economy is known as ______

A)recession.

B)the business cycle.

C)aggregate output.

D)gross domestic product.

E)economic growth.

Answer: B

Diff: 1

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

18)Which of the following best defines the term business cycle?

A)The conditions of the economic system in which an organization operates

B)The pattern of short-term ups and downs in an economy

C)The total quantity of goods and services produced by an economic system during a given period

D)The measure of economic growth that compares how much a system produces with the resources needed to produce it

E)The total quantity and quality of goods and services that a country’s citizens can purchase with the currency used in their economic system

Answer:  B

Diff: 2

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

19)Which of the following would not likely be a consequence of a recession?

A)Aggregate output declines

B)Producers will hire more employees

C)Unemployment will increase

D)Less labour will be needed to produce products

E)GDP will decrease

Answer:  B

Diff: 2

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

20)In the business cycle, what phase follows “recession”?

A)Peak

B)Trough

C)Recovery

D)Expansion

E)It is not possible to say given the information that is provided

Answer:  B

Diff: 2

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

21)Sales had been low at Stephen’s Home Office Supplies for several months, but then business starting picking up again.  Stephen’s business went through which two phases of the business cycle?

A)Recession and trough

B)Peak and recession

C)Trough and recovery

D)Recovery and peak

E)Any of these answers could be correct

Answer: C

Diff: 2

Skill: Application

Objective: 2.2

A-Heading: The Economic Environment

 

22)Which of the following best describes the term gross domestic product?

A)Total quantity and quality of goods and services that a country’s citizens can purchase with the currency used in their economic system

B)Conditions of the economic system in which an organization operates

C)Total value of all goods and services produced within a given period by a national economy through domestic factors of production

D)Total value of all goods and services produced by a national economy within a given period regardless of where the factors of production are located

E)Total quantity of goods and services produced by an economic system

Answer:  C

Diff: 2

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

23)________ refers to the total value of all goods and services produced within a given period by a national economy through domestic factors of production.

A)The standard of living

B)The gross domestic product

C)The gross national product

D)The aggregate output

E)The balance of trade

Answer:  B

Diff: 1

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

24)________ refers to the total value of all goods and services produced by a national economy within a given period regardless of where the factors of production are located.

A)The gross domestic product

B)The aggregate output

C)The standard of living

D)The balance of trade

E)The gross national product

Answer:  E

Diff: 2

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

25)Which of the following would be included in the gross national product of Canada?

A)The wages paid to Peruvian workers producing coffee for a Brazilian company

B)The profits earned by a Canadian-owned automobile plant in Brazil

C)The profits earned by a Brazilian coffee company operating in Canada

D)The profits earned by a Brazilian coffee company operating in Peru

E)The wages paid to Brazilian workers producing coffee for sale in Canada

Answer:  B

Diff: 3

Skill: Application

Objective: 2.2

A-Heading: The Economic Environment

 

26)Which of the following would be included in the gross national product of Brazil?

A)The profits earned by a Brazilian coffee company operating in Canada

B)The wages paid to Peruvian workers producing coffee for a Canadian company

C)The profits earned by a Canadian coffee company operating in Peru

D)The profits earned by a Canadian-owned automobile plant in Brazil

E)The wages paid to Peruvian workers producing coffee for sale in Canada

Answer:  A

Diff: 3

Skill: Application

Objective: 2.2

A-Heading: The Economic Environment

 

27)Which of the following would be included in the gross domestic product of Canada?

A)The profits earned by a Brazilian coffee company operating in Canada

B)The wages paid to Peruvian workers producing coffee for a Canadian company

C)The profits earned by a Brazilian coffee company operating in Peru

D)The wages paid to Brazilian workers producing coffee for sale in Canada

E)The profits earned by a Canadian-owned automobile plant in Brazil

Answer:  A

Diff: 3

Skill: Application

Objective: 2.2

A-Heading: The Economic Environment

 

28)The ________ is the growth rate of GDP adjusted for inflation and change in value of the country’s currency.

A)adjusted growth rate

B)gross national product

C)real growth rate

D)per capita GDP

E)real GDP

Answer:  C

Diff: 2

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

29)The ________ is the total gross domestic product divided by total population.

A)gross national product

B)GDP per capita

C)real growth rate

D)adjusted growth rate

E)real GDP

Answer:  B

Diff: 1

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

30)________ is GDP measured in current dollars with all components valued at current prices.

A)Per capita GDP

B)Net GDP

C)Adjusted GDP

D)Nominal GDP

E)Real GDP

Answer:  D

Diff: 1

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

31)Which of the following best describes nominal GDP?

A)Total quantity of goods and services produced by an economic system

B)Total quantity and quality of goods and services that a country’s citizens can purchase with the currency used in their economic system

C)Total value of all goods and services produced within a given period by a national economy, through domestic factors of production measured in current dollars, with all components valued at current prices

D)Total value of all goods and services produced within a given period by a national economy through domestic and international factors of production

E)Total value of all goods and services produced by a national economy within a given period regardless of where the factors of production are located

Answer:  C

Diff: 2

Skill: Application

Objective: 2.2

A-Heading: The Economic Environment

 

32)________ is GDP calculated to account for changes in currency values and price changes.

A)Nominal GDP

B)Adjusted GDP

C)Per capita GDP

D)Real GDP

E)Net GDP

Answer:  D

Diff: 1

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

33)The principle of ________ states that exchange rates are set so that the prices of similar products in different countries are about the same.

A)nominal GDP

B)gross national product

C)consumer price index

D)equal prices

E)purchasing power parity

Answer:  E

Diff: 1

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

34)________ is a measure of economic growth that compares how much a system produces with the resources needed to produce it.

A)Purchasing power parity

B)Stability

C)Recession

D)Inflation

E)Productivity

Answer:  E

Diff: 1

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

35)A measure of economic growth that compares how much a system produces with the resources needed to produce it is

A)organizational effectiveness.

B)productivity.

C)GDP.

D)GNP.

E)purchasing power parity.

Answer:  B

Diff: 2

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

36)Which of the following is accurate regarding purchasing power parity?

A)It gives us a better idea of what people can actually buy with the financial resources they have

B)It reflects the principle that exchange rates are set so that prices of similar products in different countries are unequal

C)It does not really give a good sense of the standards of living around the world

D)It reflects the principle that capitalism is a better system than communism

E)None of these statements are accurate

Answer:  A

Diff: 2

Skill: Application

Objective: 2.2

A-Heading: The Economic Environment

 

37)The ________ is the economic value of all the products that a country exports minus the economic value of imported products.

A)real GDP

B)gross national product

C)nominal GDP

D)balance of trade

E)national debt

Answer:  D

Diff: 1

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

38)Which of the following best describes real GDP?

A)Total quantity and quality of goods and services that a country’s citizens can purchase with the currency used in their economic system

B)Total quantity of goods and services produced by an economic system

C)Total value of all goods and services produced within a given period by a national economy through domestic and international factors of production

D)Total value of all goods and services produced within a given period by a national economy, through domestic factors of production measured in current dollars, or with all components valued at current prices

E)Total value of all goods and services produced by a national economy within a given period, calculated to account for changes in currency values and price changes

Answer:  E

Diff: 2

Skill: Application

Objective: 2.2

A-Heading: The Economic Environment

 

39)Which of the following best describes the term gross national product?

A)Total quantity of goods and services produced by an economic system

B)Total value of all goods and services produced by a national economy within a given period regardless of where the factors of production are located

C)Total value of all goods and services produced within a given period by a national economy through domestic factors of production

D)Total quantity and quality of goods and services that a country’s citizens can purchase with the currency used in their economic system

E)Conditions of the economic system in which an organization operates

Answer:  B

Diff: 2

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

40)Which statement is true with regard to the standard of living?

A)It is dependent on the size of the city in which one lives

B)It is comparable for every citizen in every country

C)It is the amount and quality of goods and services that people can buy with their money

D)It is improved when high-end stores stock expensive merchandise

E)It is unaffected by business productivity

Answer: C

Diff: 2

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

41)Canada’s GDP in 2009 was about

A)$575 billion.

B)$1 trillion.

C)$1.6 trillion.

D)$2.7 trillion.

E)$8.7 trillion.

Answer: C

Diff: 2

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

42)Productivity is

A)a measure of economic growth that compares how much a system produces with the resources needed to produce it.

B)also known as “real gross national product.”

C)the total value of all goods and services produced by a national economy in a given period of time regardless of where the factors of production are located.

D)the total value of all the goods produced by a single economy.

E)the total quantity and quality of goods and services that can be purchased with the currency used in an economic system.

Answer: A

Diff: 2

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

43)With regard to GDP, GNP, and GPI, which of the following is correct?

A)The profits earned by a Canadian company abroad are included in GNP, but not in GDP

B)Profits earned by foreign firms in Canada are included in GDP

C)GDP increased as a result of the Exxon Valdez oil spill, but GPI decreased because of that spill

D)GDP has been increasing for many years, but GPI has been decreasing since the 1970s

E)They all measure essentially the same thing

Answer: A

Diff: 3

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

44)If GDP is going up, the nation is experiencing

A)inflation.

B)growth.

C)an increase in demand.

D)a recession.

E)it is not possible to tell given the information provided.

Answer: B

Diff: 1

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

45)________ is the total value of all goods and services produced by a national economy within a given period regardless of where the factors of production are located.

A)The standard of living

B)Productivity

C)Purchasing power parity

D)GNP

E)GDP

Answer: D

Diff: 2

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

46)Total GDP divided by the population of a country is

A)GNP.

B)nominal GDP.

C)real GDP.

D)GDP per capita.

E)aggregate demand.

Answer: D

Diff: 2

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

47)Canada’s GDP per capita is approximately

A)$15,000.

B)$31,000.

C)$42,000.

D)$55,000.

E)$66,000.

Answer: B

Diff: 2

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

48)______has been proposed as a more realistic measure to assess economic activity. It takes into consideration activities that harm the environment or quality of life and gives these things a negative value.

A)Purchasing power parity

B)GPI

C)GDP

D)GNP

E)GRE

Answer: B

Diff: 2

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

49)Purchasing power parity gives us a good idea of

A)what people are buying outside their own country while on vacation or while doing international business.

B)what people can actually buy with the financial resources allocated to them by their economic system.

C)what people would like to buy with the financial resources in their economic system.

D)purchasing trends across the globe.

E)average annual income.

Answer: B

Diff: 2

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

50)Peter is a Canadian citizen who owns a manufacturing plant located in Brazil.  The profits earned by his company will be reflected in ________ in Canada.

A)productivity

B)GDP

C)GNP

D)balance of trade

E)GPI

Answer: C

Diff: 3

Skill: Application

Objective: 2.2

A-Heading: The Economic Environment

 

51)Paul owns a Canadian shipping company that generates profits as a result of business activities in Brazil.  These profits are included in ____ in Brazil.

A)GDP

B)national employment

C)productivity

D)GNP

E)GPI

Answer: A

Diff: 3

Skill: Application

Objective: 2.2

A-Heading: The Economic Environment

 

52)The total value of all goods and services produced by a country in a 12-month period regardless of where the factors of production are located is known as

A)Net National Product.

B)Net National Income.

C)Net National Profit.

D)Gross National Product.

E)Gross Domestic Product.

Answer: D

Diff: 1

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

53)Gross National Product is

A)the revenue from goods and services produced within Canada in one year.

B)the value of all goods and services produced by a country regardless of where the factors of production are located.

C)the revenue from goods and services produced in one year by businesses in Canada and by Canadians working outside of Canada.

D)measured by the price of a basket of goods.

E)the value of all goods and services produced by businesses in Canada in one year.

Answer: B

Diff: 1

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

54)The comparison of what an economic system produces with the resources used to produce it is known as

A)the resource ratio.

B)real GDP.

C)purchasing power parity.

D)the balance of trade.

E)productivity.

Answer: E

Diff: 1

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

55)If we know that it takes, on average, one Canadian worker and one Canadian dollar to make 10 soccer balls in an 8 hour work day, we can measure Canada’s ________.

A)balance of trade

B)GDP

C)productivity

D)GNP

E)GNP and productivity

Answer: C

Diff: 1

Skill: Application

Objective: 2.2

A-Heading: The Economic Environment

 

56)Which of the following statements is correct?

A)GNP refers to the total value of all goods and services produced by a national economy

B)GDP refers to the total value of all goods and services produced by a national economy regardless of where the factors of production are located

C)Growth depends on output increasing at a faster rate than population

D)Per capita GDP is calculated by dividing purchasing power parity by the rate of inflation

E)Real GDP compares how much a system produces with the resources needed to produce it

Answer: C

Diff: 3

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

57)The difference between a country’s exports and its imports is known as its

A)balance of trade.

B)national debt.

C)net national income.

D)balance of payments.

E)net national profit.

Answer: A

Diff: 1

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

58)A ________ balance of trade results when a country exports more than it imports.

A)depressed

B)negative

C)real

D)nominal

E)positive

Answer:  E

Diff: 1

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

59)Which of the following is the best description of the balance of trade?

A)The total of a nation’s revenues from income taxes minus its expenditures on goods and services

B)Changes in currency values and price changes

C)The profitability of business firms that are exporting goods and services

D)The total of a nation’s exports minus its imports

E)The total value of all services provided to foreigners during a one year time period

Answer: D

Diff: 2

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

60)Because Canada’s exports ________ its imports, Canada has a ________ trade balance.

A)are greater than; negative balance of trade

B)are less than; negative balance of trade

C)are greater than; positive balance of trade

D)are less than; positive balance of trade

E)none of the above

Answer: C

Diff: 2

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

61)Canada usually has a ______ balance of trade.  It is therefore a ________ nation rather than a ________ nation.

A)positive; creditor; debtor

B)negative; debtor; creditor

C)positive; debtor; creditor

D)negative; creditor; debtor

E)none of the above

Answer: A

Diff: 3

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

62)A ________ balance of trade results when a country imports more than it exports.

A)nominal

B)depressed

C)positive

D)negative

E)beneficial

Answer:  D

Diff: 1

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

63)A negative balance of trade can also be called a

A)trade shortage.

B)trade deficit.

C)trade surplus.

D)trade deficiency.

E)national debt.

Answer:  B

Diff: 1

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

64)A nation’s ________ is the total amount of money that the government owes its creditors.

A)trade deficit

B)national debt

C)trade deficiency

D)trade shortage

E)trade surplus

Answer:  B

Diff: 1

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

65)Taiwan has a positive balance of trade. This means that

A)money is flowing into the country to pay for imported goods.

B)the total amount of exported goods has increased from the previous year.

C)the total amount of imported goods has decreased from the previous year.

D)the nation is exporting more than it imports from other nations.

E)all of these are correct.

Answer: D

Diff: 2

Skill: Application

Objective: 2.2

A-Heading: The Economic Environment

 

66)Which of the following is correct with regard to budget deficits and the national debt?

A)A country’s national debt is the amount of money its government owes the United States

B)A budget deficit occurs when income tax revenue is less than interest payments on the national debt

C)Canada is the only industrialized country in the world that has a budget surplus

D)Until recently, Canada was the only industrialized country that had an annual budget surplus

E)All of these statements are correct

Answer: D

Diff: 3

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

67)The national debt refers to

A)the total amount of money that Canada owes to its creditors.

B)the ratio of Canada’s exports to its imports.

C)the result of government spending more in a year than the value of GDP.

D)the excess amount of taxes over what the government spends in one year.

E)the amount of taxes the government collects in one year.

Answer:  A

Diff: 1

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

68)A budget deficit refers to

A)The measure of economic growth that compares how much a system produces with the resources needed to produce it.

B)Government spending more in one year than it takes in during that year

C)The total of a country’s exports minus its imports

D)The total amount of money that Canada owes its creditors

E)The exchange rate that is set so prices of similar products in different countries are the same

Answer:  B

Diff: 2

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

69)From Confederation (1867) to 1981, Canada’s total accumulated debt was only  ________, but In the period between 1981-1994, annual deficits were in the ________ range.

A)$78.5 billion; $10 to $20 billion

B)$57.8 billion; $100  to $125 billion

C)$40 billion; $20 to $40 billion

D)$85.7 billion; $20 to $40 billion

E)none of these numbers are correct

Answer: D

Diff: 3

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

70)The more money the Canadian government borrows (by issuing savings bonds), the ________ money is available for private borrowing and investment that increases ________.

A)more; productivity

B)less; productivity

C)more; purchasing power parity

D)less; GDP

E)more; GDP

Answer: B

Diff: 3

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

71)If Canada fell into a depression, the Bank of Canada would most likely

A)raise interest rates.

B)leave interest rates alone.

C)lower interest rates.

D)it is not possible to tell with the information given.

E)increase gasoline taxes.

Answer: C

Diff: 2

Skill: Application

Objective: 2.2

A-Heading: The Economic Environment

 

72)With respect to inflation and deflation, which is correct?

A)Inflation is caused when consumers buy too many luxury goods

B)When inflation occurs, people have more money to spend, and there will be an increased quantity of goods for sale

C)When inflation occurs, purchasing power decreases

D)Deflation is evident when the amount of money injected into the economic system increases faster than actual output

E)All of these statements are correct

Answer: C

Diff: 3

Skill: Application

Objective: 2.2

A-Heading: The Economic Environment

 

73)What are three factors that threaten stability?

A)Purchasing power parity, productivity, and inflation

B)Productivity, inflation, and deflation

C)Purchasing power parity, inflation, and deflation

D)Inflation, deflation, and unemployment

E)Productivity, unemployment, and inflation

Answer:  D

Diff: 2

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

74)________ is the economic condition characterized by widespread increased prices throughout an economic system.

A)Stability

B)Deflation

C)Unemployment

D)Stagflation

E)Inflation

Answer:  E

Diff: 1

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

75)Which of the following statements about inflation is correct?

A)Inflation increases the purchasing power of consumer dollars

B)The consumer price index is one way to measure inflation

C)Inflation occurs when people have more money to spend as the quantity of goods available increases

D)Inflation occurs when the amount of money taken out of the economy exceeds the amount of money put into the economy

E)Inflation and deflation are really almost synonymous in practice

Answer:  B

Diff: 3

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

76)The ________ is a measure of the prices of a typical “basket of products” purchased by consumers.

A)consumer price index

B)national debt

C)balance of trade

D)gross national product

E)real GDP

Answer:  A

Diff: 1

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

77)Deflation refers to

A)a period of falling prices.

B)the occurrence of price increases throughout the economic system.

C)the condition in an economic system in which the amount of money available is greater than the amount of goods produced.

D)the measure of prices in urban areas.

E)the amount of government spending greater than the taxes collected in one year.

Answer:  A

Diff: 2

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

78)John is experiencing __________ unemployment because he is out of work temporarily while looking for a new job, while Sally is experiencing _______ unemployment because she is out work because of a downturn in the business cycle.

A)seasonal; structural

B)structural; seasonal

C)frictional; cyclical

D)cyclical; frictional

E)seasonal; cyclical

Answer: C

Diff: 3

Skill: Application

Objective: 2.2

A-Heading: The Economic Environment

 

79)Which of the following is correct regarding unemployment rates in Canada?

A)Unemployment rates have been fairly stable at about 6 percent for the last 30 years

B)Unemployment rates have been fairly stable at about 2 percent for the last 30 years

C)Unemployment rates for women have been slightly lower than unemployment rates for men during the last 10 years

D)The government did not keep track of unemployment rates for women until the 1980s

E)The unemployment rate for women is about half the unemployment rate for men

Answer:  C

Diff: 3

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

80)Ben is unemployed, but he is currently in a training program designed to increase the skills he needs to perform the kinds of jobs that are available.  Ben is experiencing __________ unemployment.

A)frictional

B)seasonal

C)cyclical

D)structural

E)none of these

Answer: D

Diff: 2

Skill: Application

Objective: 2.2

A-Heading: The Economic Environment

 

81)Unemployment is the level of joblessness among

A)people over the age of 18 within a given economic system.

B)people who have been previously employed in an economic system.

C)people who have the skills for employment within an economic system.

D)people over the age of 18 and under the age of 65 in a given economic system.

E)people actively seeking work in an economic system.

Answer:  E

Diff: 2

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

82)Low unemployment rates can result in

A)decreased prices for products.

B)decreases in sales revenue.

C)decreasing wage rates.

D)a shortage of labour.

E)increased profit margins.

Answer:  D

Diff: 3

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

83)________ unemployment results from recessions or depression, while __________ unemployment results from people being unemployed because they lack the right skills.

A)Cyclical; seasonal

B)Frictional; seasonal

C)Seasonal; structural

D)Cyclical; structural

E)Structural; seasonal

Answer:  D

Diff: 2

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

84)________ unemployment results because workers lack the right skills, while ___________ unemployment results when people are temporarily out of work while they are looking for a new job.

A)Cyclical; seasonal

B)Frictional; seasonal

C)Seasonal; structural

D)Cyclical; structural

E)Structural; frictional

Answer:  E

Diff: 2

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

85)A computer programmer who has just quit her job, but who will find a new one soon is an example of ________ unemployment.

A)seasonal

B)frictional

C)cyclical

D)structural

E)none of these

Answer: B

Diff: 2

Skill: Application

Objective: 2.2

A-Heading: The Economic Environment

 

86)Sam, an audiologist, lost his job two years ago and still hasn’t found work. There is just no market for audiologists at this time. Sam is experiencing

A)structural unemployment.

B)full unemployment.

C)cyclical unemployment.

D)bad luck.

E)frictional unemployment.

Answer: A

Diff: 2

Skill: Application

Objective: 2.2

A-Heading: The Economic Environment

 

87)Which term is used to describe the type of unemployment that occurs when reduced economic activity puts people out of work?

A)Frictional unemployment

B)Cyclical unemployment

C)Structural unemployment

D)Annual unemployment

E)Seasonal unemployment

Answer: B

Diff: 1

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

88)The chance that a society can actually achieve full employment is ________ percent.

A)10

B)75

C)45

D)1

E)0

Answer: E

Diff: 1

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

89)Don is unemployed because of a downturn in economic activity; this is an example of ________ unemployment.

A)frictional

B)seasonal

C)structural

D)cyclical

E)none of these

Answer: D

Diff: 2

Skill: Application

Objective: 2.2

A-Heading: The Economic Environment

 

90)________ policy involves the collection and spending of government revenues, while __________ policy focuses on controlling the size of the nation’s money supply.

A)productivity; inflation

B)taxation policy; monetary policy

C)monetary policy; fiscal policy

D)fiscal policy; monetary policy

E)national debt; annual deficit

Answer: D

Diff: 3

Skill: Application

Objective: 2.2

A-Heading: The Economic Environment

 

91)If you were the Minister of Finance, taking care of fiscal policy, which one of the following could you implement?

A)A tax increase

B)A cut in social security programs

C)An increase in federal transfer payments

D)An increase in spending to military bases

E)All of these ideas could be implemented

Answer: E

Diff: 3

Skill: Application

Objective: 2.2

A-Heading: The Economic Environment

 

92)Higher interest rates tend to lead to ________ consumer and business spending, while lower interest rates tend to lead to _________spending by consumers and businesses.

A)higher; lower

B)lower; lower

C)higher; higher

D)lower; higher

E)it is not possible to tell from the information given

Answer: D

Diff: 2

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

93)What effect do higher interest rates have on consumer spending?

A)Consumer spending increases as people try to quickly buy goods before rates go even higher

B)Consumer spending decreases immediately, but then rises sharply after consumers get used to the new higher interest rates

C)Consumer spending is not impacted by changes in interest rates

D)Consumer spending decreases

E)It is not possible to tell from the information given

Answer: D

Diff: 1

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

94)The government manages the collection and spending of its revenues through ________ policies.

A)economic

B)monetary

C)inflation

D)fiscal

E)revenue

Answer:  D

Diff: 1

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

95)The government controls the size of the money supply through ________ policies.

A)revenue

B)monetary

C)inflation

D)economic

E)fiscal

Answer:  B

Diff: 1

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

96)Taken together, fiscal policy and monetary policy make up ________ policy.

A)recession

B)information

C)economic

D)inflation

E)stabilization

Answer:  E

Diff: 2

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

97)________ includes all the ways by which firms create value for their constituents.

A)Marketing

B)Outsourcing

C)Processing

D)Production

E)Technology

Answer:  E

Diff: 2

Skill: Recall

Objective: 2.3

A-Heading: The Technological Environment

 

98)________ includes human knowledge, work methods, physical equipment, electronics and telecommunications, and various processing systems that are used in performing business activities.

A)The technological environment

B)The social environment

C)The political-legal environment

D)The competitive environment

E)The economic environment

Answer:  A

Diff: 1

Skill: Recall

Objective: 2.3

A-Heading: The Technological Environment

 

99)The advent of the iPod saw an increase in the downloading of music from the Internet.  Music artists are noticing a decrease in the sales of their CDs, which is an effect of which dimension of the external environment?

A)Technological

B)Economic

C)Socio-cultural

D)Political

E)Global

Answer: A

Diff: 2

Skill: Application

Objective: 2.3

A-Heading: The Technological Environment

 

100)Research and development (R&D) includes activities that are necessary to provide new products, services and processes. Two basic types of R&D are

A)deflationary and inflationary.

B)public and economical.

C)college and university.

D)pure and theoretical.

E)basic and applied.

Answer:  E

Diff: 2

Skill: Recall

Objective: 2.3

A-Heading: The Technological Environment

 

101)________ improvements and ________ in general are important contributors to the economic development of a country.

A)Research; development

B)Development; innovation

C)Technological; innovation

D)Research; innovation

E)none of these is correct

Answer: C

Diff: 2

Skill: Recall

Objective: 2.3

A-Heading: The Technological Environment

 

102)R & D spending in Canada in 2009 totalled about ________ billion.

A)$2

B)$6

C)$10

D)$16

E)$22

Answer: D

Diff: 2

Skill: Recall

Objective: 2.3

A-Heading: The Technological Environment

 

103)In 2009, the Canadian private sector accounted for about _____ percent of R&D spending, while the government accounted for about _____percent.

A)25; 10

B)10; 40

C)55; 10

D)25; 30

E)78; 20

Answer: C

Diff: 3

Skill: Recall

Objective: 2.3

A-Heading: The Technological Environment

 

104)In 2009, Canadian universities accounted for about ____ percent of R&D spending.

A)15

B)25

C)34

D)45

E)55

Answer: C

Diff: 3

Skill: Recall

Objective: 2.3

A-Heading: The Technological Environment

 

105)Which of the following is correct with respect to R & D?

A)R & D focuses on physical products, not services

B)Pure, or basic, R & D involves focusing specifically on how a technological innovation can be put to use to make products that can be sold in the marketplace

C)Applied R & D involves improving knowledge in an area without regard to how it might be useful in the marketplace

D)R & D intensity refers to R & D spending as a percentage of a company’s sales revenues

E)All of these statements are correct

Answer: D

Diff: 3

Skill: Recall

Objective: 2.3

A-Heading: The Technological Environment

 

106)As a proportion of GDP, Canada’s level of R&D ________  that of other industrialized countries.

A)lags far behind

B)lags behind

C)is about the same as

D)is ahead of

E)is far ahead of

Answer: B

Diff: 2

Skill: Recall

Objective: 2.3

A-Heading: The Technological Environment

 

107)Basic research and development describes

A)focusing specifically on how a technological innovation can be put to use in the making of a product or service that can be sold in the marketplace.

B)those activities that do not create value for the firm.

C)the process involved in getting a new technology out of the lab and into the marketplace.

D)improving knowledge in an area without a primary focus on whether any discoveries that might occur are immediately marketable.

E)those activities that increase a company’s revenues.

Answer:  D

Diff: 2

Skill: Recall

Objective: 2.3

A-Heading: The Technological Environment

 

108)Which of the following points is made in the box entitled “The Hydrogen Fuel Cell?”

A)The development of the hydrogen fuel cell has proceeded much more quickly than originally thought possible

B)The hydrogen fuel cell will be installed in 10 million automobiles by 2012

C)Initial enthusiasm about the hydrogen fuel cell has given way to skepticism

D)The major automobile companies have never shown any interest in the hydrogen fuel cell

E)The primary reason the hydrogen fuel cell has not been installed in many cars is that it does not consistently work  

Answer:  C

Diff: 3

Skill: Recall

Objective: 2.3

A-Heading: The Technological Environment

 

109)________ is a large-scale information system for organizing and managing a firm’s processes across product line, departments, and geographic locations.

A)Outsourcing

B)Viral marketing

C)Vertical integration

D)Business process management

E)Enterprise resource planning

Answer:  E

Diff: 1

Skill: Recall

Objective: 2.3

A-Heading: The Technological Environment

 

110)A(n) ________ system integrates back-office and front office processes.

A)viral marketing

B)outsourcing

C)application process management

D)vertical integration

E)enterprise resource planning

Answer:  E

Diff: 2

Skill: Recall

Objective: 2.3

A-Heading: The Technological Environment

 

111)________ systems integrate human resource, data analysis, sales and marketing, customer service, supply chain, accounting and finance, and manufacturing systems.

A)Enterprise resource planning

B)Vertical integration

C)Decision support

D)Expert

E)Organizational integration

Answer:  A

Diff: 2

Skill: Recall

Objective: 2.3

A-Heading: The Technological Environment

 

112)The political-legal environment describes

A)the relationship between business and government.

B)the customs, values, attitudes, and demographic characteristics of the society in which an organization functions.

C)the intensity of the competition in an industry.

D)the relationship between international and domestic corporations.

E)the relationship between government and unions.

Answer:  A

Diff: 2

Skill: Recall

Objective: 2.4

A-Heading: The Political-Legal Environment

 

113)Which of the following points is made in the boxed insert entitled “Nova Scotia’s Golden Nectar: Glen Breton Rare?”

A)The product called Glen Breton Rare Single Malt Whisky, produced by Glenora Distilleries in Nova Scotia, has not been well received by consumers, and the company is in financial difficulty

B)The company is involved in a dispute with the Scotch Whisky Association

C)Increased demand in Europe and Asia means that some single malt whisky distillers have found their products in short supply

D)Glenora has never experienced cash flow problems because of good financial planning

E)Use of the word “scotch” is only allowed for distilleries in Europe, not Canada

Answer: B

Diff: 2

Skill: Recall

Objective: 2.4

A-Heading: The Political-Legal Environment

 

114)Ethical conduct and social responsibility are critical elements of which environment?

A)Global

B)Political-legal

C)Industry

D)Socio-cultural

E)Economic

Answer:  D

Diff: 2

Skill: Recall

Objective: 2.5

A-Heading: The Socio-Cultural Environment

 

115)The socio-cultural environment describes

A)the relationship between government and unions.

B)the relationship between business and government.

C)the relationship between international and domestic corporations.

D)the customs, values, attitudes, and demographic characteristics of the society in which an organization functions.

E)the intensity of the competition in an industry.

Answer:  D

Diff: 2

Skill: Recall

Objective: 2.5

A-Heading: The Socio-Cultural Environment

 

116)Which of the following is not an example of a factor in the socio-cultural environment?

A)Prepackaged chili is more popular in southwestern U.S. states than in the U.S. northeast.

B)Consumers in China perceive bicycles primarily as a mode of transportation, while consumers in Canada perceive bicycles as recreational items.

C)Companies are more likely to set up foreign operations in countries with stable political and economic systems.

D)McDonald’s has added salads and other low fat foods to its menu.

E)Many people in the Middle East are unwilling to work in food service operations.

Answer:  C

Diff: 3

Skill: Application

Objective: 2.5

A-Heading: The Socio-Cultural Environment

 

117)If casinos notice an increase in business due to the fact that many people no longer regard gambling as wrong, this demonstrates a change in the ________ dimension of their external environment.

A)socio-cultural

B)technological

C)global

D)political-legal

E)economic

Answer: A

Diff: 2

Skill: Application

Objective: 2.5

A-Heading: The Socio-Cultural Environment

 

118)Companies that continue to act unethically (especially in the area of accounting) will most likely

A)have their shares appreciate in value because shareholders like aggressive accounting practices which help increase the price of their stock.

B)have their shares depreciate in value as shareholders become leery of aggressive accounting practices which distort a company’s real financial condition.

C)never be able to sell shares of stock to the public.

D)find that their share price will be unaffected by this practice.

E)no pattern is evident.

Answer: B

Diff: 1

Skill: Recall

Objective: 2.5

A-Heading: The Socio-Cultural Environment

 

119)The major cigarette companies have been experiencing a decline in sales due to the overall decrease in smoking across Canada in recent years. These companies are being affected by which dimension of their external environment?

A)Technological

B)Global

C)Business

D)Socio-cultural

E)Economic

Answer: D

Diff: 2

Skill: Application

Objective: 2.5

A-Heading: The Socio-Cultural Environment

 

120)Which of the following best describes the breadth of socio-cultural environment factors?

A)Customs, attitudes, and values

B)Demographic characteristics, customs, and values

C)Values, attitudes, customs, and demographic characteristics

D)Customs, values, religious beliefs, and consumer wealth

E)Values, religious beliefs, and consumer wealth

Answer: C

Diff: 2

Skill: Recall

Objective: 2.5

A-Heading: The Socio-Cultural Environment

 

121)One of the most popular tools to analyze competitive situations in an industry is Michael Porter’s model. The model includes

A)substitute products.

B)suppliers and buyers.

C)threat of potential entrants.

D)rivalry among existing competitors.

E)all of these.

Answer:  E

Diff: 2

Skill: Recall

Objective: 2.6

A-Heading: The Business Environment

 

122)Which of the factors in Porter’s five forces model is generally most important?

A)Threat of potential entrants

B)Rivalry among existing competitors

C)Threat of substitutes

D)Suppliers

E)None of these

Answer: E

Diff: 2

Skill: Recall

Objective: 2.6

A-Heading: The Business Environment

 

123)The rivalry between CAs, CGAs and CMAs in Canada is _________, and  the firms have responded by ________.

A)mild; working together cooperatively

B)intense; cutting costs

C)non-existent; merging

D)moderate; advertising their respective advantages

E)none of the above

Answer: B

Diff: 3

Skill: Recall

Objective: 2.6

A-Heading: The Business Environment

 

124)When Microsoft introduced Encarta, it caused the sale of hard copy encyclopedias sold by Encyclopedia Britannica to drop sharply. This is an example of which of Porter’s five forces?

A)Rivalry among existing competitors

B)Threat of potential entrants

C)Suppliers

D)Buyers

E)Substitutes

Answer: B

Diff: 2

Skill: Application

Objective: 2.6

A-Heading: The Business Environment

 

125)________ is often cited as a buyer that puts tremendous pressure on its suppliers.

A)The Bay

B)Canadian Tire

C)Target

D)Wal-Mart

E)Costco

Answer: D

Diff: 1

Skill: Recall

Objective: 2.6

A-Heading: The Business Environment

 

126)Some industries are relatively easy to enter, but automobile manufacturing is not because

A)the market is saturated.

B)it is very capital-intensive.

C)it is a foreign market.

D)it is too labour intensive.

E)none of these are correct.

Answer: B

Diff: 2

Skill: Recall

Objective: 2.6

A-Heading: The Business Environment

 

127)Porter’s five forces model includes all of the following except

A)substitutes.

B)threat of potential entrants.

C)buyers.

D)suppliers.

E)threat of replacement products.

Answer: E

Diff: 1

Skill: Recall

Objective: 2.6

A-Heading: The Business Environment

 

128)________ refers to the skills and resources with which the company competes best and creates the most value for its owners.

A)Labour

B)Outsourcing

C)Core competencies

D)Viral marketing

E)Business process management

Answer: C

Diff: 1

Skill: Recall

Objective: 2.6

A-Heading: The Business Environment

 

129)The most successful firms are getting leaner by focusing on their core competencies, but these new business models call for ________.

A)environmental management

B)unprecedented coordination

C)new corporate boundaries

D)unprecedented funds

E)none of these are correct

Answer: B

Diff: 1

Skill: Recall

Objective: 2.6

A-Heading: The Business Environment

 

130)Most successful firms are getting leaner by focusing on their ________, the skills and resources with which they compete best and create the most value for owners.

A)viral marketing

B)core competencies

C)processes

D)business process management

E)political-legal environment

Answer:  B

Diff: 1

Skill: Recall

Objective: 2.6

A-Heading: The Business Environment

 

131)A C-Suite survey found that the three most important issues facing Canadian businesses are

A)economic growth, labour shortages, and the environment.

B)labour shortages, the environment, and declining consumer spending.

C)declining consumer spending, the value of the Canadian dollar, and the balance of trade.

D)the balance of trade, the value of the dollar, and the environment.

E)the environment, a skilled labour shortage, and the value of the Canadian dollar.

Answer:  E

Diff: 3

Skill: Recall

Objective: 2.6

A-Heading: The Business Environment

 

132)________ is the strategy of paying suppliers and distributors to perform certain business processes or to provide needed materials or resources.

A)Enterprise management

B)Outsourcing

C)Alliance

D)Disruption

E)Core competency

Answer:  B

Diff: 1

Skill: Recall

Objective: 2.6

A-Heading: The Business Environment

 

133)Which of the following is the best definition of outsourcing?

A)Any activity that adds value to some input by transforming it into an output for an internal or external customer

B)An approach by which firms move away from department-oriented organization and toward process-oriented team structures that cut across old departmental boundaries

C)The strategy of paying suppliers and distributors to perform certain business processes or to provide needed materials and resources

D)The strategy of using the Internet and word-of-mouth marketing to spread product information

E)The strategy of owning the means by which an organization produces goods or services

Answer:  C

Diff: 2

Skill: Recall

Objective: 2.6

A-Heading: The Business Environment

 

134)Many firms use ________ to provide cafeteria operations for their customers.

A)enterprise management

B)disruption management

C)outsourcing

D)core competencies

E)vertical integration

Answer:  C

Diff: 2

Skill: Recall

Objective: 2.6

A-Heading: The Business Environment

 

135)What is outsourcing?

A)Using the skills of current employees to create better value for customers

B)Finding new sources of higher quality supplies that are out of the country

C)Paying suppliers and distributors to perform certain business functions

D)Sending employees overseas so they will work more cheaply

E)Bringing overseas workers to Canada

Answer: C

Diff: 2

Skill: Recall

Objective: 2.6

A-Heading: The Business Environment

 

136)________ uses word of mouth and the Internet to market products.

A)Virtual marketing

B)Compressed channel marketing

C)Viral marketing

D)Internet marketing

E)None of these

Answer: C

Diff: 1

Skill: Recall

Objective: 2.6

A-Heading: The Business Environment

 

137)When the Organic Trade Association partnered with Free Range Graphics to produce a 5-minute on-line spoof of the latest Star Wars movie, this was an example of

A)a strategic alliance.

B)viral marketing.

C)outsourcing.

D)business process management.

E)none of these.

Answer: B

Diff: 1

Skill: Application

Objective: 2.6

A-Heading: The Business Environment

 

138)Viral marketing can result in ________  when compared to traditional marketing.

A)faster consumer awareness and a wider reach

B)slower consumer awareness and a wider reach

C)quicker consumer awareness and higher costs

D)lower rates of recall and slower consumer awareness

E)lower rates of recall and higher costs

Answer: A

Diff: 2

Skill: Recall

Objective: 2.6

A-Heading: The Business Environment

 

139)Which of the following best describes viral marketing?

A)The strategy of paying suppliers and distributors to perform certain business processes or to provide needed materials and resources

B)An approach by which firms move away from department-oriented organization and toward process-oriented team structures that cut across old departmental boundaries

C)The strategy of owning the means by which an organization produces goods or services

D)Any activity that adds value to some input by transforming it into an output for an internal or external customer

E)The strategy of using the Internet and word-of-mouth marketing to spread product information

Answer:  E

Diff: 2

Skill: Recall

Objective: 2.6

A-Heading: The Business Environment

 

140)________ uses games, contests, chat rooms, and bulletin boards to encourage potential customers to try out products and tell other people about them.

A)Relationship marketing

B)Business process management

C)Enterprise planning

D)Vertical integration

E)Viral marketing

Answer:  E

Diff: 2

Skill: Recall

Objective: 2.6

A-Heading: The Business Environment

 

141)An approach which moves from a department orientated organization to a process team orientation is called

A)process improvement.

B)business process management.

C)six sigma.

D)outsourcing.

E)virtual restructuring.

Answer:  B

Diff: 2

Skill: Recall

Objective: 2.6

A-Heading: The Business Environment

 

142)Which of the following is correct with regard to business process management?

A)It is more effective than outsourcing

B)It means moving away from organizing around departments

C)It means more effective decision making, but it is somewhat slower

D)It means dismantling the formerly popular work teams and placing more emphasis on individual performance

E)It is as effective as outsourcing, but more costly

Answer: B

Diff: 2

Skill: Recall

Objective: 2.6

A-Heading: The Business Environment

 

143)________ is the approach by which firms move away from department-oriented organizations and toward process-oriented team structures.

A)Business process management

B)Team management

C)Viral marketing

D)Departmentalization

E)None of these

Answer: A

Diff: 2

Skill: Recall

Objective: 2.6

A-Heading: The Business Environment

 

144)Firms are moving away from ________ structures and embracing ________ structures.

A)process; department

B)process; team

C)department; team

D)team; process

E)team; department

Answer: C

Diff: 2

Skill: Recall

Objective: 2.6

A-Heading: The Business Environment

 

145)Which of the following best describes business process management?

A)An approach by which firms move away from department-oriented organization and toward process-oriented team structures that cut across old departmental boundaries

B)The strategy of paying suppliers and distributors to perform certain business processes or to provide needed materials and resources

C)Any activity that adds value to some input by transforming it into an output for an internal or external customer

D)The strategy of using the Internet and word-of-mouth marketing to spread product information

E)The strategy of owning the means by which an organization produces goods or services

Answer:  A

Diff: 2

Skill: Recall

Objective: 2.6

A-Heading: The Business Environment

 

146)A(n) ________ is any activity that adds value to input by transforming it into an output for a customer.

A)enterprise

B)virus

C)process

D)procedure

E)competency

Answer:  C

Diff: 1

Skill: Recall

Objective: 2.6

A-Heading: The Business Environment

 

147)Which of the following is the best definition of vertical merger?

A)A strategy in which one of the companies in the merger is a supplier or customer of the other

B)An approach by which firms move away from department-oriented organization and toward process-oriented team structures that cut across old departmental boundaries

C)The strategy of using the Internet and word-of-mouth marketing to spread product information

D)Any activity that adds value to some input by transforming it into an output for an internal or external customer

E)The strategy of paying suppliers and distributors to perform certain business processes or to provide needed materials and resources

Answer:  A

Diff: 2

Skill: Recall

Objective: 2.7

A-Heading: Redrawing Corporate Boundaries

 

148)A(n) ________ is a merger to two firms that have previously had a buyer seller relationship.

A)hostile take over

B)conglomerate merger

C)friendly take over

D)vertical merger

E)enterprise merger

Answer:  D

Diff: 1

Skill: Recall

Objective: 2.7

A-Heading: Redrawing Corporate Boundaries

 

149)A company that cuts and packages paper for photocopiers and printers that merges with a paper mill to reduce the risk of paper shortages, using a

A)poison pill merger.

B)enterprise merger.

C)friendly take over bid.

D)hostile take over.

E)vertical merger.

Answer:  E

Diff: 2

Skill: Recall

Objective: 2.7

A-Heading: Redrawing Corporate Boundaries

 

150)An acquisition takes place when

A)two firms who previously have been buyer and seller merge.

B)two firms join together to form a new entity.

C)one firm consolidates with another.

D)one firm simply buys another.

E)management adopts a defence to make its firm less attractive.

Answer:  D

Diff: 2

Skill: Recall

Objective: 2.7

A-Heading: Redrawing Corporate Boundaries

 

151)When one company sells part of its existing business operations to another company, this is called

A)outsourcing.

B)intense competition.

C)a spinoff.

D)a divestiture.

E)a strategic alliance.

Answer:  D

Diff: 2

Skill: Recall

Objective: 2.7

A-Heading: Redrawing Corporate Boundaries

 

152)When Mars Inc. bought Wm. Wrigley Jr. Co. for $23 billion, this was an example of __________, but when Canadian National Railways and the Illinois Central Railroad combined, this was an example of __________.

A)a hostile takeover; friendly takeover

B)an acquisition; a merger

C)a merger; an acquisition

D)a poison pill; a divestiture

E)a spinoff; a divestiture

Answer:  B

Diff: 3

Skill: Application

Objective: 2.7

A-Heading: Redrawing Corporate Boundaries

 

153)If Shirley’s Subs Inc. purchased Tony’s Car Repair Inc., this would be ________.

A)a horizontal merger

B)a conglomerate merger

C)a spinoff

D)a vertical merger

E)a divestiture

Answer: B

Diff: 1

Skill: Application

Objective: 2.7

A-Heading: Redrawing Corporate Boundaries

 

154)If Toyota Motors purchased Ruscombe Muffler, a small retail muffler business, the purchase would be

A)a horizontal merger.

B)a conglomerate merger.

C)a spinoff.

D)a vertical merger.

E)a divestiture.

Answer: D

Diff: 2

Skill: Application

Objective: 2.7

A-Heading: Redrawing Corporate Boundaries

 

155)Company A and Company F have been in direct competition for years selling four-ply tissue paper. Recently, an announcement was made of a merger between the two companies. This would be a _______.

A)reverse merger

B)joint venture

C)vertical merger

D)friendly takeover

E)horizontal merger

Answer: E

Diff: 2

Skill: Application

Objective: 2.7

A-Heading: Redrawing Corporate Boundaries

 

156)A corporation may overcome the resistance of a takeover target by implementing which of the following actions?

A)Buy the target company’s preferred stock instead of its common stock

B)Reduce the price offered for the target company’s stock

C)Threaten to fire the officers of the target company

D)Buy more of the target company’s stock

E)File a lawsuit

Answer: D

Diff: 2

Skill: Application

Objective: 2.7

A-Heading: Redrawing Corporate Boundaries

 

157)Stone Inc. has just been through a friendly takeover. This means that

A)two firms in completely unrelated businesses merge.

B)two firms agree to join together.

C)the acquired company welcomes the acquisition because it may need cash or other benefits which it believes will be available from the other firm.

D)the organization will buy back their own stock from an investor who threatened a hostile takeover.

E)the two firms were direct competitors before the merger and now will not compete with each other after the merger.

Answer: C

Diff: 2

Skill: Application

Objective: 2.7

A-Heading: Redrawing Corporate Boundaries

 

158)BSX Inc. gave shareholders the right to purchase company stock at a 50 percent discount if a group without approval of BSX’s board of directors acquired more than 20 percent of the company’s shares. This is an example of

A)a stock buyback.

B)a conglomerate merger.

C)greenmail.

D)a poison pill.

E)a vertical merger.

Answer: D

Diff: 1

Skill: Application

Objective: 2.7

A-Heading: Redrawing Corporate Boundaries

 

159)PepsiCo created a new corporation called Tricon Global Restaurants (now called Yum! Brands Inc.) which included Pizza Hut, KFC, and Taco Bell. This is an example of a(n)

A)hostile takeover.

B)acquisition.

C)spinoff.

D)merger.

E)divestiture.

Answer: C

Diff: 2

Skill: Application

Objective: 2.7

A-Heading: Redrawing Corporate Boundaries

 

160)The primary objective of an ESOP is to

A)keep management from making bad decisions.

B)protect against takeovers.

C)prevent worker strikes.

D)provide workers with financial security.

E)motivate workers to work harder.

Answer: E

Diff: 2

Skill: Application

Objective: 2.7

A-Heading: Redrawing Corporate Boundaries

 

161)Regarding employee-owned corporations, the survey by Western Compensation & Benefits found that

A)employee-owned corporations have been concentrated in the forest products sector.

B)the majority of companies that have adopted ESOPs have experienced improvements in both sales and profits.

C)the popularity of employee-owned corporations is decreasing.

D)it was originally thought that ESOPs would give employees an increased sense of belonging in the company, but that has not happened.

E)all of the statements are accurate.

Answer: B

Diff: 3

Skill: Recall

Objective: 2.7

A-Heading: Redrawing Corporate Boundaries

 

162)Unilever is ________ to Lever Brothers, Lipton, and Chesebrough Ponds.

A)subsidiary

B)a parent company

C)a spinoff

D)an employee stock ownership plan

E)a partner

Answer:  B

Diff: 2

Skill: Recall

Objective: 2.7

A-Heading: Redrawing Corporate Boundaries

 

 

TRUE/FALSE QUESTIONS.  Write ‘T’ if the statement is true and ‘F’ if the statement is false.

 

163)The external environment has a limited impact on the success or failure of most organizations.

Answer:  False

Diff: 2

Skill: Recall

Objective: 2.1

A-Heading: Organizational Boundaries and Environments

 

164)While no single firm can control the environment, managers should not simply react to change; they should be proactive and at least try to influence their environment.

Answer: True

Diff: 2

Skill: Recall

Objective: 2.1

A-Heading: Organizational Boundaries and Environments

 

165)An organizational boundary is that which separates the organization from its environment.

Answer:  True

Diff: 1

Skill: Recall

Objective: 2.1

A-Heading: Organizational Boundaries and Environments

 

166)Traditionally, organizational boundaries were formerly clear-cut and easy to identify, but they have now become much more complex.

Answer: True

Diff: 1

Skill: Recall

Objective: 2.1

A-Heading: Organizational Boundaries and Environments

 

167)Prevailing economic conditions will affect the performance of almost every business.

Answer:  True

Diff: 1

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

168)Low inflation means that McDonald’s will pay lower prices for its supplies as time passes.

Answer:  False

Diff: 2

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

169)Low inflation will allow McDonald’s to increase the prices it charges consumers.

Answer:  False

Diff: 2

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

170)Today, approximately 10 percent of the Canadian population works in agriculture.

Answer:  False

Diff: 2

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

171)Aggregate output refers to the pattern of short-term ups and downs in the economy.

Answer:  False

Diff: 1

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

172)The business cycle consists of four phases: peak, recession, trough, and recovery.

Answer: True

Diff: 1

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

173)GNP is the total value of all the goods and services produced by an economic system during a five-year period.

Answer: False

Diff: 1

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

174)Canada’s GDP in 2009 was approximately $6.4 trillion.

Answer: False

Diff: 1

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

175)The purchasing power parity idea gives us a better sense of the standards of living across the globe.

Answer: True

Diff: 2

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

176)An increase in aggregate output will typically result in a recession.

Answer:  False

Diff: 2

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

177)Profits from a Canadian-owned automobile factory in Brazil are included in the GNP of Brazil.

Answer:  False

Diff: 2

Skill: Application

Objective: 2.2

A-Heading: The Economic Environment

 

178)Profits from a Canadian-owned automobile factory in Brazil are included in the GDP of Brazil.

Answer:  True

Diff: 2

Skill: Application

Objective: 2.2

A-Heading: The Economic Environment

 

179)GDP includes the total value of goods and services produced within a given period by a national economy through domestic factors of production.

Answer:  True

Diff: 1

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

180)GNP is the total value of all goods and services produced by a national economy within a given period, regardless of where the factors of production are located.

Answer:  True

Diff: 1

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

181)GNP is the preferred method of calculating national income and output.

Answer:  False

Diff: 2

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

182)The real growth rate of the Canadian economic system is the growth rate of GDP adjusted for inflation and changes in the value of a country’s currency.

Answer:  True

Diff: 2

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

183)Per capita GDP for a country is calculated by dividing the total GDP by its population.

Answer:  True

Diff: 2

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

184)Nominal GDP is the gross domestic product measured in current dollars or with all components valued at current prices.

Answer:  True

Diff: 1

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

185)Nominal GDP is more important than real GDP

Answer:  False

Diff: 1

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

186)Purchasing power parity is a principle that states exchange rates are set so that the prices of similar products in different countries are about the same.

Answer:  True

Diff: 1

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

187)If productivity increases, prices to consumers will tend to increase as well.

Answer:  False

Diff: 2

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

188)According to OECD rankings, Canada is in 4th place with a productivity ratio of 96.4 compared to the U.S.

Answer:  False

Diff: 2

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

189)The standard of living in a country improves only through increases in the money supply.

Answer:  False

Diff: 1

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

190)The standard of living improves only through increases in productivity.

Answer:  True

Diff: 2

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

191)A positive balance of trade results when imports exceed exports.

Answer:  False

Diff: 2

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

192)A negative balance of trade results when a country imports more than it exports.

Answer:  True

Diff: 2

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

193)Canada is a usually a creditor nation, while the U.S. is a consistent debtor nation.

Answer:  True

Diff: 2

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

194)In 2009, Canada had a trade deficit of almost $5 billion.

Answer:  True

Diff: 2

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

195)During the period 1997-2008, Canada was the only industrialized country that had annual budget surpluses.

Answer:  True

Diff: 2

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

196)Canada’s national debt is about $680 billion.

Answer:  True

Diff: 2

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

197)The three primary factors that threaten stability are inflation, deflation and unemployment.

Answer:  True

Diff: 2

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

198)Stability, as an economic goal, is a condition in which there is a balance between money available and goods produced.

Answer: True

Diff: 2

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

199)One consequence of achieving the economic goal of stability is that wages change very little.

Answer: True

Diff: 1

Skill: Application

Objective: 2.2

A-Heading: The Economic Environment

 

200)Inflation applies to only specific industries.

Answer: False

Diff: 1

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

201)Inflation occurs when there are increased goods and services for sale.

Answer:  False

Diff: 1

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

202)Inflation increases the purchasing power of your money.

Answer:  False

Diff: 2

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

203)The consumer price index (CPI) is a measure of the prices of typical products purchased by consumers.

Answer:  True

Diff: 1

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

204)During 2008, the annual rate of inflation in Zimbabwe was 40 million percent.

Answer:  True

Diff: 2

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

205)Deflation is generally a positive thing for consumers because prices decline and consumers’ dollars go further.

Answer:  False

Diff: 2

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

206)The percent of consumer spending on necessities like food and housing has declined during the past 40 years.

Answer:  True

Diff: 2

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

207)The “basket of goods” included in the Consumer Price Index has remained the same for many years so the government can make accurate year-to-year comparisons about the rate of inflation.

Answer:  False

Diff: 2

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

208)Unemployment reflects the joblessness level of the adult population in an economic system, whether or not they are actively seeking work.

Answer:  False

Diff: 1

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

209)Ted has not worked in 5 years and has given up finding a job. He is considered unemployed.

Answer: False

Diff: 2

Skill: Application

Objective: 2.2

A-Heading: The Economic Environment

 

210)Full employment is impossible.

Answer: True

Diff: 2

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

211)In order to achieve full employment, government economists require that each business establish that as a goal.

Answer: False

Diff: 2

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

212)Full employment means that everyone who wants to work has an opportunity to do so.

Answer: True

Diff: 1

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

213)When unemployment is low, employers will tend to reduce the prices of their products.

Answer:  False

Diff: 2

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

214)When unemployment is low, businesses raise the wages that they are willing to pay.

Answer:  True

Diff: 2

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

215)Cyclical unemployment occurs as a result of a downturn in the business cycle.

Answer:  True

Diff: 2

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

216)Frictional unemployment is more important than cyclical unemployment.

Answer:  False

Diff: 2

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

217)During 2010, Canada’s unemployment rate was higher than that of the U.S.

Answer:  False

Diff: 2

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

218)Technology transfer is more important than R & D intensity.

Answer:  False

Diff: 2

Skill: Recall

Objective: 2.3

A-Heading: The Technological Environment

 

219)Technology transfer refers to the process of moving new technological developments out of government research labs and into the private sector.

Answer:  False

Diff: 2

Skill: Recall

Objective: 2.3

A-Heading: The Technological Environment

 

220)R & D spending in Canada in 2009 totaled about $16 billion.

Answer:  True

Diff: 2

Skill: Recall

Objective: 2.3

A-Heading: The Technological Environment

 

221)R&D intensity refers to R&D spending as a percentage of a company’s sales revenue.

Answer: True

Diff: 2

Skill: Recall

Objective: 2.3

A-Heading: The Technological Environment

 

222)Political stability is an important factor for international firms because no business wants to set up shop in another country unless trade relationships with that country are well defined and stable.

Answer: True

Diff: 1

Skill: Recall

Objective: 2.4

A-Heading: The Political-Legal Environment

 

223)Governments in market economies are actually quite restricted in terms of what they can require businesses to do.

Answer: False

Diff: 1

Skill: Recall

Objective: 2.4

A-Heading: The Political-Legal Environment

 

224)Relations between sovereign governments does not have much impact on businesses operating in those countries.

Answer: False

Diff: 1

Skill: Recall

Objective: 2.4

A-Heading: The Political-Legal Environment

 

225)A product such as bicycles can be marketed in the same way in both Canada and China.

Answer: False

Diff: 2

Skill: Application

Objective: 2.5

A-Heading: The Socio-Cultural Environment

 

226)The socio-cultural environment includes things like attitudes and values, but not demographic factors because the latter cannot easily be changed.

Answer: False

Diff: 2

Skill: Application

Objective: 2.5

A-Heading: The Socio-Cultural Environment

 

227)McDonald’s has enjoyed great success in the Middle East, partly because employment in food service is viewed as highly desirable.

Answer:  False

Diff: 2

Skill: Recall

Objective: 2.5

A-Heading: The Socio-Cultural Environment

 

228)Customer preferences must be taken into consideration across national boundaries, but not generally within the same country.

Answer: False

Diff: 2

Skill: Recall

Objective: 2.5

A-Heading: The Socio-Cultural Environment

 

229)Socio-cultural factors influence the way workers in a society feel about their jobs; the job can have meaningful social significance or it can simply be a means to an end.

Answer: True

Diff: 2

Skill: Recall

Objective: 2.5

A-Heading: The Socio-Cultural Environment

 

230)Burger King was the first fast food chain in Canada to reduce the fat content in its French fries.

Answer: False

Diff: 1

Skill: Recall

Objective: 2.5

A-Heading: The Socio-Cultural Environment

 

231)Product life cycles are somewhat longer than they were 20 years ago because products have become more complex.

Answer: False

Diff: 1

Skill: Application

Objective: 2.6

A-Heading: The Business Environment

 

232)To be effective, managers must understand the company’s competitive situation, and then develop a competitive strategy to exploit opportunities in the industry.

Answer: True

Diff: 1

Skill: Recall

Objective: 2.6

A-Heading: The Business Environment

 

233)Viral marketing uses word of mouth that spreads information like a virus from customer to customer.

Answer:  True

Diff: 2

Skill: Recall

Objective: 2.6

A-Heading: The Business Environment

 

234)An example of a merger would be the joining of the Canadian National Railways with the Illinois Central Railroad.

Answer:  True

Diff: 2

Skill: Application

Objective: 2.7

A-Heading: Redrawing Corporate Boundaries

 

235)A hostile takeover occurs when one organization buys enough of the other company’s shares to take control of another company even though that company may be opposed to the takeover.

Answer:  True

Diff: 2

Skill: Recall

Objective: 2.7

A-Heading: Redrawing Corporate Boundaries

 

236)There is a growing trend today for employees to buy significant stakes of larger corporations.

Answer:  True

Diff: 2

Skill: Recall

Objective: 2.7

A-Heading: Redrawing Corporate Boundaries

 

237)In an acquisition, one firm simply buys another firm, whereas in a merger the consolidation is more collaborative.

Answer: True

Diff: 1

Skill: Recall

Objective: 2.7

A-Heading: Redrawing Corporate Boundaries

 

238)When Agricore and United Grain Growers merged to form Agricore United, this was an example of a vertical merger.

Answer: False

Diff: 1

Skill: Recall

Objective: 2.7

A-Heading: Redrawing Corporate Boundaries

 

239)The majority of companies that have adopted ESOPs have experienced improvement in both sales and profits.

Answer: True

Diff: 1

Skill: Recall

Objective: 2.7

A-Heading: Redrawing Corporate Boundaries

 

 

SHORT ANSWER QUESTIONS.  Write the word or phrase that best completes each statement or answers the question.

 

240)What is an organizational boundary?

Answer:  An organizational boundary is that which separates the organization from its environment.

Diff: 2

Skill: Recall

Objective: 2.1

A-Heading: Organizational Boundaries and Environments

 

241)List the 5 dimensions of the external environment of business organizations.

Answer: economic, technological, political-legal, socio-cultural, and business environments

Diff: 2

Skill: Application

Objective: 2.1

A-Heading: Organizational Boundaries and Environments

 

242)What is the main measure of growth in an economy?

Answer:  The main measure of growth is aggregate output.

Diff: 2

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

243)What is a recession?

Answer:  A recession is a period during which aggregate output declines.

Diff: 2

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

244)How is GDP per capita calculated?

Answer:  GDP per capita is calculated by dividing the total GDP by the total population of a country.

Diff: 2

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

245)What is reflected in the real GDP?

Answer:  The real GDP is calculated to account for changes in currency values and price changes.

Diff: 2

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

246)What is productivity?

Answer: Productivity is a measure of economic growth that compares how much a system produces with theresources that are needed to produce it.

Diff: 2

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

247) Explain purchasing power parity.

Answer:  Purchasing power parity is the principle that exchange rates are set so that the prices of similar products in different countries are about the same.

Diff: 2

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

248)Under what circumstances can inflation be a positive factor?

Answer: As a sign of economic growth, more products sold, more workers are hired, more investment in new products

Diff: 2

Skill: Application

Objective: 2.2

A-Heading: The Economic Environment

 

249)What is the national debt?

Answer:  The national debt is the amount of money a country owes its creditors. It is the result of accumulated annual budget deficits.

Diff: 1

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

250)What are the three primary factors that threaten economic stability?

Answer:  Inflation, deflation, and unemployment are the three primary factors that threaten economic stability.

Diff: 1

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

251)What is measured by the consumer price index (CPI)?

Answer:  The consumer price index measures the changes in the cost of a “basket” of goods and services that a typical family might buy.

Diff: 1

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

252)Define the term unemployment.

Answer:  Unemployment is the joblessness of people actively seeking work in an economic system.

Diff: 2

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

253)What is cyclical unemployment?

Answer:  Cyclical unemployment is unemployment that results from a downturn in the business cycle.

Diff: 2

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

254)How does cyclical unemployment differ from frictional unemployment?

Answer: Cyclical unemployment results from a downturn in the business cycle, while frictional unemployment refers to people who are out of work temporarily while they are looking for a new job.

Diff: 2

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

255)What is R & D intensity?

Answer: R & D spending as a percentage of the company’s sales revenue.

Diff: 1

Skill: Recall

Objective: 2.3

A-Heading: The Technological Environment

 

256)What is the difference between pure and applied R & D?

Answer: “Pure” R & D involves developing knowledge in an area without regard to whether any discoveries that occur will be immediately marketable. “Applied” R & D means focusing specifically on how a technological innovation can be sold in the marketplace.

Diff: 1

Skill: Recall

Objective: 2.3

A-Heading: The Technological Environment

 

257)Why are customer preferences and tastes important to business?

Answer: Tastes and preferences determine what products and services will sell in various geographic regions and among various ethnic groups in Canada.

Diff: 1

Skill: Recall

Objective: 2.5

A-Heading: The Socio-Cultural Environment

 

258)List the five forces in Porter’s model.

Answer: Rivalry among existing competitors, threat of potential entrants, suppliers, buyers, and substitutes.

Diff: 1

Skill: Recall

Objective: 2.6

A-Heading: The Business Environment

 

259)What is meant by the term core competencies?

Answer:  Core competencies are the skills and resources with which an organization competes best and creates the most values for owners.

Diff: 2

Skill: Recall

Objective: 2.6

A-Heading: The Business Environment

 

260)What is outsourcing?

Answer:  Outsourcing is a strategy of paying suppliers and distributors to perform certain business processes or to provide needed materials or resources.

Diff: 2

Skill: Recall

Objective: 2.6

A-Heading: The Business Environment

 

261)What is business process management?

Answer:  A process is any activity that adds value to some input, transforming it into an output for a customer. Business process management means moving away from traditional organization by department and toward organizing around process-oriented team structures.

Diff: 2

Skill: Recall

Objective: 2.6

A-Heading: The Business Environment

 

262)What is viral marketing?

Answer: The rapid spread of information among consumers about products. It is facilitated by electronic means such as the internet.

Diff: 2

Skill: Recall

Objective: 2.6

A-Heading: The Business Environment

 

263)How is a vertical merger different than a horizontal merger?

Answer:  A vertical merger occurs when one of the companies involved in the merger is a supplier or customer of the other. A horizontal merger occurs when two companies that are competitors in the same industry merge (for example, when Molson Inc. merged with Adolph Coors Co.).

Diff: 2

Skill: Recall

Objective: 2.7

A-Heading: Redrawing Corporate Boundaries

 

264)What is a poison pill?

Answer: A poison pill is a defence that company management uses to make the company less attractive to another company that is trying to take it over. It usually takes the form of allowing stockholders to buy the company’s stock at a big discount if a hostile suitor buys more than a certain proportion of the stock.

Diff: 2

Skill: Recall

Objective: 2.7

A-Heading: Redrawing Corporate Boundaries

 

 

ESSAY QUESTIONS.  Write your answer in the space provided or on a separate sheet of paper.

 

265)List and briefly describe each of the organizational environments that affect businesses.

Answer: The environments are (1) economic (the condition of the economic system in which the company operates), (2) technological (changes in the way that businesses create value for their customers), (3) political-legal (the relationship between businesses and government), (4) socio-cultural (the customs, values, attitudes and demographics of the society in which a company operates), and (5) business (the complex, demanding, and ever-changing set of circumstances in which businesses try to differentiate themselves from their competitors).

Diff: 2

Skill: Recall

Objective: 2.1

A-Heading: Organizational Boundaries and Environments

 

266)How might an economic environment characterized by moderate unemployment and low inflation affect a McDonald’s restaurant?

Answer:  Moderate unemployment will result in most people being able to afford to eat out, but it also means that McDonald’s must pay higher wages to attract employees. Low inflation will result in McDonald’s paying relatively constant prices for its supplies, but it also means that McDonald’s will be constrained from increasing the prices it charges.

Diff: 3

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

267)How does GNP differ from GDP? Give an example of a product that would be included in Canada’s GNP, but not its GDP.

Answer:  A nation’s gross national product (GNP) measures the total value of all goods and services produced by its economy within a given period of time, regardless of where the factors of production are located. A nation’s gross domestic product (GDP) measures the total value of all goods and services produced within a given period by a national economy through domestic factors of production. The profits earned by a Canadian-owned automobile plant operating in Brazil would be included in the Canadian GNP, but not GDP.

Diff: 3

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

268)How does the national debt affect economic growth?

Answer:  A country’s national debt is the amount of money that the government owes its creditors. The government raises money through taxes and the sale of bonds. By selling bonds, the government competes with other potential borrowers for the available supply of loanable money. The more the government borrows, the less money is available for the private borrowing and investment that increases productivity.

Diff: 3

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

269)Explain the relationship between productivity and the standard of living.

Answer:  Standard of living refers to the total quantity and quality of goods and services that people can purchase with the currency used by their economic system. Productivity is a measure of economic growth that compares how much a system produces with the resources needed to produce it. Standard of living improves only through increases in productivity.

Diff: 3

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

270)What is inflation and how does it threaten economic stability?

Answer:  Inflation occurs when there are widespread price increases throughout an economic system. During periods of inflation, the amount of money injected into an economy outstrips the increase in actual output. When this happens, people will have more money to spend, but there will still be the same quantity of products available for them to buy. As they compete with one another to buy available products, prices go up. Higher prices erase the increase in the amount of money injected into the economy and purchasing power declines.

Diff: 3

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

271)What is unemployment? How does low unemployment threaten economic stability?

Answer:  Unemployment is the joblessness of people actively seeking work in an economic system. While low unemployment might seem to be positive, it can threaten economic stability. When unemployment is low, there is a shortage of labour available for businesses to hire. As businesses compete with one another for the available supply of labour, businesses raise the wages that they are willing to pay. Because higher wages cut into profit margins, companies raise the prices of their products. While the increase in pay results in consumers having more money to spend, high prices offset any gain and purchasing power declines.

Diff: 3

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

272)How is the effectiveness of the government’s attempts to manage Canada’s economy measured?  Briefly explain each tool.

Answer: * GDP: value of all goods and services produced in a country

* GNP: value of all goods and services produced by a country

* Productivity: a measure of efficiency

* Standard of living: a measure of a society’s economic well-being

* Balance of trade: exports minus imports.

Diff: 2

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

273)Draw a model of the business cycle that depicts each of its four phases.

Answer: See Figure 2.2.

Diff: 2

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

274)Which organization has proposed what they believe is a more realistic measure than GNP or GDP to assess economic activity?  What have they called this measure?  How does it provide a more realistic measure?

Answer: An organization called Redefining Progress has proposed a more realistic measure to assess economic activity. They have called this measure the Genuine Progress Indicator (GPI) which treats activities that harm the environment or our quality of life as costs and gives them negative values.

Diff: 2

Skill: Application

Objective: 2.2

A-Heading: The Economic Environment

 

275)What are the pros and cons of prolonged economic stability?

Answer: pros: balance, wages constant, low inflation, predictability, stable interest rates

cons: possible stagnation, less innovation, decreasing efficiency, job loss, slowed economy, high unemployment

Diff: 2

Skill: Application

Objective: 2.2

A-Heading: The Economic Environment

 

276)List and describe the three factors that threaten stability.

Answer: The three factors are inflation (the occurrence of widespread price increases throughout an economic system), deflation (a period of generally falling prices), and unemployment (the level of joblessness among people actively seeking work in an economic system).

Diff: 1

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

277)List and discuss the 4 different types of unemployment, using examples to demonstrate the different types.

Answer: frictional unemployment, seasonal unemployment, cyclical unemployment, structural unemployment.  Examples will vary.

Diff: 2

Skill: Recall

Objective: 2.2

A-Heading: The Economic Environment

 

278)Why should companies always be on the lookout for technological breakthroughs?

Answer: There are two good reasons. First, technological breakthroughs might allow a company to develop new products to supplement its current product offerings. The new product may well contribute to increased profits. Second, a technological breakthrough may make one or more of a company’s current product line obsolete and threaten its very survival.

Diff: 2

Skill: Recall

Objective: 2.3

A-Heading: The Technological Environment

 

279)Why is it important for businesses to be aware of trends in the political-legal environment?

Answer:  For several reasons, it is important for businesses to be aware of trends in the political-legal environment. First, the legal system defines in part what an organization can and can’t do. Various government agencies regulate important areas such as advertising practices, safety and health considerations, and acceptable standards of business conduct. Periods of pro-business sentiment may result in less regulation, while periods of anti-business sentiment may result in greater restriction in competitive activities. Finally, political stability is also an important consideration, especially for international firms.

Diff: 3

Skill: Recall

Objective: 2.4

A-Heading: The Political-Legal Environment

 

280)Why is the socio-cultural environment important for business firms?

Answer: It is important because the values, attitudes, tastes, customs and demographic characteristics of a society have a big influence on what products or services a company can profitably sell to consumers. For example, failure to accurately assess consumer tastes will lead to poor sales and reduced profitability. Unethical behaviour by a company’s managers will lead to a poor public image for the company and may very well result in decreased sales and profits.

Diff: 3

Skill: Recall

Objective: 2.5

A-Heading: The Socio-Cultural Environment

 

281)How is Porter’s Five Forces Model useful?

Answer: Porter’s model helps managers analyze the competitive situation in their industry, and then decide what their competitive strategy should be. Using the model requires assessment of five elements: rivalry among existing competitors (intensity and type varies across industries), the threat of potential new entrants (new competitors can cause big changes in an industry), the amount of bargaining power that suppliers have (the greater the number of suppliers, the less their individual bargaining power), the amount of bargaining power that buyers have (the fewer the number of buyers, the more their bargaining power), and product substitutes (if there are many substitute products, the industry is more competitive).

Diff: 3

Skill: Recall

Objective: 2.6

A-Heading: The Business Environment

 

282)What is outsourcing? Give an example of outsourcing.

Answer:  Outsourcing is the strategy of paying suppliers and distributors to perform certain business processes or to provide needed materials and services. A large bank might outsource an ancillary service such as food service. Other firms outsource payroll, training, and research and development functions.

Diff: 3

Skill: Recall

Objective: 2.6

A-Heading: The Business Environment

 

283)Describe three advantages of outsourcing.

Answer:  Outsourcing provides a number of advantages to organizations. Outsourcing often saves time and money, increases effectiveness in a firm’s core business, and results in more value for customers and owners.

Diff: 3

Skill: Recall

Objective: 2.6

A-Heading: The Business Environment

 

284)What is viral marketing? Why do firms use it?

Answer:  Viral marketing is the strategy of using the Internet and word-of-mouth marketing to spread product information. Viral marketing can gain consumer awareness faster and with wider reach than traditional media messages, and at a lower cost.

Diff: 2

Skill: Recall

Objective: 2.6

A-Heading: The Business Environment

 

285)Why is business process management important?

Answer: It is important because it requires a business to ask a very fundamental question: What must we do well to stay in business? To answer that question, a business must identify the major processes that must be performed well, and then organize resources and skills around those essential processes. This leads to faster decision making and a stronger customer orientation.

Diff: 3

Skill: Recall

Objective: 2.6

A-Heading: The Business Environment

 

286)What is a vertical merger? Provide an example.

Answer:  A vertical merger occurs when there is a consolidation of two firms and one of the firms is a supplier or customer of the other.  An example would include  a car manufacturer merging with one of its parts suppliers.

Diff: 3

Skill: Recall

Objective: 2.7

A-Heading: Redrawing Corporate Boundaries

 

287)How does poison pill work?

Answer:  A poison pill is a defence used to make a firm less attractive to an actual or potential hostile suitor in a takeover attempt.  The objective is to make the “pill” so distasteful that the potential acquirer will not want to swallow it.  For example BCE allowed its shareholders to purchase BCE stock at a 50% discount if another organization announced its intention to purchase 20% or more of BCE.

Diff: 3

Skill: Recall

Objective: 2.7

A-Heading: Redrawing Corporate Boundaries

 

CHAPTER 16

FINANCIAL AND RISK MANAGEMENT

 

MULTIPLE CHOICE QUESTIONS.  Choose the one alternative that best completes the statement or answers the question.

 

1)Which of the following is correct with regard to the opening case entitled “The Source of a Meltdown, the Joy of a Bounce, and the Prospects Ahead”?

A)The 2008 financial crisis did not start in the U.S., but that is where it had its greatest effect

B)One of the key factors in causing the meltdown was low interest rates

C)The financial meltdown was caused by mortgage lenders demanding too much collateral for loans

D)A liquidity crisis, which is normally part of a financial meltdown, did not occur in 2008

E)All of these are correct

Answer:  B

Diff: 3

Skill: Recall

Objective: 16.1

A-Heading: The Role of the Financial Manager

 

2)Who is responsible for planning and controlling the acquisition and dispersal of the company’s financial assets?

A)Financial manager

B)Accounting manager

C)Sales manager

D)Management information systems manager

E)Purchasing manager

Answer:  A

Diff: 1

Skill: Recall

Objective: 16.1

A-Heading: The Role of the Financial Manager

 

3)Which term is used to identify the business activity that is concerned with determining a firm’s long-term investments, obtaining the funds to pay for those investments, and conducting the firm’s everyday financial activities?

A)Bookkeeping

B)Corporate finance

C)Investment brokers

D)Chartered banks

E)Money markets

Answer:  B

Diff: 2

Skill: Recall

Objective: 16.1

A-Heading: The Role of the Financial Manager

 

4)Which of the following is not a responsibility of financial managers?

A)Determining a firm’s long-term investments

B)Managing risks

C)Obtaining loans

D)Identifying markets for the company’s products in order to ensure good cash flow

E)Conducting the firm’s everyday financial activities

Answer:  D

Diff: 2

Skill: Recall

Objective: 16.1

A-Heading: The Role of the Financial Manager

 

5)________ plan and control the acquisition and dispersal of a firm’s financial resources.

A)Financial managers

B)The board of directors

C)Production managers

D)Operations mangers

E)Accounting managers

Answer:  A

Diff: 1

Skill: Recall

Objective: 16.1

A-Heading: The Role of the Financial Manager

 

6)Which of the following represents the overall objective of financial managers?

A)To ensure that the company has enough funds on hand to purchase materials needed to produce goods and services

B)To ensure that the company has enough money to pay for its debts

C)To increase the supply of money for the economy

D)To increase the value of the firm and thus to increase shareholder wealth

E)To manage the firm’s cash flow

Answer:  D

Diff: 2

Skill: Recall

Objective: 16.1

A-Heading: The Role of the Financial Manager

 

7)What term identifies the management process of checking actual performance against the financial plans to ensure that the desired financial results occur?

A)Financial control

B)Activity ratios

C)Working capital

D)Capital structure

E)Cash flow management

Answer:  A

Diff: 1

Skill: Recall

Objective: 16.1

A-Heading: The Role of the Financial Manager

 

8)When a firm ensures that it always has enough funds on hand to purchase the materials and human resources that it needs to produce goods and services it is exercising

A)cash-flow management.

B)government tax reporting.

C)accounting.

D)financial planning.

E)financial control.

Answer:  A

Diff: 2

Skill: Recall

Objective: 16.1

A-Heading: The Role of the Financial Manager

 

9)________ is the process of checking actual performance against plans to ensure that desired financial results occur.

A)Cash-flow management

B)Financial planning

C)Accounting

D)Financial control

E)Government tax reporting

Answer:  D

Diff: 1

Skill: Recall

Objective: 16.1

A-Heading: The Role of the Financial Manager

 

10)________ are often the backbone of financial control.

A)Accounting managers

B)Budgets

C)Approval sign-offs

D)Financial managers

E)Authorized spending levels

Answer:  B

Diff: 2

Skill: Recall

Objective: 16.1

A-Heading: The Role of the Financial Manager

 

11)A(n) ________ describes a firm’s strategies for reaching some future financial position.

A)operating plan

B)cash-flow statement

C)balance sheet

D)financial plan

E)budget

Answer:  D

Diff: 1

Skill: Recall

Objective: 16.1

A-Heading: The Role of the Financial Manager

 

12)All of the following are responsibilities of the financial manager except

A)determining a firm’s long-term investments.

B)obtaining funds to pay for those investments.

C)developing the firm’s financial statements.

D)conducting the firm’s everyday financial activities.

E)managing the risks that the firm takes.

Answer: C

Diff: 1

Skill: Recall

Objective: 16.1

A-Heading: The Role of the Financial Manager

 

13)Tony is responsible for planning and controlling the acquisition and dispersal of the company’s financial assets. What is Tony’s job title?

A)Management information systems manager

B)Financial manager

C)Purchasing manager

D)Accounting manager

E)Chief risk manager

Answer: B

Diff: 1

Skill: Application

Objective: 16.1

A-Heading: The Role of the Financial Manager

 

14)A financial manager’s overall objective is to

A)manage the firm’s everyday financial activities.

B)decrease the risks facing the firm.

C)increase the firm’s value.

D)manage cash.

E)manage wealth.

Answer: C

Diff: 1

Skill: Recall

Objective: 16.1

A-Heading: The Role of the Financial Manager

 

15)David is in the process of checking actual performance against plans to ensure that the desired financial outcome occurs. David is involved in

A)cash flow management.

B)financial control.

C)financial planning.

D)determining the firm’s long-term investments.

E)obtaining funds to pay for investments.

Answer: B

Diff: 1

Skill: Application

Objective: 16.1

A-Heading: The Role of the Financial Manager

 

16)When constructing a financial plan, which one of the following questions does a financial manager not ask?

A)What funds are needed to meet immediate plans?

B)When will the company need more funds?

C)Where can the company get the funds to meet its short-term needs?

D)Where can the company get the funds to meet its long-term needs?

E)How well will the stock market do next year?

Answer: E

Diff: 2

Skill: Recall

Objective: 16.1

A-Heading: The Role of the Financial Manager

 

17)The “measuring stick” against which performance is evaluated is provided by

A)a budget.

B)a cash-flow statement.

C)a financial plan.

D)a balance sheet.

E)debt levels.

Answer: A

Diff: 1

Skill: Recall

Objective: 16.1

A-Heading: The Role of the Financial Manager

 

18)Henry has received notice from a supplier that all invoices must be paid within 30 days rather than 60 days as previously given. Which of the following will be impacted by this change?

A)Inventories

B)Raw materials inventory

C)Accounts receivable

D)Capital expenditures

E)Cash flow

Answer:  E

Diff: 2

Skill: Recall

Objective: 16.2

A-Heading: Why Businesses Need Funds

 

19)Typically the largest single category of a firm’s short-term debt is

A)buildings.

B)inventories.

C)accounts receivable.

D)accounts payable.

E)equipment.

Answer:  D

Diff: 1

Skill: Recall

Objective: 16.2

A-Heading: Why Businesses Need Funds

 

20)Which of the following demonstrates good management of short-term debt?

A)Delaying bill payments as long as possible

B)Selling stock instead of bonds

C)Paying bills when they are received

D)Prepaying taxes

E)Renting or leasing instead of buying

Answer:  A

Diff: 2

Skill: Recall

Objective: 16.2

A-Heading: Why Businesses Need Funds

 

21)When managers at Kraft Foods anticipate how much cheddar cheese Safeway supermarkets will buy each month and when they will pay for those purchases, Kraft is managing its

A)accounts payable.

B)accounts receivable.

C)credit policies.

D)capital expenditures.

E)inventories.

Answer:  B

Diff: 1

Skill: Application

Objective: 16.2

A-Heading: Why Businesses Need Funds

 

22)David is looking at a bill for supplies his company bought. It is dated May 1st and the terms are 2/10; net 30. In order to pay the least amount, when should he pay the bill?

A)Any day in May

B)May 10

C)May 21

D)May 31

E)May 15

Answer:  B

Diff: 2

Skill: Application

Objective: 16.2

A-Heading: Why Businesses Need Funds

 

23)Which of the following terms would a firm use to speed up cash flow?

A)1/10; net 60

B)1/10; net 30

C)3/10; net 30

D)2/10; net 60

E)2/10; net 30

Answer:  C

Diff: 2

Skill: Recall

Objective: 16.2

A-Heading: Why Businesses Need Funds

 

24)Sally is looking at an invoice dated July 1st for $1000 that has terms of 2/10; net 30. If she pays the bill on July 3rd how much should she write the cheque for?

A)$900

B)$980

C)$998

D)$1 000

E)$700

Answer:  B

Diff: 3

Skill: Application

Objective: 16.2

A-Heading: Why Businesses Need Funds

 

25)What represents the largest single category of short-term debt for most companies?

A)Number of shares outstanding

B)Accounts payable

C)Corporate bonds

D)Owners’ equity

E)Contra-assets

Answer:  B

Diff: 2

Skill: Recall

Objective: 16.2

A-Heading: Why Businesses Need Funds

 

26)Why is it necessary for a business firm to establish a credit policy?

A)A credit policy is necessary to determine how much money the business can borrow to purchase supplies

B)A credit policy is necessary to determine how dividends will be distributed to the shareholders

C)A credit policy is necessary to determine which suppliers the firm needs to pay

D)A credit policy is a means of accounting for the dollar value of inventory-in-process

E)A credit policy provides financial managers with expected dates of payment from buyers of the firm’s products and services

Answer:  E

Diff: 3

Skill: Recall

Objective: 16.2

A-Heading: Why Businesses Need Funds

 

27)Why is it in the firm’s interest to withhold payment as long as it can?

A)Withholding payment increases the value of the accounts payable that may be subsequently factored

B)The longer the firm withholds payment, the longer it will have cash available for investments or other uses

C)The longer it withholds interest, the higher the amount that can be factored from accounts receivable

D)The longer it withholds payments the more it can raise the selling price of its own goods

E)The longer it withholds funds, the lower the interest rate will be

Answer:  B

Diff: 2

Skill: Recall

Objective: 16.2

A-Heading: Why Businesses Need Funds

 

28)Which of the following represents a need for additional funds by business firms?

A)To increase the level of accounts payable

B)To obtain a long-term loan

C)To meet short-term operational expenditures

D)To increase the number of outstanding bonds issued by the firm

E)To increase the level of accounts receivable

Answer:  C

Diff: 2

Skill: Recall

Objective: 16.2

A-Heading: Why Businesses Need Funds

 

29)What does a credit policy of “2/10, net 30” mean?

A)If a customer pays its bill within 10 days, it will receive a 30 percent discount

B)If a customer pays its bill within 30 days, it will receive a 10 percent discount

C)If a customer pays its bill within 2 days, it will receive a 10 percent discount

D)If a customer pays its bill within 10 days, it will receive a 2 percent discount

E)None of these

Answer:  D

Diff: 2

Skill: Recall

Objective: 16.2

A-Heading: Why Businesses Need Funds

 

30)Jenex Corp. has a credit policy that reads “2/10, net 30.” This means that

A)the company is offering a 10 percent discount if the customer pays within 2 days.

B)the company will give a net reduction of 30 percent in the amount owed if the customer pays within 10 days.

C)the customer will have to pay at least 10 percent of the bill by the end of 30 days.

D)the customer will have to pay at least 30 percent of the bill by the end of 10 days.

E)none of these.

Answer: E

Diff: 2

Skill: Application

Objective: 16.2

A-Heading: Why Businesses Need Funds

 

31)Sally would like to speed up cash flow for her company. As her financial advisor, what terms would you recommend she use on her accounts receivable?

A)1/10; net 30

B)2/10; net 60

C)1/10; net 60

D)2/10; net 30

E)3/10; net 30

Answer: E

Diff: 2

Skill: Application

Objective: 16.2

A-Heading: Why Businesses Need Funds

 

32)________ are purchases of fixed assets such as land, buildings, and machinery.

A)Operating expenditures

B)Budgeted expenditures

C)Fixed expenditures

D)Investments

E)Long-term expenditures

Answer:  E

Diff: 1

Skill: Recall

Objective: 16.2

A-Heading: Why Businesses Need Funds

 

33)Which of the following is not an accurate statement about long-term expenditures?

A)Long-term expenditures represent an ongoing tie-up of the firm’s funds

B)Normally, long-term fixed assets are not sold or converted into cash

C)Long-term expenditures usually require less planning than operating expenditures

D)Acquisition of fixed assets requires a very large investment of company funds

E)Long-term expenditures are usually more carefully planned than short-term outlays

Answer:  C

Diff: 1

Skill: Recall

Objective: 16.2

A-Heading: Why Businesses Need Funds

 

34)John has received notice from a supplier that all invoices must be paid within 60 days rather than 90 days as previously given. Which of the following will be impacted by this change?

A)Accounts receivable

B)Capital expenditures

C)Working capital

D)Cash flow

E)Accounts payable

Answer: D

Diff: 2

Skill: Application

Objective: 16.2

A-Heading: Why Businesses Need Funds

 

35)Scott is managing a company and he has been advised by his financial manager that his largest source of short-term debt is too high.  What source of funding is Scott’s financial manager probably talking about?

A)Inventory loans

B)Bank notes

C)Credit cards

D)Commercial paper

E)Accounts payable

Answer: E

Diff: 1

Skill: Application

Objective: 16.2

A-Heading: Why Businesses Need Funds

 

36)The set of rules developed governing the extension of credit to customers is

A)credit limit.

B)credit policy.

C)line of credit.

D)credit terms.

E)credit exchange.

Answer: B

Diff: 2

Skill: Recall

Objective: 16.2

A-Heading: Why Businesses Need Funds

 

37)Scott has been informed by his financial manager that his accounts receivable are being paid much too late.  To fix this problem, Scott should

A)develop a credit policy.

B)call the companies and request the funds.

C)charge higher interest rates.

D)demand that the money be paid.

E)sell the late accounts to collection agents.

Answer: A

Diff: 2

Skill: Application

Objective: 16.2

A-Heading: Why Businesses Need Funds

 

38)Long-term expenditures are usually more carefully planed than short-term outlays because

A)they represent a binding commitment of company funds that continues long into the future.

B)they are usually sold at high-profit margins.

C)they can be used to pay off accounts payable.

D)the expenditures must finance items that are easily liquidated.

E)all of these.

Answer: A

Diff: 2

Skill: Application

Objective: 16.2

A-Heading: Why Businesses Need Funds

 

39)Algoma Steel brings in graphite, carbon, iron ore, nickel, and sulphur to produce steel. The supplies are

A)production inventory.

B)merchandise inventory.

C)raw materials inventory.

D)work-in-process inventory.

E)finished goods inventory.

Answer: C

Diff: 2

Skill: Application

Objective: 16.2

A-Heading: Why Businesses Need Funds

 

40)For Levi Strauss’ jean-making operation, rolls of denim are considered __________, while cut-but-not-yet-sewn jeans are considered ___________ .

A)work-in-process inventory; raw materials inventory

B)short-term capital; long-term capital

C)capital stock; supplies

D)raw materials inventory; work-in-process inventory

E)short-term credit; long-term credit’

Answer: D

Diff: 2

Skill: Application

Objective: 16.2

A-Heading: Why Businesses Need Funds

 

41)The Gap has t-shirts boxed and ready to ship to retailers. These goods make up part of the ________ inventory.

A)accounts receivable

B)sales

C)sales-in-process

D)credit

E)finished goods

Answer: E

Diff: 2

Skill: Application

Objective: 16.2

A-Heading: Why Businesses Need Funds

 

42)ATC Machine Shops sends its ________ inventory to Warm Inc. to have its manufactured tools heat-treated.

A)raw materials

B)work-in-process

C)capital goods

D)finished goods

E)supplies

Answer: B

Diff: 2

Skill: Application

Objective: 16.2

A-Heading: Why Businesses Need Funds

 

43)Which of the following is an accurate statement about long-term expenditures?

A)There is no such category as long-term expenditure of funds

B)They represent a non-binding commitment of company funds that does not continue long into the future

C)Acquisition of fixed assets requires a very large investment of company funds

D)They are normally sold or converted to cash

E)All of these

Answer: C

Diff: 2

Skill: Recall

Objective: 16.2

A-Heading: Why Businesses Need Funds

 

44)Which of the following statements best captures the difference between long-term expenditures and short-term expenditures?

A)They require long term financing, and are never sold

B)They are not normally sold, and they require a large investment

C)They require a large investment, and create a need to acquire long term financing

D)They are not normally sold, they require a large investment, and they represent a binding commitment of funds

E)All of these

Answer: D

Diff: 3

Skill: Recall

Objective: 16.2

A-Heading: Why Businesses Need Funds

 

45)Capital expenditures differ from operating expenditures in that

A)they are much smaller.

B)they are shorter commitments.

C)they are part of working capital.

D)they are not budgeted.

E)they are not normally sold or converted into cash.

Answer:  E

Diff: 2

Skill: Recall

Objective: 16.2

A-Heading: Why Businesses Need Funds

 

46)A “gentlemen’s agreement” to pay for products purchased is known as

A)commercial paper.

B)open-book credit.

C)a promissory note.

D)a trade draft.

E)trade credit.

Answer:  B

Diff: 1

Skill: Recall

Objective: 16.3

A-Heading: Sources of Short-Term Funds

 

47)Which term is used to identify the granting of credit by one firm to another?

A)A line of credit

B)A commitment fee

C)Trade credit

D)A secured loan

E)An inter-firm understanding of commercial intent

Answer:  C

Diff: 1

Skill: Recall

Objective: 16.3

A-Heading: Sources of Short-Term Funds

 

48)Sources of short-term funds include all of the following except

A)factoring accounts receivable.

B)secured loans.

C)bonds.

D)unsecured loans.

E)trade credit.

Answer:  C

Diff: 1

Skill: Recall

Objective: 16.3

A-Heading: Sources of Short-Term Funds

 

49)When buyers receive merchandise along with invoices stating credit terms they have most likely been given a(n)

A)trade acceptance.

B)line of credit.

C)revolving credit agreement.

D)promissory note.

E)open-book credit.

Answer:  E

Diff: 2

Skill: Recall

Objective: 16.3

A-Heading: Sources of Short-Term Funds

 

50)Mega has just shipped one of its products to Compucell on faith that they will pay the invoice. This is a(n)

A)trade acceptance.

B)revolving credit agreement.

C)line of credit.

D)open-book credit.

E)promissory note.

Answer:  D

Diff: 1

Skill: Application

Objective: 16.3

A-Heading: Sources of Short-Term Funds

 

51)What is a promissory note?

A)A “gentleman’s agreement” to pay for products which were shipped on faith that the payment would be forthcoming

B)A short-term loan which uses accounts receivable as collateral for a loan

C)An agreement signed by the buyer stating when and how much money will be paid to the seller in return for immediate credit

D)The requirement for a firm to maintain a certain amount of funds on deposit with the lending bank

E)The right given to a bank to seize certain assets if payment is not made when due

Answer:  C

Diff: 2

Skill: Recall

Objective: 16.3

A-Heading: Sources of Short-Term Funds

 

52)If a firm is not a good credit risk and the seller wants more reassurance, the seller may require the signing of a(n) ________ prior to shipping the merchandise.

A)promissory note

B)trade acceptance

C)open-book credit

D)line of credit

E)revolving credit agreement

Answer:  A

Diff: 2

Skill: Recall

Objective: 16.3

A-Heading: Sources of Short-Term Funds

 

53)Before shipping a computer, Mega Computer has insisted that its buyer sign a document that states when and how much money will be paid. This is a(n)

A)line of credit.

B)revolving credit agreement.

C)open-book credit.

D)trade acceptance.

E)promissory note.

Answer:  E

Diff: 1

Skill: Application

Objective: 16.3

A-Heading: Sources of Short-Term Funds

 

54)What is a trade draft?

A)A type of secured loan with trade products serving as collateral

B)A means of pledging accounts receivable

C)An agreement to meet certain terms, which are attached to the shipment, and which must be signed before the goods are delivered to the buyer

D)A legal agreement promising to pay for the goods, which is signed by the buyer before the seller will ship the goods

E)A standing agreement between a bank and a firm

Answer:  C

Diff: 2

Skill: Recall

Objective: 16.3

A-Heading: Sources of Short-Term Funds

 

55)A form of trade credit that is particularly useful for international transactions is

A)trade acceptance.

B)line of credit.

C)revolving credit agreement.

D)open-book credit.

E)promissory notes.

Answer:  A

Diff: 1

Skill: Recall

Objective: 16.3

A-Heading: Sources of Short-Term Funds

 

56)Jack is setting up a global operation. The form of trade credit that is particularly useful for Jack’s international transactions would be

A)revolving credit agreement.

B)promissory notes.

C)trade acceptance.

D)line of credit.

E)open-book credit.

Answer: C

Diff: 1

Skill: Application

Objective: 16.3

A-Heading: Sources of Short-Term Funds

 

57)Along with a computer, Mega Computers has included an invoice stating credit terms and trusting that the buyer will pay the invoice. This is a(n)

A)line of credit.

B)trade acceptance.

C)open-book credit.

D)revolving credit agreement.

E)promissory notes.

Answer: C

Diff: 1

Skill: Application

Objective: 16.3

A-Heading: Sources of Short-Term Funds

 

58)The most common form of trade credit is

A)open-book credit.

B)short term loans.

C)trade drafts.

D)trade acceptances.

E)promissory notes.

Answer: A

Diff: 1

Skill: Recall

Objective: 16.3

A-Heading: Sources of Short-Term Funds

 

59)Sallyanne is selling merchandise to a retailer using the terms of a trade draft. As a new employee of Sallyanne’s, you find out that a trade draft is

A)a means of pledging accounts receivable.

B)an agreement to meet certain terms, which is attached to the shipment and which must be signed before the goods are delivered to the buyer.

C)a legal agreement promising to pay for the goods, which is signed by the buyer before the seller will ship the goods.

D)a type of secured loan with trade products serving as collateral.

E)the seller ships products on faith that payment will be forthcoming.

Answer: B

Diff: 2

Skill: Application

Objective: 16.3

A-Heading: Sources of Short-Term Funds

 

60)What is a trade draft?

A)A standing agreement between a bank and a firm

B)A means of pledging accounts receivable

C)A type of secured loan with trade products serving as collateral

D)A legal agreement promising to pay for the goods, which is signed by the buyer before the seller will ship the goods

E)An agreement that is attached to a merchandise shipment by the seller which states the promised date and amount of payment due

Answer: E

Diff: 2

Skill: Recall

Objective: 16.3

A-Heading: Sources of Short-Term Funds

61)Sallyanne is selling merchandise to Jack’s Machine Shop. Sallyanne felt secure in receiving payment because she had Jack sign a promissory note. Sallyanne felt secure because a promissory note is

A)an agreement signed by the buyer stating when and how much money will be paid to the seller in return for immediate credit.

B)the requirement for a firm to maintain a certain amount of funds on deposit with the lending bank.

C)a “gentleman’s agreement” to pay for products which were shipped on faith that the payment would be forthcoming.

D)the right given to a bank to seize certain assets if payment is not made when due

E)basically the same thing as a trade acceptance.

Answer: A

Diff: 1

Skill: Application

Objective: 16.3

A-Heading: Sources of Short-Term Funds

 

62)Jack and Sam have been doing business for years. Since they have built a mutual trust they choose to use a “gentlemen’s agreement” to pay for products. This is known as

A)commercial paper.

B)a promissory note.

C)open-book credit.

D)a trade draft.

E)trade credit.

Answer: C

Diff: 1

Skill: Application

Objective: 16.3

A-Heading: Sources of Short-Term Funds

 

63)All of the following are forms of trade credit except

A)open-book credit.

B)a secured loan.

C)promissory notes.

D)trade draft.

E)trade acceptance.

Answer: C

Diff: 1

Skill: Application

Objective: 16.3

A-Heading: Sources of Short-Term Funds

 

64)Along with a computer, Mega Computers has sent a document that states the promised payment date and amount. The buyer must sign it before taking the computer. This is a(n)

A)open-book credit.

B)trade draft.

C)revolving credit agreement.

D)promissory note.

E)line of credit.

Answer:  B

Diff: 1

Skill: Application

Objective: 16.3

A-Heading: Sources of Short-Term Funds

 

65)Which term is used to identify a bank’s requirement for the borrower to give the bank the right to seize certain assets if payments are not made as promised?

A)Pledging accounts payable

B)Open-book credit

C)Pledging accounts receivable

D)Collateral

E)Trade acceptance

Answer:  D

Diff: 1

Skill: Recall

Objective: 16.3

A-Heading: Sources of Short-Term Funds

 

66)Which of the following requires the borrower to put up collateral?

A)Commercial paper

B)Unsecured loans

C)Secured loans

D)Trade credit

E)Line of credit

Answer:  C

Diff: 2

Skill: Recall

Objective: 20.3

Objective: 16.3

A-Heading: Sources of Short-Term Funds

 

67)Which of the following would a bank most likely offer?

A)Commercial paper

B)Trade credit

C)Trade drafts

D)Short-term bonds

E)Secured loans

Answer:  E

Diff: 1

Skill: Recall

Objective: 16.3

A-Heading: Sources of Short-Term Funds

 

68)Secured, short-term loans are usually secured by

A)deposits with the bank.

B)fixed assets.

C)inventories.

D)commercial paper.

E)trade credit.

Answer:  C

Diff: 1

Skill: Recall

Objective: 16.3

A-Heading: Sources of Short-Term Funds

 

69)For a specific firm, which of the following is most likely to carry the lowest interest rate?

A)Loan secured by fixed assets

B)Commercial paper

C)Loan secured by finished goods

D)Unsecured loan

E)Loan secured by raw materials

Answer:  C

Diff: 3

Skill: Recall

Objective: 16.3

A-Heading: Sources of Short-Term Funds

 

70)Which type of inventory represents the best type of collateral?

A)Inventory which is difficult to transport is better collateral than inventory which can be easily moved

B)Inventory which can be easily converted into cash

C)Raw materials inventory

D)Inventory which is already serving as collateral for another loan

E)Work-in-process inventory

Answer:  B

Diff: 2

Skill: Recall

Objective: 16.3

A-Heading: Sources of Short-Term Funds

 

71)Which of the following is not a means of providing security for short-term loans?

A)Pledging marketable securities

B)Corporate bonds

C)Inventory loans

D)Pledging finished goods

E)Pledging accounts receivable

Answer:  B

Diff: 2

Skill: Recall

Objective: 16.3

A-Heading: Sources of Short-Term Funds

 

72)The process of using accounts receivable as collateral for a short-term loan is known as

A)collateralizing accounts receivable.

B)commercial paper.

C)pledging accounts receivable.

D)factoring accounts receivable.

E)equity financing.

Answer:  C

Diff: 1

Skill: Recall

Objective: 16.3

A-Heading: Sources of Short-Term Funds

 

73)Which of the following is usually associated with unsecured short-term loans?

A)Trade drafts

B)Compensating balances

C)Collateral

D)Trade acceptances

E)Factoring

Answer:  B

Diff: 1

Skill: Recall

Objective: 16.3

A-Heading: Sources of Short-Term Funds

 

74)How may a firm obtain an unsecured short-term bank loan?

A)Obtain open-book credit

B)Provide a fixed asset as a guarantee of payment

C)Pledge accounts receivable

D)Obtain a line of credit agreement

E)Obtain an inventory loan

Answer:  D

Diff: 2

Skill: Recall

Objective: 16.3

A-Heading: Sources of Short-Term Funds

 

75)When is a commitment fee required of the borrower by a lending institution?

A)When using a revolving credit agreement in which the bank holds an open line of credit for a borrower

B)When issuing commercial paper

C)A commitment fee is never required because it is illegal for lending institutions to charge a commitment fee

D)When using collateral to secure a bank loan

E)When using trade credit

Answer:  A

Diff: 2

Skill: Recall

Objective: 16.3

A-Heading: Sources of Short-Term Funds

 

76)Which of the following requires a commitment fee?

A)Line of credit

B)Factoring

C)Revolving credit agreement

D)Trade acceptance

E)Commercial paper

Answer:  C

Diff: 1

Skill: Recall

Objective: 16.3

A-Heading: Sources of Short-Term Funds

 

77)Which of the following guarantees that funds will be available?

A)Trade credit

B)Pledging assets

C)Trade draft

D)Line of credit

E)Revolving credit agreement

Answer:  E

Diff: 1

Skill: Recall

Objective: 16.3

A-Heading: Sources of Short-Term Funds

 

78)A(n) ________ is a standing agreement between a bank and a business in which the bank promises to lend the firm a maximum amount of funds on request.

A)open-book credit

B)line of credit

C)trade agreement

D)commercial paper

E)revolving line of credit

Answer:  B

Diff: 1

Skill: Recall

Objective: 16.3

A-Heading: Sources of Short-Term Funds

 

79)Which of the following is backed solely by the firm’s promise to pay?

A)Trade credit

B)Factoring accounts receivable

C)Promissory note

D)Commercial paper

E)Pledging accounts receivable

Answer:  D

Diff: 1

Skill: Recall

Objective: 16.3

A-Heading: Sources of Short-Term Funds

 

80)Commercial paper can extend up to ________ days.

A)90

B)120

C)365

D)180

E)270

Answer:  E

Diff: 2

Skill: Recall

Objective: 16.3

A-Heading: Sources of Short-Term Funds

 

81)What is the difference between factoring accounts receivable and using accounts receivable as collateral for a short-term loan?

A)Factoring is the collateral used when issuing commercial paper

B)There is no difference

C)Factoring involves selling the accounts receivable instead of using them to obtain a loan

D)Factoring accounts receivable is accomplished through a finance company whereas using them as collateral is arranged with a bank

E)Factoring involves agreeing to repurchase accounts receivable at a future date instead of using them as collateral to obtain a loan

Answer:  C

Diff: 3

Skill: Recall

Objective: 16.3

A-Heading: Sources of Short-Term Funds

 

82)Which of the following is a short-term source of funds for an organization?

A)Issuing corporate bonds

B)Factoring accounts receivable

C)Issuing common stock

D)Issuing preferred stock

E)Obtaining financial help from a venture capitalist

Answer:  B

Diff: 1

Skill: Recall

Objective: 16.3

A-Heading: Sources of Short-Term Funds

 

83)Why is it necessary for a business firm to put up collateral when it takes out a loan?

A)So that the bank can keep a portion as advance payment on the loan

B)To show the bank that the business is big enough to require the loan

C)To assure the bank that loan payments will be made as promised

D)So the financial managers know dates of payment

E)So that the accounting people can generate accurate financial statements

Answer: C

Diff: 3

Skill: Application

Objective: 16.3

A-Heading: Sources of Short-Term Funds

 

84)The Royal Bank has the right to seize assets if payments are not made as promised because the borrower

A)pledged their accounts receivable.

B)agreed to a trade acceptance.

C)pledged their accounts payable.

D)allowed the bank to open-book credit.

E)secured the payment with collateral.

Answer: E

Diff: 1

Skill: Application

Objective: 16.3

A-Heading: Sources of Short-Term Funds

 

85)Which of the following is considered a financing method for short-term funds?

A)Retained earnings

B)Trade credit

C)Equity financing

D)Common stock

E)Bonds

Answer: B

Diff: 1

Skill: Recall

Objective: 16.3

A-Heading: Sources of Short-Term Funds

 

86)Collateral is

A)any asset that a lender has the right to seize if a borrower does not repay a secured loan.

B)when you use your forecasted sales to secure a loan.

C)the use of someone’s signature in order to secure a loan.

D)when you use liquidated assets to pay off a loan.

E)any of these can be collateral.

Answer: A

Diff: 2

Skill: Recall

Objective: 16.3

A-Heading: Sources of Short-Term Funds

 

87)Collateral would be needed in which of the following?

A)Trade credit

B)Unsecured loans

C)A line of credit

D)Commercial paper

E)Secured loans

Answer: E

Diff: 2

Skill: Application

Objective: 16.3

A-Heading: Sources of Short-Term Funds

 

88)Jack is borrowing money which requires him to put up collateral. What type of credit is he using?

A)Line of credit

B)Unsecured loans

C)Trade credit

D)Commercial paper

E)Secured loans

Answer: E

Diff: 2

Skill: Application

Objective: 16.3

A-Heading: Sources of Short-Term Funds

 

89)The process of using accounts receivable as collateral is called ___________; the specific means by which the money is raised is called ___________.

A)commercial paper; factoring

B)factoring; commercial paper

C)pledging accounts receivable; factoring

D)equity financing; debt financing

E)short-term credit; long-term credit

Answer: C

Diff: 2

Skill: Recall

Objective: 16.3

A-Heading: Sources of Short-Term Funds

 

90)You are managing a company that needs a quick injection of cash.  Two ways of raising secured funds quickly are

A)bank loans and lines of credit.

B)inventory loans and factoring accounts receivable.

C)inventory loans and accessing accounts receivable.

D)accounts receivable and trade credit.

E)lines of credit and commercial paper.

Answer: B

Diff: 1

Skill: Application

Objective: 16.3

A-Heading: Sources of Short-Term Funds

 

91)John is a factor who has just bought $40,000 worth of finished goods for $24,000. The profit that he will make on this transaction depends on

A)the quality of the receivables, the cost of collecting them, and interest rates.

B)the cash he has available, and the trade credit he is able to get.

C)the availability of government loans, the quality of the receivables, and the interest rate.

D)the interest rate, the cost of collecting the receivables, and the maturity date of bonds of his company.

E)the general state of the economy, the number of firms who might be interested in the receivables, and the amount of money those firms have available.

Answer: A

Diff: 2

Skill: Application

Objective: 16.3

A-Heading: Sources of Short-Term Funds

 

92)What is the difference between a line of credit and a revolving credit agreement?

A)A line of credit is normally used by charitable and public-sector organizations, while a revolving credit agreement is usually used by private-sector business firms

B)More money can be borrowed with a line of credit than with a revolving credit agreement

C)There is no guarantee that the money will be available when it is requested in a line of credit, but there is an agreement that it will be available when requested in a revolving credit agreement

D)A line of credit is only obtainable from a credit union, while a revolving credit agreement is only obtainable from a bank

E)All of these

Answer: C

Diff: 3

Skill: Recall

Objective: 16.3

A-Heading: Sources of Short-Term Funds

 

93)Commercial paper is usually issued for a specific period ranging from ________  days to ________ days but it legally can be issued for ________ days.

A)30; 60; 180

B)60; 90; 120

C)90; 120; 180

D)30; 90; 180

E)30; 90; 270

Answer: E

Diff: 3

Skill: Recall

Objective: 16.3

A-Heading: Sources of Short-Term Funds

 

94)Which of the following does not create an obligation to pay a sum of money in the future?

A)Revolving line of credit

B)Factoring accounts receivable

C)Commercial paper

D)Line of credit

E)Trade agreement

Answer: B

Diff: 2

Skill: Recall

Objective: 16.3

A-Heading: Sources of Short-Term Funds

 

95)When a bank agrees to make some amount of funds available on demand to a firm for continuing short-term loans, and when the bank guarantees that the money will be available when requested, this is a(n)

A)unsecured loan.

B)revolving credit arrangement.

C)secured loan.

D)accounts receivable loan.

E)bond.

Answer: B

Diff: 2

Skill: Recall

Objective: 16.3

A-Heading: Sources of Short-Term Funds

 

96)When is a commitment fee required of the borrower by a lending institution?

A)When using a revolving credit agreement in which the bank holds an open line of credit for a borrower

B)When using trade credit

C)When issuing commercial paper

D)When using collateral to secure a bank loan

E)It is illegal for lending institutions to charge a commitment fee

Answer: A

Diff: 2

Skill: Recall

Objective: 16.3

A-Heading: Sources of Short-Term Funds

 

97)Monolith Corp.’s credit rating is so high that it is able to issue ________, which is backed solely by the firm’s promise to pay.

A)accounts receivable

B)commercial paper

C)promissory notes

D)trade credit

E)debentures

Answer: B

Diff: 2

Skill: Application

Objective: 16.3

A-Heading: Sources of Short-Term Funds

 

98)Which of the following is a primary source of long-term borrowing from outside the corporation?

A)A long-term loan from a bank

B)Inventory loans

C)Insurance

D)Factor accounts receivable

E)Trade credit

Answer:  A

Diff: 2

Skill: Recall

Objective: 16.4

A-Heading: Sources of Long-Term Funds

 

99)Why does a business firm require long-term sources of funds?

A)To finance long-term expenditures for fixed assets

B)A long-term source of funds replaces the need for insurance

C)To obtain funds for purchasing inventories

D)To eliminate the need for frequently seeking short-term financing

E)To finance annual bonus payments for employees

Answer:  A

Diff: 2

Skill: Recall

Objective: 16.4

A-Heading: Sources of Long-Term Funds

 

100)The two primary sources of long-term debt funds are

A)lines of credit and revolving credit agreements.

B)common stock and preferred stock.

C)trade credit and commercial paper.

D)commercial paper and bank loans.

E)long-term loans and the sale of bonds.

Answer:  E

Diff: 2

Skill: Recall

Objective: 16.4

A-Heading: Sources of Long-Term Funds

 

101)Which of the following is a source of long-term borrowing from outside the corporation?

A)Corporate bonds

B)Sale of equity shares

C)Commercial paper

D)Line of credit

E)Inventory loans

Answer:  A

Diff: 2

Skill: Recall

Objective: 16.4

A-Heading: Sources of Long-Term Funds

 

102)Which of the following is a restriction that may be placed on a borrowing firm for a long-term loan?

A)The borrower must pledge a certain amount of inventory

B)The borrower must pledge future sales

C)The borrower must factor accounts receivable

D)The borrower must pledge long-term assets as collateral

E)The borrower must pledge accounts receivable

Answer:  D

Diff: 2

Skill: Recall

Objective: 16.4

A-Heading: Sources of Long-Term Funds

 

103)What is the major source of long-term debt financing for most corporations?

A)Corporate bonds

B)Long-term loans

C)Trade credit

D)Equity financing

E)Retained earnings

Answer:  A

Diff: 1

Skill: Recall

Objective: 16.4

A-Heading: Sources of Long-Term Funds

 

104)Which of the following is a long-term source of funds?

A)Open-book credit

B)Revolving credit agreement

C)Line of credit

D)Commercial paper

E)Equity financing

Answer:  E

Diff: 1

Skill: Recall

Objective: 16.4

A-Heading: Sources of Long-Term Funds

 

105)Which of the following is not one of the advantages of loans as a source of large, long-term funds?

A)Ease of finding lenders

B)No public disclosure

C)Terms can be changed

D)Flexible time duration

E)Can be quickly arranged

Answer:  A

Diff: 2

Skill: Recall

Objective: 16.4

A-Heading: Sources of Long-Term Funds

 

106)Which of the following is not specified in the bond indenture?

A)Interest rate

B)Maturity date

C)Who gets paid

D)Amount to be paid

E)Collateral

Answer:  C

Diff: 2

Skill: Recall

Objective: 16.4

A-Heading: Sources of Long-Term Funds

 

107)Mega Computer needs a large amount of long-term financing for a long period of time. The best choice is most likely

A)loans.

B)preferred stock.

C)common stock.

D)commercial paper.

E)bonds.

Answer:  E

Diff: 3

Skill: Application

Objective: 16.4

A-Heading: Sources of Long-Term Funds

 

108)If a bond issuer fails to make a bond payment, it is said to be

A)bankrupt.

B)over-due.

C)in arrears.

D)in default.

E)non-conforming.

Answer:  D

Diff: 1

Skill: Recall

Objective: 16.4

A-Heading: Sources of Long-Term Funds

 

109)Which of the following would require General Motors to publicly disclose the purpose for which funds are being sought?

A)Long-term loan

B)Sale of preferred stock

C)Short-term loan

D)Sale of common stock

E)Sale of bonds

Answer:  E

Diff: 2

Skill: Recall

Objective: 16.4

A-Heading: Sources of Long-Term Funds

 

110)A form of hybrid financing is

A)preferred stock.

B)factoring.

C)common stock.

D)commercial paper.

E)bonds.

Answer:  A

Diff: 1

Skill: Recall

Objective: 16.4

A-Heading: Sources of Long-Term Funds

 

111)Which of the following is correct with regard to the box entitled “An Online Community for People 50 and Over”?

A)55-Alive is a social networking site

B)55-Alive has so far been financed with Kelly and Jeff Lantz’s own money

C)55-Alive needs outside funding to expand the site’s content

D)55-Alive receives only about 100,000 visits per month

E)All of these are correct

Answer:  A

Diff: 1

Skill: Recall

Objective: 16.4

A-Heading: Sources of Long-Term Funds

 

112)Which of the following is not an advantage of raising financing through the sale of preferred shares?

A)Payments need not be made if the company makes no profit

B)Payments are tax deductible

C)Does not require repayment at maturity

D)No loss of control

E)Flexibility in cash flow

Answer:  B

Diff: 1

Skill: Recall

Objective: 16.4

A-Heading: Sources of Long-Term Funds

 

113)Manitoba Hydro has steady, predictable profits and cash-flow patterns. Its best choice for long-term funding is most likely

A)factoring accounts receivable.

B)common stock.

C)either common or preferred stock but not bonds.

D)preferred stock.

E)bonds.

Answer:  E

Diff: 2

Skill: Application

Objective: 16.4

A-Heading: Sources of Long-Term Funds

 

114)In most cases, equity financing takes two forms

A)revolving credit agreements and lines of credit.

B)bank loans and commercial paper.

C)issuing common stock and retaining the firm’s earnings.

D)issuing common stock and lines of credit.

E)commercial paper and retaining the firm’s earnings.

Answer:  C

Diff: 2

Skill: Recall

Objective: 16.4

A-Heading: Sources of Long-Term Funds

 

115)John is a financial planner who wants to appeal to the broadest possible market and gain access to more funds. Which of the following would he use?

A)Long-term debt

B)A financial risk index

C)A variety of debt and equity forms

D)Factoring accounts receivable

E)Equity

Answer:  C

Diff: 2

Skill: Application

Objective: 16.4

A-Heading: Sources of Long-Term Funds

 

116)The mix of debt and equity funding that a firm uses is called its

A)long-term funding mix.

B)financial mix.

C)corporate capital mix.

D)capital structure.

E)debt-to-equity ratio.

Answer:  D

Diff: 1

Skill: Recall

Objective: 16.4

A-Heading: Sources of Long-Term Funds

 

117)Which of the following is the most conservative mix of long-term funding?

A)25% debt, 75% equity

B)75% debt, 25% equity

C)100% equity

D)100% debt

E)50% debt, 50% equity

Answer:  C

Diff: 2

Skill: Recall

Objective: 16.4

A-Heading: Sources of Long-Term Funds

 

118)Which of the following is the riskiest mix of long-term funding?

A)25% debt, 75% equity

B)100% equity

C)50% debt, 50% equity

D)75% debt, 25% equity

E)100% debt

Answer:  E

Diff: 2

Skill: Recall

Objective: 16.4

A-Heading: Sources of Long-Term Funds

 

119)Laura is analyzing several investment possibilities. She thinks that some options have better chances of good paybacks but those paybacks are smaller. She is exploring the

A)cash flow trade-off.

B)cash flow decision.

C)risk-return relationship.

D)safety factor.

E)risky principle.

Answer:  C

Diff: 1

Skill: Application

Objective: 16.4

A-Heading: Sources of Long-Term Funds

 

120)________ shows the amount of risk and the likely rate of return on various financial instruments.

A)An umbrella relationship

B)A riskiness diagram

C)A graph

D)The risk rate of return

E)The risk-return relationship

Answer:  E

Diff: 2

Skill: Recall

Objective: 16.4

A-Heading: Sources of Long-Term Funds

 

121)Bonds that have the highest default rate and the highest yield rate are ________ bonds.

A)high grade

B)investment grade

C)mixed grade

D)income grade

E)junk

Answer:  E

Diff: 1

Skill: Recall

Objective: 16.4

A-Heading: Sources of Long-Term Funds

 

122)In the financial community, the uncertainty about receiving future cash flows and the likely amount of those cash flows is called the

A)cash flow decision.

B)safety factor.

C)risky principle.

D)risk-return relationship.

E)cash flow trade-off.

Answer:  D

Diff: 2

Skill: Recall

Objective: 16.4

A-Heading: Sources of Long-Term Funds

 

123)The principle that safer investments tend to offer lower returns while riskier investments tend to offer higher returns is called the

A)safety factor.

B)risk-return relationship.

C)risky principle.

D)cash flow trade-off.

E)cash flow decision.

Answer:  B

Diff: 1

Skill: Recall

Objective: 16.4

A-Heading: Sources of Long-Term Funds

 

124)What is the difference between debt and equity financing?

A)Debt financing is more expensive than equity financing

B)Equity financing is cheaper than debt financing because no money has to be paid back to the people who bought the company’s stock

C)Debt financing is riskier than equity financing because with debt financing debts are incurred which must be paid back

D)Debt financing is more short-term oriented than equity financing

E)Equity financing can be done successfully only when stock markets are rising, whereas debt financing can be done any time

Answer: C

Diff: 2

Skill: Recall

Objective: 16.4

A-Heading: Sources of Long-Term Funds

 

125)All of the following are advantages of long-term loans except

A)the number of parties is limited.

B)loans can be arranged quickly.

C)the duration of the loan can be matched to the borrower’s needs.

D)they may require the pledging of assets as collateral.

E)if the firm’s needs change, the terms of the loan can be changed.

Answer: D

Diff: 2

Skill: Recall

Objective: 16.4

A-Heading: Sources of Long-Term Funds

 

126)Which of the following is correct with respect to long-term loans?

A)Businesses try to avoid them whenever possible because banks charge high interest rates

B)Large borrowers may have trouble finding lenders to supply enough funds

C)Once a loan’s terms are set, they cannot be changed until all the money is paid back

D)Loans are difficult to arrange quickly

E)The time frame of the loan may be difficult to match with the borrower’s needs

Answer: B

Diff: 2

Skill: Recall

Objective: 16.4

A-Heading: Sources of Long-Term Funds

 

127)Which of the following most closely resembles commercial paper?

A)Line of credit

B)Corporate bond

C)Inventory loan

D)Accounts payable loan

E)Bank loan

Answer: B

Diff: 1

Skill: Recall

Objective: 16.4

A-Heading: Sources of Long-Term Funds

 

128)Which of the following is specified in the bond indenture?

A)Maturity date

B)Collateral

C)Interest rate

D)Amount to be paid

E)All of these

Answer: E

Diff: 2

Skill: Recall

Objective: 16.4

A-Heading: Sources of Long-Term Funds

 

129)Which of the following would be a likely result of using retained earnings to provide long-term funds?

A)Smaller dividends to stockholders

B)Increased interest expenses

C)Loss of corporate ownership control

D)Stock price may drop

E)Smaller dividends to stockholders and the company’s stock price may drop

Answer: E

Diff: 3

Skill: Application

Objective: 16.4

A-Heading: Sources of Long-Term Funds

 

130)Stockholders usually purchase common stock for ________ and ________.

A)dividends; appreciation of the stock price

B)dividends; interest

C)control; appreciation of the stock price

D)right to vote at meetings; dividends

E)retained earnings; profit

Answer: A

Diff: 2

Skill: Recall

Objective: 16.4

A-Heading: Sources of Long-Term Funds

 

131)If Sunshine Tanning’s founders invested $10,000 by buying the original 500 shares at $20.00 per share in 1994 and then raised $50,000 by selling 500 more shares at $100 per share, the additional paid-in capital would bring shareholder’s equity to

A)$40,000

B)$50.00 per shareholder

C)$60,000

D)$51,000

E)$100.00 per shareholder

Answer: C

Diff: 2

Skill: Application

Objective: 16.4

A-Heading: Sources of Long-Term Funds

 

132)Equity financing includes

A)retained earnings, retaining dividends.

B)issuing common stock, issuing preferred stock, retained earnings.

C)issuing common stock, retained earnings.

D)issuing preferred stock, issuing common stock.

E)issuing preferred shares, retained earnings.

Answer: C

Diff: 2

Skill: Recall

Objective: 16.4

A-Heading: Sources of Long-Term Funds

 

133)Algoma Steel issued 1,000 common shares at a price of $15.00 each. If all shares sold, Algoma could expect to raise

A)$14,000.

B)$1,500.

C)$15,000.

D)$1,000.

E)it is not possible to tell with the information that is given.

Answer: C

Diff: 2

Skill: Application

Objective: 16.4

A-Heading: Sources of Long-Term Funds

 

134)Equity financing via common stock can be more expensive than issuing bonds because

A)common stocks must be insured.

B)there is more administration involved.

C)common stocks are backed by retained earnings.

D)common stock must be sold through a broker.

E)interest paid to bondholders is a tax-deductible business expense, but stock dividends are not tax-deductible.

Answer: E

Diff: 3

Skill: Recall

Objective: 16.4

A-Heading: Sources of Long-Term Funds

 

135)Using retained earnings as a source of equity financing has one major disadvantage, which is

A)the stockholders do not receive dividends.

B)the firm will have to pay the interest to common shareholders.

C)the price of the company’s stock will increase because the company is using sound financial planning.

D)the firm will not have to borrow money.

E)there are actually no disadvantages in using retained earnings as a source of equity.

Answer: A

Diff: 2

Skill: Application

Objective: 16.4

A-Heading: Sources of Long-Term Funds

 

136)Adrianna decided to purchase preferred shares because

A)common stockholders get paid first at a lower rate of return and preferred shareholders get paid next at a much higher rate of return.

B)it has some of the features of corporate bonds and some features of common stock.

C)preferred shares allow shareholders to choose whether they wish to receive cash dividends or more shares.

D)preferred shares mature very quickly.

E)she likes the variable interest rate paid by preferred shares.

Answer: B

Diff: 3

Skill: Application

Objective: 16.4

A-Heading: Sources of Long-Term Funds

 

137)Falling somewhere between debt and equity financing, ________ are also referred to as ___________.

A)retained earnings; debt financing

B)promissory notes; hybrid financing

C)common shares; preferred shares

D)preferred shares; hybrid financing

E)preferred shares; debt

Answer: D

Diff: 3

Skill: Recall

Objective: 16.4

A-Heading: Sources of Long-Term Funds

 

138)What is the capital structure of a firm?

A)The organizational structure of the firm’s domestic, but not international, operations

B)The mix of debt and equity in the firm’s financial base

C)The balance of short- and long-term debt

D)The number of shares outstanding multiplied by the value of a given share

E)The total amount of dividends and bond interest payments that must be made in a given year

Answer: B

Diff: 2

Skill: Recall

Objective: 16.4

A-Heading: Sources of Long-Term Funds

 

139)What are the two variables that are used to determine where a specific financial instrument will be placed on the risk-return continuum?

A)The prime interest rate and the quality of the company in question

B)The amount of debt and the amount of equity the company has

C)The size of the financial returns that must be offered to induce investment and the uncertainty about financial returns on investments

D)The size of the financial returns that must be offered to induce investment and the economic growth prospects over the next year

E)The mix of short- and long-term sources of funds the firm is using

Answer: C

Diff: 3

Skill: Recall

Objective: 16.4

A-Heading: Sources of Long-Term Funds

 

140)The most conservative investments are government savings bonds and bank GICs. In decreasing order of conservativeness, the next two investments are

A)medium-quality preferred stock and high-grade corporate bonds.

B)commercial paper and lower-quality common stocks.

C)high-grade corporate bonds and commercial paper.

D)commercial paper and medium-quality preferred stocks.

E)junk bonds and high-grade corporate bonds.

Answer: C

Diff: 3

Skill: Recall

Objective: 16.4

A-Heading: Sources of Long-Term Funds

 

141)The least conservative investments are low-quality common stocks.  In decreasing order of aggressiveness, the next two investments are

A)medium-quality preferred stock and high-grade corporate bonds.

B)commercial paper and lower-quality common stocks.

C)junk bonds and medium-quality preferred stocks.

D)commercial paper and medium-quality preferred stocks.

E)junk bonds and high-quality cyclical common stocks.

Answer: E

Diff: 3

Skill: Recall

Objective: 16.4

A-Heading: Sources of Long-Term Funds

 

142)After analyzing several investment possibilities, June concludes that options that have a better chance of giving a payback also (unfortunately) have a higher likelihood of giving a smaller payback. June has just discovered the notion of the

A)risk-return relationship.

B)cash flow trade-off.

C)debt-to-equity ratio.

D)safety factor.

E)cash flow decision.

Answer: A

Diff: 1

Skill: Application

Objective: 16.4

A-Heading: Sources of Long-Term Funds

 

143)All of the following are reasons for new start-up businesses being under-funded except

A)entrepreneurs underestimate the value of establishing bank credit.

B)entrepreneurs use trade credit ineffectively.

C)entrepreneurs fail to consider venture capital as a source of funding.

D)entrepreneurs are notorious for not planning cash flow properly.

E)entrepreneurs rely too much on equity financing and not enough on debt financing.

Answer: E

Diff: 2

Skill: Recall

Objective: 16.5

A-Heading: Financial Management For Small Businesses

 

144)Samantha is planning to start a new business. The bank has requested she complete ________ so that her cash flow projections can be more understandable.

A)a statement of cash flows

B)a business plan

C)a consumer analysis

D)a sales forecast

E)a risk-return analysis

Answer: B

Diff: 2

Skill: Application

Objective: 16.5

A-Heading: Financial Management For Small Businesses

 

145)Samantha should prepare a cash flow requirements projection because

A)she can see how much anticipated taxes she will have to pay.

B)by anticipating shortfalls, she can seek funds in advance and minimize their cost, and by anticipating excess cash she can plan to put funds to work in short-term, interest-bearing investments.

C)she will be able to plan her vacation.

D)she will know when to hire extra staff for peak periods.

E)she will need this information when she is planning for an initial public offering of her company’s stock.

Answer: B

Diff: 2

Skill: Application

Objective: 16.5

A-Heading: Financial Management For Small Businesses

 

146)The business plan outlines all of the following except

A)who the money will be paid to.

B)how the money will be used to improve the company.

C)how much money is needed.

D)when the money will be paid back.

E)why the money is needed.

Answer:  A

Diff: 2

Skill: Recall

Objective: 16.5

A-Heading: Financial Management for Small Businesses

 

147)The risk associated with designing and distributing a new product is a(n)________ risk.

A)“act of God”

B)speculative

C)financial

D)market

E)pure

Answer:  B

Diff: 1

Skill: Application

Objective: 16.6

A-Heading: Risk Management

 

148)The risk associated with the chance of a warehouse fire is a(n)________ risk.

A)”act of God”

B)pure

C)speculative

D)financial

E)market

Answer:  B

Diff: 2

Skill: Application

Objective: 16.6

A-Heading: Risk Management

 

149)What type of risk involves only the possibility of a loss?

A)optimal risk

B)pure risk

C)risk transfer

D)insurable risk

E)speculative risk

Answer:  B

Diff: 1

Skill: Recall

Objective: 16.6

A-Heading: Risk Management

 

150)Which of the following is the first step in managing risk?

A)Choose techniques that best handle the loss

B)Identify risks and potential losses

C)Implement the risk management program

D)Measure the frequency of losses

E)Transfer the risk

Answer:  B

Diff: 1

Skill: Recall

Objective: 16.6

A-Heading: Risk Management

 

151)________ risks involve the possibility of gain or loss.

A)”Acts of God”

B)Financial

C)Speculative

D)Pure

E)Market

Answer:  C

Diff: 2

Skill: Recall

Objective: 16.6

A-Heading: Risk Management

 

152)Conserving the firm’s earning power and assets by reducing the threat of losses due to uncontrollable events is ________ management.

A)disaster

B)financial

C)risk

D)insurance

E)contingency

Answer:  C

Diff: 1

Skill: Recall

Objective: 16.6

A-Heading: Risk Management

 

153)The second step in a risk management program is to

A)measure frequency and severity of potential losses.

B)monitor results of the program.

C)evaluate alternatives.

D)implement the program.

E)identify risks and potential losses.

Answer:  A

Diff: 2

Skill: Recall

Objective: 16.6

A-Heading: Risk Management

 

154)The final step in a risk management program is to

A)measure frequency and severity of potential losses.

B)identify risks and potential losses.

C)monitor results of the program.

D)implement the program.

E)evaluate alternatives.

Answer:  C

Diff: 2

Skill: Recall

Objective: 16.6

A-Heading: Risk Management

 

155)Which of the following methods of risk management is a business firm practising when it chooses to terminate its delivery system to avoid the risk of physical damage or injury?

A)Risk shift

B)Risk control

C)Risk transfer

D)Risk avoidance

E)Risk retention

Answer:  D

Diff: 2

Skill: Application

Objective: 16.6

A-Heading: Risk Management

 

156)When a pharmaceutical maker withdraws a new drug for fear of liability suits it is practising

A)risk avoidance.

B)risk shift.

C)risk control.

D)risk transfer.

E)risk retention.

Answer:  A

Diff: 2

Skill: Application

Objective: 16.6

A-Heading: Risk Management

 

157)A firm that buys an insurance policy to protect itself against automobile wrecks is practising

A)risk avoidance.

B)risk transfer.

C)risk acceptance.

D)risk control.

E)risk retention.

Answer:  B

Diff: 2

Skill: Application

Objective: 16.6

A-Heading: Risk Management

 

158)Paying employee medical costs out of company funds rather than buying insurance is an example of

A)risk avoidance.

B)risk transfer.

C)risk control.

D)risk retention.

E)risk shift.

Answer:  D

Diff: 2

Skill: Application

Objective: 16.6

A-Heading: Risk Management

 

159)Installing a new sprinkler system is an example of

A)risk retention.

B)risk avoidance.

C)risk transfer.

D)risk shift.

E)risk control.

Answer:  E

Diff: 2

Skill: Application

Objective: 16.6

A-Heading: Risk Management

 

160)Which one of the following risk management techniques does a firm practise when it chooses self-insurance instead of submitting claims to an insurance company?

A)Risk transfer

B)Risk avoidance

C)Risk retention

D)Risk control

E)Risk shift

Answer:  C

Diff: 2

Skill: Recall

Objective: 16.6

A-Heading: Risk Management

 

161)If a restaurant buys an insurance policy that covers vandalism losses up to $40,000, this is an example of the risk management strategy of

A)risk retention.

B)risk avoidance.

C)risk control.

D)risk transfer.

E)risk shift.

Answer:  D

Diff: 3

Skill: Application

Objective: 16.6

A-Heading: Risk Management

 

162)If riot police officers are trained to handle violent soccer fans, this is an example of the ________ strategy for risk management.

A)risk avoidance

B)risk transfer

C)risk control

D)risk retention

E)risk shift

Answer:  C

Diff: 3

Skill: Application

Objective: 16.6

A-Heading: Risk Management

 

163)Risk avoidance is

A)the practice of evaluating all costs associated with a decision.

B)the assumption of financial consequences of loss by the firm.

C)the shifting of the risk to an insurance company.

D)the practice of minimizing the frequency or severity of losses from risky activities.

E)the practice of avoiding risk by declining or ceasing to participate in an activity.

Answer:  E

Diff: 2

Skill: Recall

Objective: 16.6

A-Heading: Risk Management

 

164)Risk control is

A)the practice of minimizing the frequency or severity of losses from risky activities.

B)the practice of avoiding risk by declining or ceasing to participate in an activity.

C)the assumption of financial consequences of loss by the firm.

D)the shifting of the risk to an insurance company.

E)the practice of evaluating all costs associated with a decision.

Answer:  A

Diff: 2

Skill: Recall

Objective: 16.6

A-Heading: Risk Management

 

165)Risk retention is

A)the practice of avoiding risk by declining or ceasing to participate in an activity.

B)the practice of evaluating all costs associated with a decision.

C)the shifting of the risk to an insurance company.

D)the practice of minimizing the frequency or severity of losses from risky activities.

E)the assumption of financial consequences of loss by the firm.

Answer:  E

Diff: 2

Skill: Recall

Objective: 16.6

A-Heading: Risk Management

 

166)Blake Corp. wants to transfer its risk to another organization. Which of the following methods would it most likely use?

A)surety bonds

B)fidelity bonds

C)premiums

D)contracts

E)insurance

Answer:  E

Diff: 2

Skill: Application

Objective: 16.6

A-Heading: Risk Management

 

167)A business firm which purchases insurance is attempting to

A)eliminate risk.

B)transfer the risk.

C)avoid the risk.

D)reduce the risk to an acceptable level.

E)reduce risk to zero.

Answer:  B

Diff: 1

Skill: Recall

Objective: 16.6

A-Heading: Risk Management

 

168)Which of the following represents the reason that insurance companies are willing to assume the risk of certain potentially devastating losses for other companies?

A)Insurance companies have more experience with the risk

B)In return for a sum of money, they are protected against certain losses

C)Profit

D)The ultimate purpose of insurance is to indemnify policyholders

E)Insurance companies know the likelihood of a particular loss

Answer:  C

Diff: 1

Skill: Recall

Objective: 16.6

A-Heading: Risk Management

 

169)Risk transfer is

A)the assumption of financial consequences of loss by the firm.

B)the practice of avoiding risk by declining or ceasing to participate in an activity.

C)the shifting of the risk to an insurance company.

D)the practice of minimizing the frequency or severity of losses from risky activities.

E)the practice of evaluating all costs associated with a decision.

Answer:  C

Diff: 2

Skill: Recall

Objective: 16.6

A-Heading: Risk Management

 

170)Insurance companies make money by taking in more from ________ than they pay out to cover policy-holders’ losses.

A)receivables

B)revenues

C)dues

D)premiums

E)dividends

Answer:  D

Diff: 2

Skill: Recall

Objective: 16.6

A-Heading: Risk Management

 

171)________ are fees paid by a policy-holder for insurance coverage.

A)Dividends

B)Revenues

C)Receivables

D)Premiums

E)Dues

Answer:  D

Diff: 1

Skill: Recall

Objective: 16.6

A-Heading: Risk Management

 

172)Jarvis Corp. is expanding its product line; this is an example of ________ risk.

A)speculative

B)avoidance

C)pure

D)transferable

E)financial

Answer: A

Diff: 2

Skill: Application

Objective: 16.6

A-Heading: Risk Management

 

173)Magnum Corp. has embarked on a risk-management process.  They have just completed identifying risks and potential losses.  What should they do next?

A)Choose techniques that best handle the loss

B)Implement the risk management program

C)Measure the frequency and severity of losses

D)Transfer the risk

E)Evaluate alternatives for handling risk

Answer: C

Diff: 1

Skill: Application

Objective: 16.6

A-Heading: Risk Management

 

174)Jerold Corp. has recently bought a fire insurance policy.  This is an example of which approach to risk?

A)Risk control

B)Risk transfer

C)Risk retention

D)Risk avoidance

E)Risk severity

Answer: B

Diff: 2

Skill: Application

Objective: 16.6

A-Heading: Risk Management

 

175)Parker Corp. has decided to pay employee medical costs out of company funds rather than buying insurance.  This is an example of

A)risk control.

B)risk avoidance.

C)risk transfer.

D)risk shift.

E)risk retention.

Answer: E

Diff: 2

Skill: Application

Objective: 16.6

A-Heading: Risk Management

 

176)Quick-X Corp. has recently sent its delivery drivers to a defensive driving course in order to reduce accidents with company vehicles.  This is an example of

A)risk shift.

B)risk control.

C)risk transfer.

D)risk retention.

E)risk avoidance.

Answer: B

Diff: 2

Skill: Application

Objective: 16.6

A-Heading: Risk Management

 

177)Approximately how much money is lost to insurance fraud each year in Canada?

A)More than $100 million

B)More than $300 million

C)More than $1 billion

D)More than $4 billion

E)More than $11 billion

Answer: C

Diff: 2

Skill: Recall

Objective: 16.6

A-Heading: Risk Management

 

178)Generally speaking, what is the best approach to use when coping with potential losses?

A)Risk transfer

B)Risk avoidance

C)Risk control

D)Risk retention

E)There is no one best option; it depends on the circumstances

Answer: E

Diff: 2

Skill: Recall

Objective: 16.6

A-Heading: Risk Management

 

179)What is the fundamental reason that insurance companies are willing to assume the risk of certain potentially devastating losses for other companies?

A)To indemnify policyholders

B)To protect companies against specific losses they might incur

C)To identify the likelihood of specific losses

D)To make a profit

E)To help small business owners who cannot afford large losses

Answer: D

Diff: 1

Skill: Recall

Objective: 16.6

A-Heading: Risk Management

 

 

TRUE/FALSE QUESTIONS.  Write ‘T’ if the statement is true and ‘F’ if the statement is false.

 

180)The overall objective of the financial manager is to invest the firm’s money wisely.

Answer:  False

Diff: 2

Skill: Recall

Objective: 16.1

A-Heading: The Role Of The Financial Manager

 

181)A financial manager’s overall objective is to increase the value of the firm and thus to increase shareholders’ wealth.

Answer:  True

Diff: 1

Skill: Recall

Objective: 16.1

A-Heading: The Role Of The Financial Manager

 

182)A financial plan describes how a business will reach some financial position it seeks for the future.

Answer:  True

Diff: 1

Skill: Recall

Objective: 16.1

A-Heading: The Role Of The Financial Manager

 

183)The accounting manager is usually responsible for cash-flow management.

Answer:  False

Diff: 1

Skill: Recall

Objective: 16.1

A-Heading: The Role Of The Financial Manager

 

184)Budgets are often the backbone of financial control.

Answer:  True

Diff: 2

Skill: Recall

Objective: 16.1

A-Heading: The Role Of The Financial Manager

 

185)The responsibilities of financial managers fall into three general categories: cash flow management, financial control, and financial planning.

Answer: True

Diff: 1

Skill: Recall

Objective: 16.1

A-Heading: The Role Of The Financial Manager

 

186)One study showed that businesses that average about $2 million in annual sales hold about $40,000 in non-interest bearing accounts. This is an example of good cash flow management.

Answer: False

Diff: 1

Skill: Recall

Objective: 16.1

A-Heading: The Role Of The Financial Manager

 

187)To increase a firm’s value, financial managers must ensure that it always has enough funds on hand to purchase the materials and human resources that it needs to produce goods and services.

Answer: True

Diff: 2

Skill: Recall

Objective: 16.1

A-Heading: The Role Of The Financial Manager

 

188)Accurate information about current cash status ensures good cash management.

Answer: False

Diff: 2

Skill: Recall

Objective: 16.1

A-Heading: The Role Of The Financial Manager

 

189)Accounts payable is the largest single category of short-term debt for most companies.

Answer:  True

Diff: 1

Skill: Recall

Objective: 16.2

A-Heading: Why Businesses Need Funds

 

190)It is in the firm’s best interest to pay its accounts payables as rapidly as possible.

Answer:  False

Diff: 2

Skill: Recall

Objective: 16.2

A-Heading: Why Businesses Need Funds

 

191)Accounts payble and accounts receivable are both part of the important category called “short-term expenditures.”

Answer:  True

Diff: 2

Skill: Recall

Objective: 16.2

A-Heading: Why Businesses Need Funds

 

192)There are two basic categories of inventory: raw materials and finished goods.

Answer:  False

Diff: 2

Skill: Recall

Objective: 16.2

A-Heading: Why Businesses Need Funds

 

193)A credit policy of “2/10, net 30” means that the selling compoany offes a 2 percent discount if the customer pays within 10 days.

Answer:  True

Diff: 2

Skill: Recall

Objective: 16.2

A-Heading: Why Businesses Need Funds

 

194)A credit policy of “2/10, net 30” means that the selling compoany offes a 10 percent discount if the customer pays within 2 weeks, but the customer will have to pay the full amount if the customer doesn’t pay until 30 days.

Answer:  False

Diff: 2

Skill: Recall

Objective: 16.2

A-Heading: Why Businesses Need Funds

 

195)Capital expenditures are essentially the same as operating expenditures except they last longer than one year.

Answer:  False

Diff: 1

Skill: Recall

Objective: 16.2

A-Heading: Why Businesses Need Funds

 

196)Long-term expenditures are usually more carefully planned than are short-term expenditures.

Answer:  True

Diff: 1

Skill: Recall

Objective: 16.2

A-Heading: Why Businesses Need Funds

 

197)Accounts payable is an example of short-term expenditures.

Answer: True

Diff: 2

Skill: Recall

Objective: 16.2

A-Heading: Why Businesses Need Funds

 

198)Work-in-process inventory consists of goods partway through the production process that are damaged and will be written off.

Answer: False

Diff: 2

Skill: Recall

Objective: 16.2

A-Heading: Why Businesses Need Funds

 

199)Work-in-process inventory includes things like t-shirts, which a store like the Gap has packaged and made ready to be shipped to customers.

Answer: False

Diff: 2

Skill: Recall

Objective: 16.2

A-Heading: Why Businesses Need Funds

 

200)Accounts payables are expenditures as well as a source of funds.

Answer:  True

Diff: 2

Skill: Recall

Objective: 16.2

A-Heading: Why Businesses Need Funds

 

201)Open-book credit is a secured short-term loan that requires that the borrower put up collateral.

Answer:  False

Diff: 1

Skill: Recall

Objective: 16.3

A-Heading: Sources of Short-Term Funds

 

202)A promissory note states when payment will be made and how much money will be paid to the seller in return for immediate credit.

Answer:  True

Diff: 1

Skill: Recall

Objective: 16.3

A-Heading: Sources of Short-Term Funds

 

203)Once a trade draft is signed it becomes a trade acceptance.

Answer:  True

Diff: 2

Skill: Recall

Objective: 16.3

A-Heading: Sources of Short-Term Funds

 

204)Collateral gives the lender the right to seize certain assets if payment is not made as promised.

Answer:  True

Diff: 1

Skill: Recall

Objective: 16.3

A-Heading: Sources of Short-Term Funds

 

205)Inventory can only rarely be used as collateral.

Answer:  False

Diff: 1

Skill: Recall

Objective: 16.3

A-Heading: Sources of Short-Term Funds

 

206)When accounts receivables are used as collateral, the process is called factoring accounts receivable.

Answer:  False

Diff: 2

Skill: Recall

Objective: 16.3

A-Heading: Sources of Short-Term Funds

 

207)To get a line of credit the borrower must pay a commitment fee.

Answer:  False

Diff: 2

Skill: Recall

Objective: 16.3

A-Heading: Sources of Short-Term Funds

 

208)With a line of credit, a business knows the maximum amount of money it will be able to borrow, but only if the bank has the money available to lend.

Answer:  True

Diff: 2

Skill: Recall

Objective: 16.3

A-Heading: Sources of Short-Term Funds

 

209)Although the bank issues a line of credit to a business firm for a certain amount, the bank does not guarantee that the funds will be available when requested.

Answer:  True

Diff: 2

Skill: Recall

Objective: 16.3

A-Heading: Sources of Short-Term Funds

 

210)One key difference between a line of credit and a revolving credit agreement is that in the latter case the bank guarantees that the money will be available.

Answer:  True

Diff: 2

Skill: Recall

Objective: 16.3

A-Heading: Sources of Short-Term Funds

 

211)One option when obtaining a short-term loan, which is available only to the most creditworthy and largest firms, is to factor accounts receivable.

Answer:  False

Diff: 2

Skill: Recall

Objective: 16.3

A-Heading: Sources of Short-Term Funds

 

212)The maximum maturity for commercial paper is 180 days.

Answer:  False

Diff: 2

Skill: Recall

Objective: 16.3

A-Heading: Sources of Short-Term Funds

 

213)Commercial paper is generally issued by companies that have trouble getting bank loans.

Answer:  False

Diff: 2

Skill: Recall

Objective: 16.3

A-Heading: Sources of Short-Term Funds

 

214)Secured loans allow borrowers to get funds when they might not qualify for unsecured credit.

Answer: True

Diff: 2

Skill: Recall

Objective: 16.3

A-Heading: Sources of Short-Term Funds

 

215)A company that pledges accounts receivable is probably in financial difficulty.

Answer: False

Diff: 2

Skill: Recall

Objective: 16.3

A-Heading: Sources of Short-Term Funds

 

216)Some unsecured loans are one-time-only arrangements, and may take the form of lines of credit, revolving credit agreements, or commercial paper.

Answer: True

Diff: 2

Skill: Recall

Objective: 16.3

A-Heading: Sources of Short-Term Funds

 

217)Using accounts receivable as collateral for a loan is known as pledging accounts receivable.

Answer: True

Diff: 2

Skill: Recall

Objective: 16.3

A-Heading: Sources of Short-Term Funds

 

218)Debt financing refers to the long-term borrowing of funds from outside the company.

Answer:  True

Diff: 1

Skill: Recall

Objective: 16.4

A-Heading: Sources of Long-Term Funds

 

219)The two primary sources for obtaining long-term borrowing from outside the business firm are the issuance of commercial paper and factoring of accounts receivable.

Answer:  False

Diff: 2

Skill: Recall

Objective: 16.4

A-Heading: Sources of Long-Term Funds

 

220)The two basic types of long-term financing are debt and equity.

Answer:  True

Diff: 1

Skill: Recall

Objective: 16.4

A-Heading: Sources of Long-Term Funds

 

221)Usually loans and bonds both carry fixed interest rates and must be paid regardless of how well the company does.

Answer:  True

Diff: 1

Skill: Recall

Objective: 16.4

A-Heading: Sources of Long-Term Funds

 

222)A corporate bond issue is an attractive means of raising a large amount of money for long periods of time.

Answer:  True

Diff: 1

Skill: Recall

Objective: 16.4

A-Heading: Sources of Long-Term Funds

 

223)Loans are the major source of long-term debt financing for most corporations.

Answer:  False

Diff: 2

Skill: Recall

Objective: 16.4

A-Heading: Sources of Long-Term Funds

 

224)A bond indenture includes the maturity date of the bond.

Answer:  True

Diff: 1

Skill: Recall

Objective: 16.4

A-Heading: Sources of Long-Term Funds

 

225)The most important element in the bond indenture is the company’s cash flow situation.

Answer:  False

Diff: 1

Skill: Recall

Objective: 16.4

A-Heading: Sources of Long-Term Funds

 

226)The bond indenture spells out the amount to be paid and the interest rate, but it does not identify the assets that are pledged as collateral for the bonds.

Answer:  False

Diff: 1

Skill: Recall

Objective: 16.4

A-Heading: Sources of Long-Term Funds

 

227)The bond indenture specifies the terms of the bond and any collateral supporting the bond.

Answer:  True

Diff: 3

Skill: Recall

Objective: 16.4

A-Heading: Sources of Long-Term Funds

 

228)Equity financing involves obtaining long-term funding from within the business firm.

Answer:  True

Diff: 2

Skill: Recall

Objective: 16.4

A-Heading: Sources of Long-Term Funds

 

229)Equity financing is obtained by borrowing funds from the corporation’s shareholders.

Answer:  False

Diff: 2

Skill: Recall

Objective: 16.4

A-Heading: Sources of Long-Term Funds

 

230)Paying dividends is more expensive than paying bond interest.

Answer:  True

Diff: 2

Skill: Recall

Objective: 16.4

A-Heading: Sources of Long-Term Funds

 

231)The business firm may elect to provide for long-term funding needs by retaining earnings instead of paying dividends to the shareholders.

Answer:  True

Diff: 1

Skill: Recall

Objective: 16.4

A-Heading: Sources of Long-Term Funds

 

232)Preferred shares never mature, however, payments to the holder are fixed in amount and can be withheld if the company wishes.

Answer:  True

Diff: 2

Skill: Recall

Objective: 16.4

A-Heading: Sources of Long-Term Funds

 

233)The mix between debt and equity financing is termed a company’s capital structure.

Answer:  True

Diff: 1

Skill: Recall

Objective: 16.4

A-Heading: Sources of Long-Term Funds

 

234)In liquidation, shareholders must wait until creditors are paid and preferred equity precedes common equity.

Answer:  True

Diff: 2

Skill: Recall

Objective: 16.4

A-Heading: Sources of Long-Term Funds

 

235)Junk bonds are bonds that pay very low interest rates to holders.

Answer:  False

Diff: 1

Skill: Recall

Objective: 16.4

A-Heading: Sources of Long-Term Funds

 

236)Junk bonds are not worth anything on the open market.

Answer:  False

Diff: 1

Skill: Recall

Objective: 16.4

A-Heading: Sources of Long-Term Funds

 

237)High-grade corporate bonds rate low in terms of risk and high in terms of expected returns.

Answer:  False

Diff: 2

Skill: Recall

Objective: 16.4

A-Heading: Sources of Long-Term Funds

 

238)If a company fails to make a bond payment, the company is in default.

Answer: True

Diff: 2

Skill: Recall

Objective: 16.4

A-Heading: Sources of Long-Term Funds

 

239)Debt financing does not affect management control.

Answer: True

Diff: 2

Skill: Recall

Objective: 16.4

A-Heading: Sources of Long-Term Funds

 

240)Debt financing does not affect management flexibility.

Answer: False

Diff: 2

Skill: Recall

Objective: 16.4

A-Heading: Sources of Long-Term Funds

 

241)The two primary sources of debt financing are pledging accounts receivable and selling bonds.

Answer: False

Diff: 1

Skill: Recall

Objective: 16.4

A-Heading: Sources of Long-Term Funds

 

242)Generally speaking, debt financing is wiser from a financial perspective than equity financing.

Answer: False

Diff: 2

Skill: Recall

Objective: 16.4

A-Heading: Sources of Long-Term Funds

 

243)Equity financing puts more constraints on management than debt financing.

Answer: False

Diff: 2

Skill: Recall

Objective: 16.4

A-Heading: Sources of Long-Term Funds

 

244)Equity financing of long-term debt is obtained by borrowing funds from the corporation’s shareholders.

Answer: False

Diff: 2

Skill: Recall

Objective: 16.4

A-Heading: Sources of Long-Term Funds

 

245)High-quality, stable common stocks are riskier than commercial paper.

Answer: True

Diff: 2

Skill: Recall

Objective: 16.4

A-Heading: Sources of Long-Term Funds

 

246)Government savings bonds are riskier than high-grade corporate bonds.

Answer: False

Diff: 2

Skill: Recall

Objective: 16.4

A-Heading: Sources of Long-Term Funds

 

247)Preferred stock is hybrid because it has some of the features of corporate bonds and some features of a short-term loan.

Answer: False

Diff: 2

Skill: Recall

Objective: 16.4

A-Heading: Sources of Long-Term Funds

 

248)High quality cyclical common stocks are riskier than medium quality preferred shares.

Answer: True

Diff: 2

Skill: Recall

Objective: 16.4

A-Heading: Sources of Long-Term Funds

 

249)One approach to equity financing is to use retained earnings.

Answer: True

Diff: 2

Skill: Recall

Objective: 16.4

A-Heading: Sources of Long-Term Funds

 

250)The business plan is a document that tells potential lenders why money is needed, the amount needed, how the money will be used to improve the company, and when it will be paid back.

Answer:  True

Diff: 1

Skill: Recall

Objective: 16.5

A-Heading: Financial Management for Small Businesses

 

251)Small businesses often fail to consider venture capital as a source of funding, and they are notorious for not planning cash-flow needs properly.

Answer: True

Diff: 2

Skill: Recall

Objective: 16.5

A-Heading: Financial Management for Small Businesses

 

252)Start-up firms without proven financial success usually must present a business plan to demonstrate that the firm is a good credit risk.

Answer: True

Diff: 2

Skill: Recall

Objective: 16.5

A-Heading: Financial Management for Small Businesses

 

253)The two basic types of business risk are speculative risks and pure risks.

Answer:  True

Diff: 1

Skill: Recall

Objective: 16.6

A-Heading: Risk Management

 

254)Financial managers deal only with speculative risks.

Answer:  False

Diff: 1

Skill: Recall

Objective: 16.6

A-Heading: Risk Management

 

255)Designing and distributing a new product is a pure risk because there is the possibility of either a gain or a loss.

Answer:  False

Diff: 2

Skill: Recall

Objective: 16.6

A-Heading: Risk Management

 

256)When a delivery service trains its drivers in defensive-driving techniques and maintains their trucks in good working order, they are practising risk avoidance.

Answer:  False

Diff: 2

Skill: Recall

Objective: 16.6

A-Heading: Risk Management

 

257)Risk avoidance and risk retention are two methods which business firms use to cope with risks.

Answer:  True

Diff: 1

Skill: Recall

Objective: 16.6

A-Heading: Risk Management

 

258)Firms can practice risk transfer through loss prevention or loss reduction techniques.

Answer:  False

Diff: 1

Skill: Recall

Objective: 16.6

A-Heading: Risk Management

 

259)When a company decides to insure its buildings and equipment against loss by fire, it is practising risk control.

Answer:  False

Diff: 2

Skill: Recall

Objective: 16.6

A-Heading: Risk Management

 

260)The transfer of risk from one organization to another can be accomplished through the use of burglar alarms and security video services.

Answer:  False

Diff: 2

Skill: Recall

Objective: 16.6

A-Heading: Risk Management

 

261)An insurance company makes a profit by taking in more in premiums than it pays out to cover customer losses.

Answer:  True

Diff: 1

Skill: Recall

Objective: 16.6

A-Heading: Risk Management

 

262)The first step in the risk management process is to measure the frequency and severity of losses and their impact.

Answer: False

Diff: 2

Skill: Recall

Objective: 16.6

A-Heading: Risk Management

 

263)The chance of a flood is pure risk.

Answer: True

Diff: 2

Skill: Application

Objective: 16.6

A-Heading: Risk Management

 

264)Conserving a firm’s financial power or assets by minimizing the financial effect of accidental losses is risk management.

Answer: True

Diff: 2

Skill: Recall

Objective: 16.6

A-Heading: Risk Management

 

265)A trucking company that decides it is cheaper to pay for vandalism repairs than it is to submit claims to its insurance company is practicing risk control.

Answer: False

Diff: 1

Skill: Application

Objective: 16.6

A-Heading: Risk Management

 

266)To measure the frequency and severity of losses, managers must consider both past history and current activities.

Answer: True

Diff: 2

Skill: Recall

Objective: 16.6

A-Heading: Risk Management

 

267)Because risk management is an ongoing activity, follow-up is always essential.

Answer: True

Diff: 2

Skill: Recall

Objective: 16.6

A-Heading: Risk Management

 

 

SHORT ANSWER QUESTIONS.  Write the word or phrase that best completes each statement or answers the question.

 

268)What is a financial manager?

Answer:  A financial manager is responsible for planning and controlling the acquisition and dispersal of a firm’s financial resources.

Diff: 2

Skill: Recall

Objective: 16.1

A-Heading: The Role of the Financial Manager

 

269)What is the financial manager’s overall objective?

Answer: To increase a firm’s value (and thus stockholders’ wealth).

Diff: 2

Skill: Recall

Objective: 16.1

A-Heading: The Role of the Financial Manager

 

270)What are the four responsibilities of finance (corporate finance)?

Answer:  ∙Determining a firms long term investments

∙Obtaining funds to pay for those investments

∙Conducting the firm’s everyday financial activities

∙Helping to manage the risks that the firm takes

Diff: 2

Skill: Recall

Objective: 16.1

A-Heading: The Role of the Financial Manager

 

271)What is involved in cash flow management?

Answer: Stated most generally, financial managers must make sure that the company always has enough funds on hand to purchase the materials and human resources it needs to produce the goods and services that are sold to consumers. Financial managers must also make specific decisions about investing funds that are not needed immediately.

Diff: 2

Skill: Recall

Objective: 16.1

A-Heading: The Role of the Financial Manager

 

272)What is financial control?

Answer: Financial control is the process of checking actual performance against lans to ensure that desired financial outcomes actually occur. Control involves monitoring revenues and making appropriate financial adjustments.

Diff: 2

Skill: Recall

Objective: 16.1

A-Heading: The Role of the Financial Manager

 

273)What is credit policy?

Answer: A credit policy states the guidelines that a company uses when extending credit to customers. A credit policy sets a standard to help managers decide which buyers are eligible for what type of credit. Credit policy also sets specific payment terms.

Diff: 2

Skill: Recall

Objective: 16.2

A-Heading: Why Businesses Need Funds

 

274)What do credit terms of 2/10; net 30 refer to?

Answer:  The selling company is offering a two percent discount if the bill is paid within 10 days. The customer has 30 days to pay the regular price.

Diff: 2

Skill: Recall

Objective: 16.2

A-Heading: Why Businesses Need Funds

 

275)List four sources of short-term funds.

Answer:  Trade credit, secured loans, unsecured loans, and factoring accounts receivable.

Diff: 2

Skill: Recall

Objective: 16.3

A-Heading: Sources of Short-Term Funds

 

276)What is open-book credit?.

Answer:  A gentlemen’s agreement whereby buyers receive merchandise along with invoices stating credit terms.  Sellers ship products on faith that payment will be forthcoming

Diff: 2

Skill: Recall

Objective: 16.3

A-Heading: Sources of Short-Term Funds

 

277)Differentiate between a trade draft and a trade acceptance.

Answer:  A trade draft is a form of trade credit in which buyers must sign statements of payment terms attached to merchandise by sellers. A trade acceptance is a trade draft that has been signed by the buyer.

Diff: 2

Skill: Recall

Objective: 16.3

A-Heading: Sources of Short-Term Funds

 

278)What is a line of credit?

Answer:  A line of credit is a standing arrangement in which a lender agrees to make available a specified amount of funds upon the borrower’s request.

Diff: 2

Skill: Recall

Objective: 16.3

A-Heading: Sources of Short-Term Funds

 

279)What is commercial paper?

Answer:  Commercial paper is a short-term security, or note, containing a borrower’s promise to pay.

Diff: 2

Skill: Recall

Objective: 16.3

A-Heading: Sources of Short-Term Funds

 

280)What are the two primary sources of debt financing?

Answer:  Long-term loans and bonds.

Diff: 2

Skill: Recall

Objective: 16.4

A-Heading: Sources of Long-Term Funds

 

281)What is the difference between debt financing and equity financing?

Answer: Equity financing means selling ownership in the company (common stock) as a means of getting the long-term funds it needs to buy things like land, buildings, and equipment. This money does not have to be paid back (although investors may expect dividends to be paid on a regular basis). By contrast, debt financing (long-term loans and the sale of bonds) means borrowing money to use in the company. This borrowed money must be paid back at some point.

Diff: 2

Skill: Recall

Objective: 16.4

A-Heading: Sources of Long-Term Funds

 

282)Why is paying dvidends more expensive than paying bond interest?

Answer: Because bond interst is tax deductible, but stock dividends are not.

Diff: 2

Skill: Recall

Objective: 16.4

A-Heading: Sources of Long-Term Funds

 

283)What is the risk-return relationship?

Answer:  ∙the higher the risk, the more return the investors will expect to receive; the lower the risk, the smaller the expected return

Diff: 1

Skill: Recall

Objective: 16.4

A-Heading: Sources of Long-Term Funds

 

284)What is venture capital?

Answer:  Venture capital is outside equity financing provided in return for part ownership of the borrowing firm.

Diff: 2

Skill: Recall

Objective: 16.5

A-Heading: Financial Management for Small Businesses

 

285)Differentiate between pure and speculative risk.

Answer:  Speculative risk is risk involving the possibility of gain or loss, while pure risk involves only the possibility of loss or no loss.

Diff: 2

Skill: Recall

Objective: 16.6

A-Heading: Risk Management

 

286)List the four choices that a company has to handle risk.

Answer:  Risk avoidance, risk control, risk retention, and risk transfer.

Diff: 2

Skill: Recall

Objective: 16.6

A-Heading: Risk Management

 

 

ESSAY QUESTIONS.  Write your answer in the space provided or on a separate sheet of paper.

 

287)Briefly explain the three responsibilities of a financial manager.

Answer:  ∙cash flow management: managing the pattern in which cash flows into the firm in the form of revenues and out of the firm in the form of debt payments

financial control: the process of checking actual performance against plans to ensure that the desired financial status is achieved

financial planning: a description of how a business will reach some financial position it seeks for the future; includes projections for sources and uses of funds

Diff: 1

Skill: Recall

Objective: 16.1

A-Heading: The Role of the Financial Manager

 

288)What questions must the financial manager ask in order to develop a sound financial plan?

Answer: There are three basic questions: (1) What funds are needed to meet immediate plans? (2) When will the company need more funds? (3) Where can the company get the funds it needs so that it can meet its short- and long-term needs?

Diff: 1

Skill: Recall

Objective: 16.1

A-Heading: The Role of the Financial Manager

 

289)What are the three financial or operational areas that must be carefully managed by the financial manager to provide for short-term expenditures?

Answer:  ∙accounts payable: to pay them on time, but not too early to allow for cash for short-term investments

accounts receivable: to be sure to receive them in a timely fashion with discounts and penalties to shorten the wait period before payment occurs

inventories: inventories must be monitored so as to purchase when needed without having too much cash tied up in inventories

Diff: 2

Skill: Recall

Objective: 16.2

A-Heading: Why Businesses Need Funds

 

290)How do long-term expenditures differ from short-term expenditures?

Answer: Compared to short-term expenditures, long-term expenditures are used to buy fixed assets which are not normally sold or converted to cash. Their acquisition requires a relatively large investment, and they represent a binding commitment of company funds that continues long into the future.

Diff: 2

Skill: Recall

Objective: 16.2

A-Heading: Why Businesses Need Funds

 

291)Describe the primary short-term sources of funds.

Answer:  There are four sources: (1) trade credit–the granting of credit by a selling firm to a buying firm (open-book credit, promissory notes, trade drafts);

(2) secured short-term loans–the borrower is required to put up collateral (inventory loans, accounts receivable) and the lender has these items as security that the loan will be repaid or they take possession of inventories and/or accounts receivable; (3) unsecured short-term loans–the borrower is not required to put up collateral (lines of credit, revolving credit agreements, commercial paper); and

(4) factoring accounts receivable–selling a firm’s accounts receivable to another company for some percentage of their face value in order to realize immediate cash

Diff: 3

Skill: Recall

Objective: 16.3

A-Heading: Sources of Short-Term Funds

 

292)How can a lender gain some sort of assurance that the borrower of funds will repay the debt?

Answer: The most basic way is to make a secured loan, which requires the borrower to put up collateral (for example, inventories, accounts receivable, and other assets).

Diff: 2

Skill: Recall

Objective: 16.3

A-Heading: Sources of Short-Term Funds

 

293)Identify and briefly describe the three key sources of unsecured, short-term funds.

Answer:  ∙three types of unsecured short-term funds:

lines of credit: a standing agreement that specifies the maximum amount that will be made available to a borrower, which the borrow can get when the funds are available

revolving credit agreement: a guaranteed line of credit for which the funds are available on demand

commercial paper: notes that are sold for less than face value which are bought back by the borrower at a later date for face value

Diff: 2

Skill: Recall

Objective: 16.3

A-Heading: Sources of Short-Term Funds

 

294)How is a line of credit different than a revolving credit agreement?

Answer: With a line of credit, the company borrowing the money knows the maximum amount it will be allowed to borrow (if the bank has sufficient funds). With a revolving credit agreement, the company knows not only the maximum amount, but it is also guaranteed that the bank will make the money available (the company pays a commitment fee to get this guarantee).

Diff: 2

Skill: Recall

Objective: 16.3

A-Heading: Sources of Short-Term Funds

 

295)Define and describe the process of factoring accounts receivable.

Answer:  ∙A firm can raise funds rapidly by factoring, i.e., by selling the firm’s accounts receivables.  In this process, the purchaser of the receivables, usually a financial institution, is known as the factor.  The factor pays some percentage of the full amount of receivables due to the selling firm.  The seller gets this money immediately.  The factor profits to the extent that the money it eventually collects exceeds the amount it is paid.

Diff: 2

Skill: Recall

Objective: 16.3

A-Heading: Sources of Short-Term Funds

 

296)Give an example of how commercial paper works.

Answer: Suppose Corporation X needs $20 million dollars to buy new equipment. It might issue commercial paper with a total face value of $20.4 million to various other organizations that would like to earn interest on their idle funds (say, for example, an insurance company). These other companies would loan Corporation X a total of $20 million, and after say, 90 days, they would receive a total of $20.4 million from Corporation X.

Diff: 2

Skill: Recall

Objective: 16.3

A-Heading: Sources of Short-Term Funds

 

297)What are the customary methods of debt financing? Which methods do most corporations use as their major source of long-term debt financing?

Answer:  ∙long-term loans: extend three to ten years, usually from chartered banks but may also be from insurance companies, credit companies and pension funds

corporate bonds: a promise by the issuing company to pay the holder a certain amount of money on a specified date, with stated interest payments in the interim; a form of long-term debt financing

∙corporate bonds are the major source of debt financing for most corporations because of the large amounts of money that are available for loan

Diff: 1

Skill: Recall

Objective: 16.4

A-Heading: Sources of Long-Term Funds

 

298)Since equity funding is expensive, why don’t businesses rely totally on debt capital?

Answer: Because that would be too risky. Long-term loans and bonds carry fixed interest rates and represent a fixed promise to pay regardless of the profitability of the company. If the company can’t make its fixed payments, it may have to declare bankruptcy, but it doesn’t have pay dividends to stockholders if it is short of funds.

Diff: 1

Skill: Recall

Objective: 16.4

A-Heading: Sources of Long-Term Funds

 

299)Why is retained earnings viewed as a form of equity financing?

Answer: Because the earnings that are retained in the business (and not paid out to stockholders as dividends) allow the company to avoid borrowing money and therefore having to pay interest on loans or bonds. This saves the company more money.

Diff: 1

Skill: Recall

Objective: 16.4

A-Heading: Sources of Long-Term Funds

 

300)Identify, briefly describe, and give one example for each of the two types of long-term financing.

Answer:  ∙long-term financing can be done though debt or equity financing

∙debt financing can be done through long-term loans or issuing corporate bonds

∙equity financing can be done through issuing common stock or using retained earnings

Diff: 1

Skill: Recall

Objective: 16.4

A-Heading: Sources of Long-Term Funds

 

301)What are the two methods of equity financing for long-term funding requirements? What issues must be considered before the choice is made between the two methods? Explain your reason.

Answer:  ∙common stock: selling shares in ownership to raise money

retained earnings: using the built up stock of cash as a form of financing

∙the use of retained earnings means that a company will not have to borrow money or pay interest on that money

∙however, it will result in lower dividends

∙lower dividends may lead to lower stock prices

Diff: 2

Skill: Recall

Objective: 16.4

A-Heading: Sources of Long-Term Funds

 

302)Discuss the advantages and disadvantages of financing using preferred stock.

Answer:  ∙preferred stock is a form of hybrid financing, falling somewhere between debt and equity financing.  It is a hybrid because it has some of the features of corporate bonds, and some of the features of common stock

∙similar to bonds, payments on preferred stock are for fixed amounts.  However, unlike bonds, preferred stock never matures.  It can be held indefinitely.  Dividends need not be paid if the company makes no profit.  If dividends are paid, preferred shareholders receive them first in preference to dividends on common stock.  A major advantage of preferred shares financing is the flexibility:  no loss of control, no repayment of principal amount, no maturity, and no requirement to pay dividends in leaner times.

Diff: 1

Skill: Recall

Objective: 16.4

A-Heading: Sources of Long-Term Funds

 

303)Why is preferred stock referred to as hybrid financing?

Answer:  ∙it has features of both debt and equity financing

∙like bonds, there are fixed payments and no loss of control as there are no voting rights

∙like equity it never matures and there is no requirement to pay dividends if the company is unprofitable

Diff: 2

Skill: Recall

Objective: 16.4

A-Heading: Sources of Long-Term Funds

 

304)Compare debt financing to equity financing on the issues of repayment, claims on income, claims on assets, management control, tax effect and management flexibility.

Answer:  See Figure 20.1

Diff: 2

Skill: Recall

Objective: 16.4

A-Heading: Sources of Long-Term Funds

 

305)What is risk? What is the difference between speculative risk and pure risk? What is risk management?

Answer:  ∙risk: uncertainty about future events

speculative risk: involve the possibility of gain or loss

pure risk: involve the possibility of loss or no loss only

risk management: conserving a firm’s financial power or assets by minimizing the financial effect of accidental losses

Diff: 1

Skill: Recall

Objective: 16.6

A-Heading: Risk Management

 

306)What are the five steps in the risk management process?

Answer:  ∙Step 1: Identify risks and potential losses

Step 2: Measure the frequency and severity of losses and their impact

Step 3: Evaluate alternatives and choose the techniques that will best handle the losses

Step 4: Implement the risk-management program

Step 5: Monitor results

Diff: 2

Skill: Recall

Objective: 16.6

A-Heading: Risk Management

 

307)What are the methods used by business firms to cope with risk?

Answer:  ∙risk avoidance: stopping participation in or refusing to participate in ventures that carry any risk

risk control: techniques to prevent, minimize, or reduce losses or the consequences of losses

risk retention: the covering of a firm’s unavoidable losses with its own funds

risk transfer: the transfer of risk to another individual or firm, often by contract

Diff: 2

Skill: Recall

Objective: 16.6

A-Heading: Risk Management

 

 

 

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