Chapter 15 - Financial Decisions And Risk Management

Front 1

What are the 5 steps in the Risk Management Process?

Back 1

1. identify risks and potential losses

2. measure the frequency and severity of losses and their impact

3. evaluate alternatives and choose the techniques that will best handle the losses

4. implement the risk-management program

5. monitor results

Front 2

Meagan is comparing her firm's actual quarterly results to the budget projection that was completed six months ago. When analyzing these documents, she discovers that sales were lower than the firm had anticipated. Meagan is involved in ________

A) financial control

B) cash flow management

C) financial planning

D) management accounting

Back 2

A) financial control

Front 3

Crystal, an owner of a travel agency, is beginning to worry that her cash flows are not going to cover her current operating expenses. With the cold weather approaching, crystal knows that her cash inflows will pick up very quickly as people begin to book vacations to the sunny south. Crystal can resolve her current cash flow concerns by obtaining _______ financing

A) immediate

B) short-term

C) contingency

D) long-term

Back 3

B) short-term

Front 4

Azim has been approved for a bank loan; however the bank manager requires Azim's signature allowing the bank to seize his car if payment is not made as agreed. Azim's car is being used as ______

A) security

B) a promissory note

C) equity

D) collateral

Back 4

D) collateral

Front 5

Businesses may seek long-term financing from these major sources:

A) debt, equity and insurance financing

B) debt, equity and hybrid financing

C) government funds and bank loans

D) commercial paper and promissory notes

Back 5

B) debt, equity and hybrid financing

Front 6

Extended periods where most stock prices are increasing is characterized as a _____ market; periods where mot prices are falling is characterized as a _______ market.

A) growth; decline

B) recovery; recession

C) bull; bear

D) bear; bull

Back 6

C) bull; bear

Front 7

Define Finance

Back 7

the business function involving decisions about a firm's long-term investments and obtaining the funds to pay for those investments

Front 8

cash-flow management

Back 8

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

Front 9

financial control

Back 9

the process of checking actual performance against plans to ensure that the desired financial status is achieved

Front 10

financial plan

Back 10

a description of how a business will reach some financial position it seeks for the future; it includes projections for sources and uses of unds

Front 11

inventory

Back 11

materials and goods currently held by the company that will be sold within the year

Front 12

trade credit

Back 12

the granting of credit by selling a firm to a buying firm

Front 13

secured loans

Back 13

short-term loan in which the borrower is required to put up collateral

Front 14

unsecured loan

Back 14

short-term loan in which the borrower is not required to put up collateral

Front 15

line of credit

Back 15

standing agreement between a bank and a firm in which the bank specifies the maximum amount it will make available to the borrower for a short-term unsecured loan; the borrower can then draw on those funds, when available

Front 16

revolving credit agreement

Back 16

a guaranteed line of credit for which the firm pays the bank interest on funds borrowed, as well as a fee for extending the line of credit

Front 17

commercial paper

Back 17

a method of short-run fundraising in which a firm sells unsecured notes for less than the face value and then repurchases them at the face value within 270 days; buyers' profits are the difference between the original price paid and the face value

Front 18

debt financing

Back 18

raising money to meet long-term expenditures by borrowing from outside the company; usually in the form of long-term loans or the sale of corporate bonds

Front 19

corporate bond

Back 19

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

Front 20

secured bonds

Back 20

bonds issued by borrowers who pledge assets as collateral in the event on non-payment

Front 21

equity financing

Back 21

raising money to meet long-term expenditures by issuing common stock or by retaining earnings

Front 22

par value

Back 22

the arbitrary value of a stock set by the issuing company's board of directors and stated on stock certificates; used by accountants but of little significance to investors

Front 23

book value

Back 23

the value of a common stock expressed as total stockholders' equity divided by the number of shares of stock

Front 24

market value

Back 24

the current price of one share of a stock in the secondary securities market; the real value of a stock

Front 25

market capitalization

Back 25

the dollar value (market value) of stocks listed on a stock exchange

Front 26

capital structure

Back 26

relative mix of a firm's debt and equity financing

Front 27

risk-return relationship

Back 27

shows the amount of risk and the likely rate of return on various financial instruments

Front 28

securities

Back 28

stocks, bonds, and mutual funds representing secured, or asset-based, claims by investors against issuers

Front 29

investment bankers

Back 29

financial specialists in issuing new securities

Front 30

stock exchange

Back 30

a voluntary organization of individuals formed to provide an institutional setting where members can buy and sell stock for themselves and their clients in accordance with the exchange's rules

Front 31

stockbroker

Back 31

an individual licensed to buy and sell securities for customers in the secondary market; may also provide other financial services

Front 32

over-the-counter (OTC) market

Back 32

organization of securities dealers formed to trade stock outside the formal institutional setting of the organized stock exchanges

Front 33

market index

Back 33

a measure of the market value of stocks; provides a summary of price trends in a specific industry or the stock market as a whole

Front 34

bull market

Back 34

a period of rising stock prices

Front 35

bear market

Back 35

a period of falling stock prices

Front 36

stock option

Back 36

the purchased right to buy or sell a stock

Front 37

margin

Back 37

the percentage of the total sales price that a buyer must put up to place an order for stock or a futures contract

Front 38

short sale

Back 38

selling borrowed shares of stock in the expectation that their price will fall before they must be replaced, so that replacement shares can be bought for less than the original shares were sold for

Front 39

mutual fund

Back 39

any company that pools the resources of many investors and uses those funds to purchase various types of financial securities, depending on the fund's financial goals

Front 40

exchange-traded fund (ETF)

Back 40

a bundle of stocks (or bonds) that is in an index that tracks the overall movement of the market

Front 41

hedge funds

Back 41

private pools of money that try to give investors a positive return regardless of stock-market performance

Front 42

future contracts

Back 42

agreement to purchase specified amounts of a commodity (or stock) at a given price on a set future date

Front 43

blue-sky laws

Back 43

laws regulating how corporations must back up securities

Front 44

risk

Back 44

uncertainty about future events

Front 45

speculative risk

Back 45

an event that offers the chance for either a gain or a loss

Front 46

pure risk

Back 46

an event that offers no possible gain; it only offers the chance of a loss or no loss

Front 47

risk management

Back 47

conserving a firm's (or an individual's) financial power or assets by minimizing the financial effect of accidental losses

Front 48

risk avoidance

Back 48

stopping participation in or refusing to participate in ventures that carry any risk

Front 49

risk control

Back 49

techniques to prevent, minimize, or reduce losses or the consequences of losses

Front 50

risk retention

Back 50

the covering of a firm's unavoidable losses with its own funds

Front 51

risk transfer

Back 51

the transfer of risk to another individual or firm, often by contract