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Questions and Answers
Which type of financing should Crystal obtain to alleviate her immediate cash flow issues?
Which type of financing should Crystal obtain to alleviate her immediate cash flow issues?
In the context of obtaining a bank loan, what is Azim’s car classified as?
In the context of obtaining a bank loan, what is Azim’s car classified as?
Which combination represents the major sources from which businesses may seek long-term financing?
Which combination represents the major sources from which businesses may seek long-term financing?
What is considered a negative aspect of relying solely on long-term financing?
What is considered a negative aspect of relying solely on long-term financing?
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What characteristic best defines periods where most stock prices are increasing?
What characteristic best defines periods where most stock prices are increasing?
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What financing option would not typically be categorized as long-term?
What financing option would not typically be categorized as long-term?
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Which financing source is least likely to be used by established businesses seeking long-term capital?
Which financing source is least likely to be used by established businesses seeking long-term capital?
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What does obtaining contingency financing primarily aim to address?
What does obtaining contingency financing primarily aim to address?
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What is one of the primary responsibilities of a financial manager?
What is one of the primary responsibilities of a financial manager?
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Which of the following best defines cash-flow management?
Which of the following best defines cash-flow management?
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What is a source of short-term financing for businesses?
What is a source of short-term financing for businesses?
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Which of the following is a responsibility of a financial manager in the context of risk management?
Which of the following is a responsibility of a financial manager in the context of risk management?
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Which is NOT typically considered a long-term expenditure?
Which is NOT typically considered a long-term expenditure?
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Which is an aspect of financial planning for a financial manager?
Which is an aspect of financial planning for a financial manager?
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In terms of funding strategies, what is a common source of long-term financing?
In terms of funding strategies, what is a common source of long-term financing?
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What is a key aspect of financial control in a business?
What is a key aspect of financial control in a business?
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What is a primary responsibility of financial control?
What is a primary responsibility of financial control?
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Which of the following is an objective of financial planning?
Which of the following is an objective of financial planning?
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Which type of financing involves borrowing money for a period of 3 to 10 years?
Which type of financing involves borrowing money for a period of 3 to 10 years?
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What characterizes callable bonds?
What characterizes callable bonds?
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Why do businesses need long-term funds?
Why do businesses need long-term funds?
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Which source of short-term funding involves the firm extending credit to another?
Which source of short-term funding involves the firm extending credit to another?
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Which of the following is NOT a source of unsecured short-term loans?
Which of the following is NOT a source of unsecured short-term loans?
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What are debentures primarily categorized as?
What are debentures primarily categorized as?
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What differentiates secured loans from unsecured loans?
What differentiates secured loans from unsecured loans?
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Which type of financing allows a company to finance itself without distributing dividends?
Which type of financing allows a company to finance itself without distributing dividends?
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Which of the following is NOT typically considered a long-term expenditure?
Which of the following is NOT typically considered a long-term expenditure?
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Which type of bond offers the option to receive common stock instead of cash at redemption?
Which type of bond offers the option to receive common stock instead of cash at redemption?
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What is one benefit of using secured short-term loans?
What is one benefit of using secured short-term loans?
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What is a key feature of serial bonds?
What is a key feature of serial bonds?
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What is factoring accounts receivable?
What is factoring accounts receivable?
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Which of the following forms of long-term funding directly involves receiving money in exchange for ownership?
Which of the following forms of long-term funding directly involves receiving money in exchange for ownership?
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What is the role of stockbrokers in the securities market?
What is the role of stockbrokers in the securities market?
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Which of the following correctly describes the Toronto Stock Exchange (TSX)?
Which of the following correctly describes the Toronto Stock Exchange (TSX)?
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What distinguishes the National Association of Securities Dealers Automated Quotation (NASDAQ)?
What distinguishes the National Association of Securities Dealers Automated Quotation (NASDAQ)?
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Which of these markets primarily accommodates smaller firms not listed on major exchanges?
Which of these markets primarily accommodates smaller firms not listed on major exchanges?
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What was a significant factor in the meme-stock phenomenon observed in early 2021?
What was a significant factor in the meme-stock phenomenon observed in early 2021?
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How can stock quotations be typically read?
How can stock quotations be typically read?
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What types of securities are primarily traded in the Over-the-Counter Market (OTC)?
What types of securities are primarily traded in the Over-the-Counter Market (OTC)?
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What is a characteristic of discount brokers?
What is a characteristic of discount brokers?
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What is the primary focus of ethical funds in socially responsible investing?
What is the primary focus of ethical funds in socially responsible investing?
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Which of the following best describes an Exchange-Traded Fund (ETF)?
Which of the following best describes an Exchange-Traded Fund (ETF)?
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What is a key characteristic of hedge funds?
What is a key characteristic of hedge funds?
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What is a futures contract in commodities?
What is a futures contract in commodities?
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What does a call option allow an investor to do?
What does a call option allow an investor to do?
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Which statement is true regarding Canadian Securities Regulations?
Which statement is true regarding Canadian Securities Regulations?
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What must small business owners focus on to enhance their financial management?
What must small business owners focus on to enhance their financial management?
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What does a put option allow an investor to achieve?
What does a put option allow an investor to achieve?
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Study Notes
Business Essentials Chapter 15: Financial Decisions and Risk Management
- Financial managers are responsible for a firm's long-term investments, obtaining funds, conducting daily financials, and managing risks.
- Short-term expenditures (operating expenses) include accounts payable, accounts receivable, credit policy, inventory (raw materials and work in process).
- Short-term financing sources include trade credit, secured loans, unsecured loans, and factoring accounts receivable.
- Trade credit involves a seller granting credit to a buyer. Forms include open-book credit, promissory notes, and trade drafts.
- Secured short-term loans require collateral, usually with lower interest rates than unsecured loans.
- Unsecured short-term loans include lines of credit, revolving credit agreements, and commercial paper.
- Long-term expenditures (capital expenditures) involve assets with long lives and significant value, such as land, buildings, and machinery.
- Long-term financing sources include long-term loans and corporate bonds.
- Bonds (secured or unsecured/debentures, registered or bearer/coupon) are promises by the borrower to repay the lender a specific amount at a future date.
- Callable bonds can be repaid earlier than the maturity date; serial bonds have staggered redemption dates while convertible bonds offer an option for receiving common stock instead of cash.
- Equity financing includes common stock (having market, book, and par values), retained earnings (profit retained in the company instead of paid out as dividends).
- Preferred stock is a hybrid form of financing with fixed payments like bonds, but without a maturity date and no voting rights.
- Choosing between debt and equity financing involves understanding capital structure; equity is usually more expensive but has no formal obligations. Debt is cheaper but requires the company to service the debt.
- Securities Markets include the primary (sale of new securities) and secondary (sale of previously issued securities) markets.
Securities Markets (LO 15.5)
- Investment banks are financial specialists who issue and sell new securities.
- Stock exchanges provide a setting where members can buy or sell stock according to exchange rules; examples include TSX and NASDAQ.
- Stockbrokers facilitate buying and selling for customers in the secondary market, with types like discount, full-service, and online brokers.
- The over-the-counter (OTC) market includes individual dealers who trade securities, dealing in bonds and other fixed-income securities.
- Market indexes summarize stock market trends and include the Dow Jones Industrial Average, S&P Composite/500 index, NASDAQ Composite, and S&P/TSX index.
- Market orders, limit orders, stop orders, round lots, and odd lots are various types of orders used to buy or sell securities.
- Margin trading lets an investor make a down payment and finance the rest using the broker, who borrows from the bank. The broker charges a higher interest rate than what they pay.
- Short selling is when an investor borrows shares from the broker, sells them, and buys back an equal amount to return to the broker later.
Other Investments (LO 15.7)
- Mutual funds pool investor resources to purchase various securities; examples include no-load and load funds.
- Ethical funds invest in companies with strong social and environmental records.
- Exchange-traded funds (ETFs) act like stocks, traded continuously but do not have pricing tied to the end of the day and have lower operating expenses.
- Hedge funds are private pools of money that aim to provide positive returns regardless of the market, typically sold to wealthy investors, and sometimes labelled as "principal-protected notes".
- Commodities such as futures contracts, are undifferentiated products, involving agreements to buy or sell specific amounts at a future date.
- Stock options (call and put options) give the holder the right, but not the obligation, to buy (call) or sell (put) a particular stock at a specified price.
Securities Regulations (LO 15.7)
- Canadian securities regulations are primarily provincial.
- "Blue-sky laws" regulate how firms deal in securities.
- Prospectuses (offering documents) detail information on new securities.
Financial Management for Small Businesses (LO 15.7)
- Small business owners need to obtain and manage credit effectively, establish bank credit and trade credit, and plan for cash flow efficiently.
Risk Management (LO 15.8)
- Risk management aims to minimize the financial consequences of losses by conserving financial power and assets.
- Risk encompasses uncertainty about future events, speculative risk (with potential gain or loss), and pure risk (involving only loss).
- Risk management involves identifying risks, measuring frequency and severity of losses, evaluating and choosing risk-handling techniques (avoidance, control, transfer, retention), implementing a plan, and monitoring the results.
Quick Check Questions
- Example questions about financial management concepts are provided, but without answers.
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Description
Explore key concepts from Chapter 15 on financial decisions and risk management in business. This chapter covers the responsibilities of financial managers, differences between short-term and long-term expenditures, and various financing sources. Test your understanding of operating expenses, trade credit, secured and unsecured loans, and capital expenditures.
