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After studying this chapter, you will be able to 1. Identify three fundamental concepts that affect financial decisions and identify the primary responsibilities of a financial manager 2. Describe the budgeting process, three major budgeting challenges, and the four major types of budgets 3. Compare the advantages and disadvantages of debt and equity financing and explain the two major considerations in choosing from financing alternatives 4. Identify the major categories of short- term debt fin…

Planning for a firm's money needs and managing the allocation and spending of funds

financial management

The balance of potential risks against potential rewards

risk-return trade-off

A document that outlines the funds needed for a certain period of time, along with the sources and intended uses of those funds

financial plan

Amounts that are currently owed to a firm

accounts receivable

Amounts that a firm currently owes to other parties

accounts payable

Planning and control tool that reflects expected revenues, operating expenses, and cash receipts and outlays


The process of analyzing and adjusting the basic financial plan to correct for deviations from forecasted events

financial control

Protecting against cost increases with contracts that allow a company to buy supplies in the future at designated prices


Budgeting approach in which each department starts from zero every year and must justify every item in the budget, rather than simply adjusting the previous year's budget amounts

zero- based budgeting

Budget that identifies the money a new company will need to spend to launch operations

start- up budget

Also known as the master budget, budget that identifies all sources of revenue and coordinates the spending of those funds throughout the coming year

operating budget

Budget that outlines expenditures for real estate, new facilities, major equipment, and other capital investments

capital budget

Money paid to acquire something of permanent value in a business

capital investments

Budget that identifies the costs needed to accomplish a particular project

project budget

Arranging funding by borrowing money

debt financing

Arranging funding by selling ownership shares in the company, publicly or privately

equity financing

Financing used to cover current expenses ( generally repaid within a year)

short- term financing

Average rate of interest a firm pays on its combination of debt and equity

cost of capital

leverage Technique of increasing the rate of return on an investment by financing it with borrowed funds


A firm's mix of debt and equity financing

capital structure

Credit obtained by the purchaser directly from the supplier

trade credit

Loans backed up with assets that the lender can claim in case of default, such as a piece of property

secured loans

Tangible asset a lender can claim if a borrower defaults on a loan


Loans requiring no collateral but a good credit rating

unsecured loans

Portion of an unsecured loan that is kept on deposit at the lending institution to protect the lender and increase the lender's return

compensating balance

Arrangement in which the financial institution makes money available for use at any time after the loan has been approved

line of credit

Short- term promissory notes, or contractual agreements, to repay a borrowed amount by a specified time with a specified interest rate

commercial paper

Obtaining funding by selling accounts receivable


Agreement to use an asset in exchange for regular payment; similar to renting


Method of funding in which the issuer borrows from an investor and provides a written promise to make regular interest payments and repay the borrowed amount in the future


Bonds backed by specific assets that will be given to bondholders if the borrowed amount is not repaid

secured bonds

Corporate bonds backed only by the reputation of the issuer


Corporate bonds that can be exchanged at the owner's discretion into common stock of the issuing company

convertible bonds

Account into which a company makes annual payments for use in redeeming its bonds in the future

sinking fund

Ownership assets that aren't publicly traded; includes venture capital

private equity

A specialized type of bank that buys the shares from the company preparing an IPO and sells them to investors


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