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Business in Action Ch 18 BUSN100 Financial Management

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…
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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
budget
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
hedging
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
leverage
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
collateral
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
factoring
Agreement to use an asset in exchange for regular payment; similar to renting
lease
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
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
debentures
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
underwriter