1. What is a focus area of business finance?
A. Personal budgeting
B. Capital budgeting Correct
C. Tax collection
D. Historical data analysis
Explanation
Business finance centers on decisions that shape a company's future, such as allocating resources to long-term projects. Capital budgeting stands out as a core focus, guiding investments in assets like equipment or facilities. Unlike personal budgeting or tax collection, it directly drives corporate growth and value creation.
2. Why is understanding the cost of capital important in business finance?
A. To comply with tax regulations
B. To determine the best financing options for projects Correct
C. To prepare accurate financial statements
D. To manage individual retirement accounts
Explanation
The cost of capital acts as a benchmark for evaluating investment opportunities, revealing the true expense of funding through debt or equity. It helps managers choose financing mixes that minimize costs while maximizing returns. Without this insight, firms risk overpaying for capital or rejecting profitable projects.
3. What does risk management in business finance involve?
A. Filing government reports
B. Managing potential financial losses Correct
C. Preparing income statements
D. Balancing personal budgets
Explanation
Risk management in business finance is like installing safety nets across the company's financial landscape, identifying threats from market swings or credit defaults. It involves strategies to mitigate losses through insurance, diversification, or hedging. This proactive approach safeguards profitability and ensures long-term stability.
4. What are bonds?
A. Contracts to buy or sell assets in the future
B. Loans provided by investors to issuers Correct
C. Ownership shares in a company
D. Securities that only governments may issue
Explanation
Bonds function as IOUs where investors lend money to corporations or governments in exchange for periodic interest and principal repayment. They represent debt, not equity, offering fixed income without ownership rights. This structure provides issuers with capital while giving bondholders predictable returns.
5. What makes Treasury bonds attractive to firms with extra cash?
A. Ownership in the government
B. Government backing and low risk Correct
C. High returns with high risk
D. Daily liquidity
Explanation
Treasury bonds shine as a safe harbor for surplus corporate cash, backed by the full faith of the U.S. government, virtually eliminating default risk. Their low volatility preserves capital, making them ideal for liquidity management. Firms prioritize this security over higher yields from riskier assets.