Question

1. Are the following capital budgeting or financing decisions?

A. Intel decides to spend $1 billion to develop a new microprocessor.

B. Avon spends $200 million to launch a new range of cosmetics in US markets.

C. Pfizer issues new shares to buy a small biotech company.

D. Toyota borrows 350 million yen from Bank of Tokyo.

2. Would the following activities increase or decrease the firm’s cash balance?

A. Inventories are increased.

B. Accounts payable are decreased.

C. Additional common stock issued.

D. New equipment is purchased.

Answer 1

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Ans -1)

A. Intel decides to spend $1 billion to develop a new microprocessor. : Capital budgeting decision

B. Avon spends $200 million to launch a new range of cosmetics in US markets : Capital budgeting decision

C. Pfizer issues new shares to buy a small biotech company. : Both – Capital budgeting and Finance decision

D. Toyota borrows 350 million yen from Bank of Tokyo. : Finance Decision

Ans 2)

A. Inventories are increased. : Decrease in Cash flow- Increase in inventory will block cash as inventory and therefore cash flow will decrease.

B. Accounts payable are decreased : Decrease in cash flow – Decrease in account payable means we have paid creditor and cash has reduced.

C. Additional common stock issued: Increase in cash flow – Issue of common stock will result into cash receipt.

D. New equipment is purchased : Decrease in cash flow- Equipment purchase will require cash outflow.