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Finance - Chapter 1
Finance - Exam 1
| Question | Answer |
|---|---|
| Finance | the science and art of how indidivuials and firms raise, allocate, and invest money |
| Managerial Finance | concerned with the responsibilities of a financial manager working in a business |
| What is the goal of a firm? | maximize shareholder value |
| sole proprietorships | 1. for-profit business owned by one person 2. raises capital from personal resources or by borrowing 3. do not pay taxes on their income as separate entities 4. taxed on personal level |
| What is unlimited liability? | liabilities of the business are the entrepreneurs responsibility and that creditors can make claims against the entrepreneur's personal assets if the business fails to pay its debt |
| What legal forms have unlimited liability? | sole proprietorships and partnerships |
| Partnerships | 1. consists of two or more owners doing business together for profit 2. established by a written contract known as articles of partnership |
| What are the primary activites of the financial manager | 1. What long-term investments or project should the business take on (fixed assets) 2. How will the firm finance long-term investment/projects ( long-term debt and equity) 3. How will the firm manage the day-to-days finances of the firm (current ass/lia) |
| What are the key decisions of the financial manager? | 1. investment decisions 2. capital budgeting 3. financing decisions 4. capital decisions |
| What is the agency problem? | In many situations, managers may act in accordance with their own interests |
| Debt is a form of | borrowing money |
| equity is a form of | ownership |
| primary market | company issues securities and gets money for it |
| secondary market | securities are traded between investors, and the company does not get any money |
| Which of the following best describes the concept of the time value of money? | A dollar today is worth more than a dollar in the future. |
| A disadvantage of a partnership is __________ | unlimited liability |
| The set of rules, processes and laws that dictate how a firm is controlled, operated and regulated is known as __________. | corporate governance |
| One of the basic premises in finance is that when the risk of an investment is high, the rate of return required by the investor will be: | high |
| The primary goal of the financial manager is to: | maximize shareholder wealth |
| When a manager makes a poor decision that is not in the shareholders’ best interest it will be: | reflected in the stock price. |
| Which of the following is one of the primary questions addressed by financial managers? | Which projects should the firm invest resources in to increase shareholder wealth? |
| If the managers of a company are not the owners of the company, they are considered: | agents |
| Financial managers are more concerned with a firm’s __________ than a firm’s earnings per share when evaluating a potential acquisition. | cash flows |
| Financial managers __________ when making decisions because it can have a direct impact on shareholder wealth. | should always engage in ethical behavior |
| The process of evaluating long-term investment opportunities for the firm, and then determining which ones the firm should invest in is known as: | capital budgeting |
| The science and art of managing money is known as __________. | finance |
| When a firm has agency problems, the stock price is often depressed, which makes the firm: | an attractive takeover candidate. |
| A __________ is a form of business organization that is a separate legal entity from its owners and has limited liability. | corporation |
| Capital structure refers to the: | mix of the firm’s long-term sources of financing |
| One of the primary tasks of the financial manager is to manage short-term cash needs, which is known as: | working capital management |
| Which of the following is an example of an agency cost? | Fees of outside auditors |
| Which of the following is one of the primary functions of the financial manager? | Making financing decisions |
| Financial managers evaluating decision alternatives or potential actions must consider ________. | risk, return, and the impact on share price |
| The principal agent problem arises when ________. | the owners of the firm are not the people managing the firm |
| ________ decisions refer to how a firm manages its short-term resources on a day-to-day basis. | working capital |
| Which of the following legal forms of organization is most expensive to organize? | corporations |
| Under which of the following legal forms of organization is ownership readily transferable? | corporations |
| A major weakness of a partnership is ________. | the difficulty in liquidating or transferring ownership |
| Which of the following is a strength of a corporation? | limited liability |
| Corporate governance refers to ________. | the rules, processes, and laws by which companies are operated, controlled, and regulated |
| Agency costs are ________. | costs that shareholders bear because managers pursue their own interests rather than acting in the interests of shareholders |
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