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Financial Management
Chapter 1
| Question | Answer |
|---|---|
| What are proprietorships? | unincorporated business owned by one individual |
| Advantages of a proprietorship: | easily/inexpensive to form; few government regulations; subject to lower income taxes. |
| Limitations of a proprietorship: | unlimited personal liability; life of the business is limited to the life of the individual; difficulty in obtaining capital. |
| What is a partnership? | a legal arrangement between 2 or more people. |
| Advantages of a partnership? | Established easy & inexpensive; income rated on a pro rata basis & taxed on an individual basis (avoids corporate tax situation) |
| Limitations of a partnership? | Unlimited personal liability; unlimited liability makes it difficult to raise capital. |
| What is a corporation? | a legal entity created by a state; separate and distinct from its owners and managers. |
| What are the advantages of a corporation? | Limits SH losses to the amount invested in the firm. Unlimited life; easy to transfer shares of stock; more success in raising capital. |
| Waht are the disadvantages of a corporation? | corporate taxes. Double taxation-corporate earnings are taxed and after-tax earnings on dividends are taxed. |
| What is a limited liability company | a hybrid between a partnership and a corporation. |
| What are the advantages of an LLC? | Both LLCs and LLPs have limited liability like corporations but are taxed like partnerships |
| What is an S corporation? | : taxed if it were a partnership, exempt from corporate tax. To qualify as an S, no more than 75 shareholders |
| What is management’s primary goal? | Decisions should be made to maximize the long-run value of the firm’s common stock. |
| What is market price? | stock value based on perceived but possibly incorrect information as seen by the marginal investor. |
| What is the definition of perceived? | what investors expect, given the limited information they actually have. |
| What is intrinsic value? | An estimate of a stock’s “true” value based on accurate risk and return data. The intrinsic value can be estimated but not measured precisely. |
| How do you define true value? | returns and risk that investors would expect if they had all of the information that existed about the company. |
| Define equilibrium? | The situation in which the actual market price equals the intrinsic value so investors are indifferent between buying or selling a stock. |
| What four trends affect business management in general and financial management in particular? | 1. Sarbanes Oxley Bill which requires the CEO and CFO of a firm to certify that the firm’s financial statements are accurate. |
| Increased globalization of business. | |
| Improving information technology (IT) | |
| Corporate governance. | |
| How would you define “business ethics”? | standards of conduct or moral behavior. |
| What are three techniques stockholders can use to motivate managers to maximize their stock’s long-run price? | (1) Reasonable compensation packagews (2) Firing managers who are not performing well (3) The threat of hostile takeovers. |
Created by:
stamberger
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