1 Introduction to Financial Management

Question 1

Agency problem.

Answer 1

The difficulties that arise when a principal hires an agent and cannot fully monitor the agent’s actions.

Question 2

Angel investors.

Answer 2

Individuals who provide small amounts of capital and expert business advice to small firms in exchange for an ownership stake in the firm.

Question 3

Asset classes.

Answer 3

A group of securities that exhibit similar characteristics, behave similarly in the marketplace, and are subject to the same laws and regulations.

Question 4

Auditor.

Answer 4

A person who performs an independent assessment of the fairness of a firm’s financial statements.

Question 5

Board of directors.

Answer 5

The group of directors elected by stockholders to oversee management in a corporation.

Question 6

Chief executive officer (CEO).

Answer 6

The highest ranking corporate manager.

Question 7

Corporate governance.

Answer 7

The set of laws, policies, incentives, and monitors designed to handle the issues arising from the separation of ownership and control.

Question 8

Credit analyst.

Answer 8

A person who analyses a company’s ability to repay its debts and reports the findings as a grade.

Question 9

Defined benefit plan.

Answer 9

A retirement plan in which the employer funds a pension generally based on each employee’s years of service and salaries.

Question 10

Defined contribution plan.

Answer 10

A retirement plan in which the employee contributes money and directs its investment. The amount of retirement benefits is directly related to the amount of money contributed and the success of its investment.

Question 11

Double taxation.

Answer 11

A situation in which two taxes must be paid on the same income.

Question 12

Economies of scale.

Answer 12

Cost advantages when fixed costs are spread over a large number of units.

Question 13

Employee stock option plan (ESOP).

Answer 13

An incentive program that grants options to employees (typically managers) as compensation.

Question 14

Equity.

Answer 14

An ownership interest in a business enterprise.

Question 15

Ethics.

Answer 15

The study of values, morals, and morality.

Question 16

Fiduciary.

Answer 16

A legal duty between two parties where one party must act in the interest of the other party.

Question 17

Finance.

Answer 17

The study of applying specific value to things we own, services we use, and decisions we make.

Question 18

Financial asset.

Answer 18

A general term for securities like stocks, bonds, and other assets that represent ownership in a cash flow.

Question 19

Financial institutions and markets.

Answer 19

The organisations that facilitate the flow of capital between investors and companies.

Question 20

Financial management.

Answer 20

The process for and the analysis of making financial decisions in the business context.

Question 21

Financial markets.

Answer 21

The arenas through which funds flow.

Question 22

401k plan.

Answer 22

A defined contribution plan that is sponsored by corporate employers.

Question 23

General partnership.

Answer 23

A form of business organisation where the partners own the business together and are personally liable for legal actions and debts of the firm.

Question 24

Hybrid organisations.

Answer 24

Business forms that have some attributes of corporations and some of proprietorships/partnerships.

Question 25

Individual retirement account (IRA).

Answer 25

A self sponsored retirement program.

Question 26

International finance.

Answer 26

The use of finance theory in a global business environment.

Question 27

Investment.

Answer 27

The analysis and process of choosing securities and other assets to purchase.

Question 28

Investment analyst.

Answer 28

A person who analyses a company's business prospects and gives opinions about its future success.

Question 29

Investment banks.

Answer 29

Banks that help companies and governments raise capital.

Question 30

Investors.

Answer 30

Those who buy securities or other assets in hopes of earning a return and getting more money back in the future.

Question 31

Invisible hand.

Answer 31

A metaphor used to illustrate how an individual pursuing his own interests also tends to promote the good of the community.

Question 32

Limited liability.

Answer 32

Limitation of a person's financial ability to a fixed sum or investment.

Question 33

Maximisation of shareholder wealth.

Answer 33

A view that management should first and foremost consider the interests of shareholders in its business decisions.

Question 34

Option.

Answer 34

The opportunity to buy stock at a fixed price over a specific period of time.

Question 35

Perks/perquisites.

Answer 35

Nonwage compensation, often in the form of a company car, golf club membership, and so forth.

Question 36

Public corporation.

Answer 36

A company owned by a large number of stockholders from the general public.

Question 37

Real assets.

Answer 37

Physical property like gold, machinery, equipment, or real estate.

Question 38

Real markets.

Answer 38

The places and processes that facilitate the trading of real assets.

Question 39

Restricted stock.

Answer 39

A special type of stock that is not transferable from the current holder to others until specific conditions are satisfied.

Question 40

Retained earnings.

Answer 40

The portion of company profits that are kept by the company rather than distributed to the stockholders as cash dividends.

Question 41

Risk.

Answer 41

A potential future negative impact to value and/or cash flows. It is often discussed in terms of the probability of loss and the expected magnitude of the loss.

Question 42

Sole proprietorship.

Answer 42

A business entity that is not legally separate from its owner.

Question 43

Stakeholder.

Answer 43

A person or organisation that has legitimate interest in a corporation.

Question 44

Time value of money (TVM).

Answer 44

The theory and application of valuing cash flows at various points in time.

Question 45

Unlimited liability.

Answer 45

A situation in which a person's personal assets are at risk from a business liability.

Question 46

Venture capitalists.

Answer 46

Similar to angel investors except that they are organised at groups of investors and can provide larger amounts of capital.