Chapter 1

Question 1

The role of the financial manager

Answer 1

• making decisions that are in the best interest of the firm’s owners
• maximize wealth

Question 2

Stakeholder theory

Answer 2

view of capitalism that stresses the interconnected relationships between a business and its stakeholders

Question 3

Capital budgeting

Answer 3

• decision making process through which the firm purchases productive assets
• one of the most important decision processes in a firm

Question 4

financing decisions

Answer 4

determine the ways in which firms obtain and manage long term financing to acquire and support their productive assets

Question 5

3 fundamental decisions
(capital budgeting and financing decisions)

Answer 5

1.) capital budgeting decisions- identifying productive assets the firm should buy
2.) financing decisions - determining how the firm should finance or pay for assets
3.) working capital management- how day-to-day financial matter should be managed to pay bills and invest surplus cash

Question 6

agency conflicts

Answer 6

conflicts of interest between a principal and an agent

Question 7

agency relationship

Answer 7

the relationship between stockholders and management

Question 8

partnership

Answer 8

two or more joined legally to manage business and share its profits

Question 9

sole proprietorship:
agency conflicts/ relationships?

Answer 9

owned by a single person (unlimited liability)

Question 10

corporations
agency conflicts/ relationships?

Answer 10

a legal entity formed and authorized under a state charter, in a legal sense, a corporation is a “person” distinct from its owners

Question 11

LLP (limited liability partnership) and LLC (limited liability company)

Answer 11

LLP and LLC: a legal entity formed and authorized under a state charter; in a legal sense, a corporation is a “person” distinct from its owners

Question 12

goal of the firm

Answer 12

make decisions to maximize the value of firms stock

Question 13

alignment of goals of shareholders to managers

Answer 13

• if the linkage between stockholder and manager goal is weak, a number of mechanisms can help to better align the behavior of managers with the goals of the stockholders. These include…
  1.) board of directors
  2.) management compensation
  3.) managerial labor market
  4.) other managers
  5.) large stockholders
  6.). the takeover market
  7.) the legal and regulatory environment

Question 14

Sarbanes Oxley

Answer 14

• regulations for all public companies…
  - greater board independence
  - internal accounting controls
  - compliance programs
  - ethics programs
  - audit committees oversight powers