chapter 1

Question 1

learn to think like a financial manager (3):

Answer 1

What questions do they have to ask?
What decisions do they have to make?
How do they make those decisions?

Question 2

3 major questions we consider as financial managers

Answer 2

What long-term investments should the firm take on?
Where will we get the long-term financing to pay for these investments?
How will we manage the everyday financial activities of the
firm?

Question 3

What long-term investments should the firm take on? what does this question mean?

Answer 3

what Opportunities that add value to the asset side of the balance sheet

capital budgeting question

Question 4

another name for this question: Where will we get the long-term financing to pay for these investments?

Answer 4

Capital structure question

debt and equity in liabilites side of B/S

Question 5

another name for this question: How will we manage the everyday financial activities of the firm?

Answer 5

Working capital management question

current assets and current liabilites on B/S

Question 6

goal of a financial manager

Answer 6

maximizing VALUE

Question 7

other ways to express goals of financial management

Answer 7

Max shareholders value / owners equity
max share price
max firm value

Question 8

common shares is ___ financing

Answer 8

external

Question 9

retained earnings is ___ financing

Answer 9

internal

Question 10

3 major forms of business in canada

Answer 10

sole proprietorship
partnership
corp

Question 11

sole proprietorship

Answer 11

business owned by a single individual

Question 12

partnership

Answer 12

business formed by two or more co-owners

Question 13

corporation

Answer 13

Business created as a distinct legal entity
owned by one or more individuals or entities

Question 14

double taxation for corporations does not mean …

Answer 14

double tax

Question 15

agency relationship

Answer 15

Principal hires an agent to represent their interests

Question 16

example of agency

Answer 16

Stockholders (principals) hire managers (agents) to run the company

Question 17

agency problem

Answer 17

Conflicts of interest can exist between the principal and the agent

Question 18

agency costs

Answer 18

only comes up if theres an agency problem

Question 19

direct agency costs example

Answer 19

Hiring family member and paying them more than should that is bad for firm

Question 20

indirect agency costs example

Answer 20

opportunity cost

Question 21

monitoring managers subjects (3)

Answer 21

monitoring, managerial compensation, corporate control

Question 22

monitoring

Answer 22

costly and considered an agency cost

Question 23

managerial compensation

Answer 23

not automatically agency cost
Incentives used to align management and stockholder interests
incentives generally

Question 24

corporate control

Answer 24

The threat of a takeover may result in better management

Question 25

What is the role of financial markets in corporate finance (3)

Answer 25

Cash flows to and from the firm Money vs. capital markets Primary vs. secondary markets

Question 26

money markets

Answer 26

borrowing and lending money in short-term securities (less than 1 year)

Question 27

money market examples

Answer 27

Treasury Bills, commercial paper

Question 28

two types of captial markets

Answer 28

bond and stock markets

Question 29

bond capital markets

Answer 29

Long-term borrowing and lending (over 1 yr)

Question 30

example of bond capital markets

Answer 30

long term bonds

Question 31

stock capital market

Answer 31

Selling shares and raising capital to invest in assets Long-term equity financing

Question 32

example of stock market

Answer 32

common shares

Question 33

financial institutions

Answer 33

act as intermediaries between suppliers and users of funds

Question 34

institutions earn income on services provided (2)

Answer 34

Earn interest on the spread between loans and deposits Service fees

Question 35

2 financial markets

Answer 35

indirect and direct finance

Question 36

indirect finance

Answer 36

accessing money/capital from a financial intermediary (i.e. chartered bank)

Question 37

direct finance

Answer 37

Raising money/capital directly from the Money or Capital markets

Question 38

primary market

Answer 38

where a firm issues new bonds or shares to raise new funds

Question 39

secondary market

Answer 39

where investors buy and sell (trade) outstanding bonds or shares