Chapter 1

Question 1

What is Financial Management?

Answer 1

Concerns the acquisition, financing, and management of assets with some overall goal in mind.

Primarily focused on raising funds and managing firms’ cash positions.

Question 2

Why is Financial Management increasingly important?

Answer 2

Due to:
* Increased corporate competition
* Rapid technological changes
* Volatility in inflation & interest rates
* Worldwide economic uncertainty
* Fluctuating exchange rates
* Changing tax laws
* Ethical concerns over financial dealings.

Question 3

What are the key reasons to care about Financial Management?

Answer 3

It:
* Prepares for the workplace of tomorrow
* Broadens expectations of financial knowledge and skills
* Helps understand financial terminology
* Develops cross-functional capabilities
* Enhances critical thinking.

Question 4

What are the three important decisions in Financial Management?

Answer 4

They are:
* Investment Decisions (Capital Budgeting)
* Financing Decisions
* Asset Management Decisions.

Question 5

What is the focus of Investment Decisions in Financial Management?

Answer 5

Determines optimal firm size and evaluates expansion through new products or services.

Most important of the three decision functions.

Question 6

What do Financing Decisions determine?

Answer 6

They determine:
* How assets will be financed (short-term/long-term debt, equity)
* The best type and mix of financing
* The best dividend policy
* How funds will be physically acquired.

Question 7

What is the focus of Asset Management Decisions?

Answer 7

Efficiently managing existing assets with greater emphasis on current asset management.

Question 8

What is the primary responsibility of Financial Management staff?

Answer 8

Maximize share (stock) value by:
* Forecasting and planning
* Making investment and financing decisions
* Coordination and control
* Managing transactions in financial markets
* Managing risk.

Question 9

What role does the VP Finance (CFO) play in a business organization?

Answer 9

Oversees the Treasurer and Controller.

Question 10

What are the responsibilities of the Treasurer?

Answer 10

Includes:
* Credit Manager
* Inventory Manager
* Capital Budgeting Director.

Question 11

What are the responsibilities of the Controller?

Answer 11

Includes:
* Cost Accounting
* Financial Accounting
* Tax Department.

Question 12

What financial management issues are relevant in the new millennium?

Answer 12

They include:
* Effect of changing technology
* Globalization of business.

Question 13

What is a Sole Proprietorship?

Answer 13

An unincorporated business owned by one individual.

Question 14

List two advantages of a Sole Proprietorship.

Answer 14

• Ease of formation
• Subject to few regulations.

Question 15

List two disadvantages of a Sole Proprietorship.

Answer 15

• Difficult to raise capital
• Unlimited liability.

Question 16

What is a Partnership?

Answer 16

An unincorporated business owned by two or more persons.

Question 17

What are the advantages of a Partnership?

Answer 17

• Ease of formation
• Subject to few regulations.

Question 18

What are the disadvantages of a Partnership?

Answer 18

• Difficult to raise capital
• Unlimited liability.

Question 19

What is a Corporation?

Answer 19

A legal entity created by a state, separate and distinct from its owners and managers.

Question 20

List three advantages of a Corporation.

Answer 20

• Unlimited life
• Easy transfer of ownership
• Limited liability.

Question 21

What are two disadvantages of a Corporation?

Answer 21

• Double taxation
• Cost of set-up and report filing.

Question 22

What is the primary financial management goal of a corporation?

Answer 22

Shareholder wealth maximization, translating to maximizing share (stock) price.

Question 23

Is stock price maximization the same as profit maximization?

Answer 23

No.

Question 24

What factors affect share (stock) price?

Answer 24

• Projected cash flows to shareholders
• Timing of the cash flow stream
• Riskiness of the cash flows.

Question 25

What affects the level and riskiness of cash flows?

Answer 25

Decisions made by financial managers and the external environment.

Question 26

Define an Agency Relationship.

Answer 26

Exists whenever a principal (owners) hires an agent (managers) to act on their behalf.

Question 27

What conflicts exist between Shareholders and Managers?

Answer 27

Managers may act in their own best interests, conflicting with shareholder wealth maximization.

Question 28

What are mitigating factors for conflicts between Shareholders and Managers?

Answer 28

* Managerial compensation plans * Direct intervention by shareholders * Threat of firing * Threat of takeover.

Question 29

What conflict exists between Shareholders and Creditors?

Answer 29

Shareholders may take actions to maximize share price that are detrimental to creditors.

Question 30

What is Intrinsic Value?

Answer 30

An estimate of a share's (true) value based on accurate risk and return data.

Question 31

What is Market Price?

Answer 31

Based on perceived but possibly incorrect information as seen by the marginal investor.

Question 32

Who is a Marginal Investor?

Answer 32

An investor whose views determine the actual stock price.

Question 33

What is Equilibrium in financial terms?

Answer 33

The situation in which the actual market price equals the intrinsic value.

Question 34

What is Executive Compensation?

Answer 34

Incentives awarded to managers to focus on stock prices, often through stock options.

Question 35

Define Business Ethics.

Answer 35

A company's attitude and conduct toward its employees, customers, community, and stockholders.

Question 36

What are important business trends affecting financial management?

Answer 36

* Changes in business practices * Increase in globalization of business * Effect of improving information technology.

Question 37

What is Corporate Governance?

Answer 37

The way the top managers operate and interface with stockholders.