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Flashcards in Chapter 1 Deck (19):
1

What is Finance?
(Academic Definition)

A subset of Microeconomics

About the management of Money, not numbers.

2

"Economics"

The study of how people use scarce resources to produce, distribute, and consume goods and services.

It's about the allocation of scarce resources for a whole population (macro) or at the individual or organization level (micro).

3

"Finance"

Management of money invested in any asset expected to produce at least a fair return for the asset's Owners.

4

"Accounting"

Focuses on the timely and accurate recording and reporting of activities/transactions which have a financial impact. It's about producing reports according to GAAP, measures historical, book values.

5

"Finance"

Focuses on investing activities, the estimated or actual market value of assets, future cash flows, and producing a fair rate of return on investment for risks taken/assumed.

Finance depends on good Accounting for information.

6

What is Finance?
(Functional Definition)

About the principles of Investing.

7

"Business Finance"

Management of Money invested in business assets expected to produce at least a fair return for the Owners.

Business Fin. = Corporate Fin.

8

Jobs and Careers in Finance

Corporate Finance
Commercial Banking
Investment Banking
Money Management
Insurance
Research/Education/Consulting
Government Finance
(more detailed info on slide 17)

9

Primary Goal of Business Finance?

Management should work to "maximize the Intrinsic value per share of the existing common stock".

10

All of these are identifying elements of business finance/financial management except
A) A synonymous term to corporate finance
B) Accounts for future appreciation of a business assets’ value and/or cash flows
C) Focuses on decisions relating to how much and what type of assets to acquire
D) Provides a heavy influence of speculation when generating revenues
E) Can be applicable to both profit and non-for-profit companies

D) Provides a heavy influence of speculation when generating revenues

11

A primary financial goal of managers in a publicly owned company is assumed to be
A) To maximize the long-run value of the firm’s common stock
B) Increase the social responsibility of the company
C) To maximize shareholder wealth
D) b+c
E) a+c

E) a+c

12

Which of the following best describes a situation at equilibrium
A) A situation where the actual market price is equal to the intrinsic value
B) Easily determined since intrinsic values always perfectly reflect stock prices
C) Where the stock price is undervalued
D) Is distorted when executive compensation is overly inflated
E) None of the Above

A) A situation where the actual market price is equal to the intrinsic value

13

The Sarbanes-Oxley Act of 2002:
A) Setup the Securities Exchange Commission to regulate stock trading
B) Mandates social responsibility in organizations
C) Requires the CEO and CFO to certify that their firm’s financial
statements are accurate
D) Mandates that companies adhere to security analysis and portfolio theory in
accordance to sound corporate finance principles
E) None of the Above

C) Requires the CEO and CFO to certify that their firm’s financial
statements are accurate

14

Bondholders and other lenders:
A) Applaud the use of a company’s use of additional debt for the possible generation
of greater profits
B) Almost always in alignment with shareholders in regards to the decision-making of managers
C) Will almost always discourage additional debt from the company even
though the debt might generate future profits for the company
D) Receive floating payments that vary with the performance of the company
E) All of the above

C) Will almost always discourage additional debt from the company even
though the debt might generate future profits for the company

15

Which of the following best describes investing, and not speculating?
A) The probability of a fair, just and reasonable return is between 25 and 50%
B) The probability of a fair, just and reasonable return is between 0 and 50%
C) The probability of a fair, just and reasonable return is between 50 and 100%
D) The probability of a fair, just and reasonable return is 100%
E) All of the above are investing

C) The probability of a fair, just and reasonable return is between 50 and 100%

16

Which of the following is not a potential career in finance?
A) Investment Banking
B) Auditing
C) Money Management
D) Corporate Finance
E) Insurance

B) Auditing

17

Which of the following usually refer(s) to a legal corporation?
A) “S” Corporation
B) Partnership
C) Limited Liability Corporation (LLC)
D) Sole Proprietorship
E) A and C

E) A and C

18

What is the primary goal of business finance?
A) Maximizing Profit
B) Staying in business as long as possible
C) Maximizing intrinsic value per bond
D) Maximizing shareholder wealth
E) Maximizing creditor wealth

D) Maximizing shareholder wealth

19

The main conflict between managers and stockholders is referred to as:
A) Stockholder Problem
B) Manager Problem
C) Agency Problem
D) Debtor Problem
E) Business Problem

C) Agency Problem