Chapter 1

Question 1

Stakeholder

Answer 1

anyone other than an owner (stockholder) with a claim on the cash flows of a firm, including employees, suppliers, creditors, and the government

Question 2

A shareholder or stockholders.

Answer 2

owns part of a public company through shares of stock,

Question 3

productive assets

Answer 3

the long-term tangible, like equipment, machinery. and long- term intangible assets, like patents trademarks, technical expertise, a firm uses to generate cash flows.

Question 4

capital budgeting decision

Answer 4

A firm’s capital budget is simply a list of the productive (capital) assets that management wants to purchase over a budget cycle, typically one year

Question 5

working capital management decisions

Answer 5

Management must also decide how to manage the firm’s current assets, such as cash, inventory, and accounts receivable, as well as its current liabilities, such as trade credit and accounts payable.

Question 6

current assets

Answer 6

assets that will be converted into cash within one year.Ex: cash, inventory, and account receivable.

Question 7

current liabilities

Answer 7

liabilities are liabilities that must be paid within one year. EX: short-term debt and account payable.

Question 8

residual cash flows

Answer 8

the cash remaining after a firm has paid operating expenses and what it owes creditors and in taxes; can be distributed to the owners as a cash dividend or by repurchasing some shares, or reinvested in the business

Question 9

net working capital

Answer 9

the dollar difference between total current assets and total current liabilities. ( the difference between current assets and current liabilities).

Question 10

capital structure

Answer 10

the mix of debt and equity that is used to finance a firm.

Question 11

capital markets

Answer 11

financial markets where equity and debt instrument with maturities than one year are traded

Question 12

Sole Proprietorship

Answer 12

is a business that is owned by a single person. Its life is limited to the period that the owner (proprietor) is associated with the business because there is no ownership interest that can be transferred to someone else—there is no stock or other such interest that can be sold. A sole proprietorship ceases to exist when the proprietor stops being involved with the business. Many small businesses in the United States are organized this way.

Question 13

partnership

Answer 13

A partnership consists of two or more owners who have joined together legally to manage a business. To form a partnership, the owners (partners) enter into an agreement that details how much capital each partner will invest in the partnership, what their management roles will be, how key management decisions will be made, how the profits will be divided, and how ownership will be transferred in case of specified events, such as the retirement or death of a partner. A general partnership is a partnership in which all of the partners are owners of (investors in) the business and active in managing it

Question 14

corporation

Answer 14

Most large businesses are organized as corporations. A corporation is a legal entity authorized under a state charter. In a legal sense, it is a “person” distinct from its owners

Question 15

public market

Answer 15

such as the New York Stock Exchange (NYSE) and NASDAQ, are regulated by the Securities and Exchange Commission (SEC).3

Question 16

privately held, or closely held, corporations

Answer 16

are typically owned by a small number of investors, and their shares are not traded publicly

Question 17

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

Answer 17

hybrid business organizations that combine some of the advantages of corporations and partnerships; in general, income to the partners is taxed only as personal income, but the partners have limited liability

Question 18

The treasurer

Answer 18

The treasurer looks after the collection and disbursement of cash, investing excess cash so that it earns interest, raising new capital, handling foreign exchange transactions, and overseeing the firm’s pension fund managers. The treasurer also assists the CFO in handling important Wall Street relationships,

Question 19

The risk manager

Answer 19

The risk manager monitors and manages the firm’s risk exposure in financial and commodity markets and the firm’s relationships with insurance providers.

Question 20

The controller

Answer 20

The controller is really the firm’s chief accounting officer. The controller’s staff prepares the financial statements, maintains the firm’s financial and cost accounting systems, prepares the taxes, and works closely with the firm’s external auditors.

Question 21

The internal auditor

Answer 21

The internal auditor is responsible for identifying and assessing major risks facing the firm and performing audits in areas where the firm might incur substantial losses. The internal auditor reports to the board of directors as well as the CFO.

Question 22

Agency conflict

Answer 22

the sum of the fair market values of the individual assets in a business

Question 23

Agency Costs

Answer 23

the costs arising from conflicts of interest between a principal and an agent— for example, between a firm’s owners and its managers. Ex: jet for executives.

Question 24

Board of Directors

Answer 24

A corporation’s board of directors has a legal responsibility to represent stockholders’ interests. The board’s duties include hiring and firing the CEO, setting his or her compensation, and monitoring his or her performance. The board also approves major decisions concerning the firm, such as the firm’s annual capital budget or the acquisition of another business.

Question 25

Management Compensation

Answer 25

The most effective means of aligning the interests of managers with those of stockholders is a well-designed compensation (pay) package that rewards managers when they do what stockholders want them to do and penalizes them when they do not.

Question 26

Sarbanes-Oxley and Other Regulatory Reforms

Answer 26

which focuses on (1) reducing agency costs in corporations, (2) restoring ethical conduct within the business sector, and (3) improving the integrity of the accounting reporting system within firms. 1. Ensure greater board independence Establish internal accounting controls 3. Establish compliance programs 4. Establish an ethics program. 5. Expand the audit committee's oversight powers. it was passed by congress in 2002

Question 27

Managerial Labor Market

Answer 27

The managerial labor market also provides managers with incentives to act in the interests of stockholders. Firms that have a history of poor performance or a reputation for “shady operations” or unethical behavior have difficulty hiring top managerial talent. Individuals who are top performers have better alternatives than to work for such firms. Therefore, to the extent that managers want to attract high-quality people, the labor market provides incentives to run a good company.

Question 28

Other Managers

Answer 28

Competition among managers within firms also helps provide incentives for each manager to act in the interests of stockholders.Managers compete to attain the CEO position and in doing so try to attract the board of directors' attention by acting in the stockholders' interests.

Question 29

Larg Stockholders

Answer 29

All stockholders have an interest in providing managers with incentives to maximize stockholder value. However, as we noted earlier, most stockholders in large corporations own too few shares to make it worthwhile for them to actively monitor managers

Question 30

The Takeover Market

Answer 30

The market for takeovers provides incentives for managers to act in the interests of stockholders. When a firm performs poorly because its current managers are doing a poor job, an opportunity arises for astute investors, so-called corporate raiders, to make money by buying the company at a price that reflects its poor performance and replacing the current managers with a top-flight management team. If the investors have evaluated the situation correctly, the firm will soon be transformed into a strong performer, its stock price will increase, and investors can sell their stock for a significant profit.

Question 31

The Legal and Regulatory Environment

Answer 31

the laws and regulations that firms must adhere to limit the ability of managers to make decisions that harm the interests of stockholders. An example is federal and state statutes that make it illegal for managers to steal corporate assets.

Question 32

Business Ethics

Answer 32

The term ethics describes a society's ideas about what actions are right and wrong. Ethical values are not moral absolutes, and they can and do vary across societies.

Question 33

Information asymmetry

Answer 33

the situation in which one party in a business transaction has information that is unavailable to the other parties in the transaction