Chapter 1 - Book

Question 1

Primary goal of financial management decision making

Answer 1

Maximization of shareholder wealth as measured by the price of the firm’s stock

Question 2

What has an important effect on the firm’s performance?

Answer 2

Agency relationships such as relationship with stockholders and managers and the relationship between owners and lenders give rise to certain agency problems and costs that will have an important effect on the firm’s performance.

Question 3

What are the amount, timing, and risk of cash flow generated by a firm determined by?

Answer 3

They are determined by key financial management decisions including investment decisions, dividends, financing, and ownership structure decisions.

Question 4

What are the three primary forms of business organizations

Answer 4

• sole proprietorship.
• -partnership - both limited and general
• corporation

Question 5

______ have certain advantages over the other 2 forms of business organization especially for large businesses.

Answer 5

Corporation

Question 6

Define corporation.

Answer 6

A legal person composed one or more actually individuals or legal entities.

Question 7

The owners of a corporations are called _________

Answer 7

Stockholders or shareholders

Question 8

The stockholders elect a ___________ that deals with broad policy matters, where as the day-to-day operations are supervised by the corporate officers

Answer 8

Boards of directors

Question 9

Corporations issue ________ to investors who lend money to the corporation and _______ to investors who become owners

Answer 9

• debt security

- equity securities

Question 10

The optimal form of an organization for business enterprise is influenced by _________

Answer 10

By factors such as

• cost
• complexity
• owner liability
• business continuity
• need for rising capital
• owners desire to maintain decision making authority.
• tax considerations

Question 11

The finance function is usually headed by a _______

Answer 11

Vice President or chief financial officer (cfo)

Question 12

The financial management responsibilities are often divided between ______

Answer 12

The controller and the treasurer

Question 13

The controller has the responsibility for all

Answer 13

Accounting related activities

Question 14

The treasurer is concerned with

Answer 14

The acquisition , custody, and expenditure of funds

Question 15

Financial management is closely related to ________

Answer 15

Other areas of business decision making, particular accounting and economics

Question 16

The finance profession offers a number of career opportunities _______

Answer 16

Both within the corporate finance function and the financial service sector

Question 17

Important equation

Answer 17

Shareholder wealth = number of shares outstanding x market price per share

Question 18

Shareholder wealth

Answer 18

Defined as the present value of the expected future returns to the owners of the firm. It is measured by the market value of the shareholders’ common stock holdings.

Question 19

Corporation major benefit for individuals is limited ______ and ______

Answer 19

Liability and abilities to raise large amount of capital

Question 20

Present value

Answer 20

Defined as the value today of some future payment or stream of payments evaluated at an appropriate discount rate

Question 21

Discount rate

Answer 21

Takes into account the returns that are available from alternative investment opportunities during a specific (future) time period.

Question 22

Risk

Answer 22

The greater the risk with associated with receiving future benefit, the lower the value investors place on the benefit

Question 23

Stock prices

Answer 23

The measures of shareholder wealth

Question 24

Market value

Answer 24

The price at which the stock trades in the marketplace, such as the New York stock exchange

Question 25

Stakeholders

Answer 25

Include customers, employees, suppliers, and the communities in which they operate - and not just the interest of stockholders.

Question 26

Agency relationships

Answer 26

Occur when one or more individuals (the principals) hire another individual (the agent) to perform a service on behalf of the principles

Question 27

Agency cost

Answer 27

Are incurred by shareholders to immunize agency problems

Question 28

Exercise price

Answer 28

Stock options granted by mangers entitle them to buy shares of the company at a particular price which is called exercise price

Question 29

Profit

Answer 29

Earning or income

Question 30

Book value

Answer 30

Reflects the historic cost of assets, not the earning capacity of those assets. Also, the book value does not consider the risk associated with the assets

Question 31

Cash flow

Answer 31

Relates to the actual cash generated or paid by the firm

Question 32

Partnership

Answer 32

Is a business organization in which two or more co-owners form a business normally with the intention to make a profit

Question 33

General partnership

Answer 33

Each partner has unlimited liability for all of the obligations of the business

Question 34

____% of all partnership in the us are general partnerships

Answer 34

23

Question 35

Limited partnership

Answer 35

Usually involves one or more general partnership and one or more limited partners. Although the limited partners may limit their liability, the extent of the liability can vary and is set forth in the partnership agreement

Question 36

The corporate form or business organizations has 4 major advtanges over sole proprietorship and partnerships

Answer 36

- limited liability - Permanency - flexibility - ability to raise capital