Chapter 1 - Introduction to Financial Management

Question 1

What is finance?

Answer 1

Applies specific value and financial management

Question 2

Finance applies specific value to ____ .

Answer 2

things owned, services used, decisions made

Question 3

Financial management is an organization’s approach to ____ .

Answer 3

valuation

Question 4

Type 1 Participants

Answer 4

do not lend or spend in business context
No direct role in financial markets
Indirect role: to provide labor and consume products

Question 5

Type 4 Participants use financial tools to ______ and _____ and are ______, so no need for financial markets.

Answer 5

evaluate own businesses; choose highest-potential ideas;

self-funded

Question 6

Types 2 and 3 Participants use financial institutions and financial markets for ______ .

Answer 6

mutually beneficial exchange

Question 7

Type 2 Participants make _____ to Type 3.

Answer 7

temporary loans

Question 8

Type 3 Participants typically consist of _______ .

Answer 8

companies engaging in R & D

Question 9

make questions for slide

Answer 9

6

Question 10

Economically successful projects _____ (plus profit) to investors. Friction occurs when not all cash is returned to ____ . Examples are

Answer 10

repay money; investors; retained earnings and taxes

Question 11

Subareas of finance are ____ .

Answer 11

investments; financial management; financial institutions and markets; international finance

Question 12

investments

Answer 12

Involve methods and techniques for making decisions about what kinds of securities to own

Question 13

financial management

Answer 13

decisions about acquiring and using cash

Question 14

Examples of financial management include ____ .

Answer 14

organizing and raising capital
tax decisions
projects to fund

Question 15

Financial institutions and markets ____ .

Answer 15

facilitate flow of capital between investors and companies.

Question 16

International finance is ______ .

Answer 16

finance theory used in global business environment

Question 17

Risk is the _____.

Answer 17

uncertainty of future cash flows due to timing and size

Question 18

Financial asset is the _____.

Answer 18

ownership in cash flow represented by securities like stocks, bonds, and other assets

Question 19

Real assets are _______.

Answer 19

physical property like gold, machinery, equipment, real estate

Question 20

Real markets are _____.

Answer 20

places/processes that facilitate real asset trading

Question 21

Time Value of Money (TVM) is the ______.

Answer 21

theory and application of valuing cash flows at various points in time

Question 22

Finance vs Accounting

Answer 22

Accounting
Tracks what happened to firm’s money in the past

Financial Management
Combines historical figures and current information
Determines what should happen with firm’s money now and in the future

Question 23

Accounting tracks _____ .

Answer 23

what happened to firm’s money in the past

Question 24

Financial management combines _______ and determines _____.

Answer 24

historical figures and current information; what should happen with firm’s money now and in the future

Question 25

The Chief Financial Officer is the _____ level financial officer.

Answer 25

highest level

Question 26

The Controller oversees _____.

Answer 26

accounting function

Question 27

The Treasurer is responsible for managing _____.

Answer 27

cash, credit, financing, capital budgeting, risk management

Question 28

______ are the most visible finance-related positions.

Answer 28

CFO and Treasurer

Question 29

Finance is used throughout and organization. It is used to ______ strategy. It is also used in day-to-day business operations such as ______.

Answer 29

develop and manage; operations, marketing, human resources

Question 30

Finance can be used in a persons personal life to help make good _____ decisions.

Answer 30

financial

Question 31

When organizing a business each type of ownership whether it be a single owner, partners, or corporations have advantages and disadvantages related to:

Answer 31

Controls and ownership of firm Owners’ risks Access to capital and tax ramifications

Question 32

business form types

Answer 32

Sole Proprietorships General Partnerships Corporations Hybrids

Question 33

Sole proprietorships are _____ separate from the owner.

Answer 33

not legally

Question 34

Disadvantages of sole proprietorships are _____.

Answer 34

Unlimited liability | Limited access to capital

Question 35

Advantages of sole proprietorships are _____.

Answer 35

Easy to start Light regulatory and paperwork burden Single taxation at the personal tax rate

Question 36

General partnerships are formed when ______.

Answer 36

partners own the business together

Question 37

Advantages of general partnerships are _____.

Answer 37

Relatively easy to start | Single taxation

Question 38

Disadvantages of a general partnership are ____.

Answer 38

Partners jointly share unlimited liability Personally liable for legal actions and debts of firm Difficult to raise large amounts of capital

Question 39

A public corporation is a legally ______ entity separate from its owners.

Answer 39

independent entity

Question 40

Advantages of forming a public corporation are ____.

Answer 40

Limited liability for owners Can raise large amounts of capital Easy to transfer ownership

Question 41

Disadvantages of forming a public corporation are ____.

Answer 41

Double taxation (corporate level and personal level)

Question 42

Hybrid Organizations are formed ______.

Answer 42

when attributes of several forms are combined.

Question 43

Advantages of forming a hybrid organization are ___.

Answer 43

Offer single taxation and limited liability to all owners S Corporations Limited Liability Partnerships (LLPs) Limited Liability Companies (LLCs)

Question 44

Firm goals are when an owner seeks to maximize shareholder wealth and company’s value through ____.

Answer 44

Maximizing present value of future cash flows Maximizing owners’ equity Decisions about attracting additional funds projects in which to invest returning profits to owners over time

Question 45

Corporate Goals are made with the intent to maximize value of owners’ equity by _____.

Answer 45

increasing the current value per share (stock price) of existing shares

Question 46

Common methods of increasing the current value per share (stock price) of existing shares are _____.

Answer 46

Common methods Maximize net income or profit Minimize costs Maximize market share

Question 47

Agency theory says that problems arise when _____ | Manager’s interest may not be aligned with _____.

Answer 47

principal (shareholder) hires agent (manager) to operate firm but cannot monitor the agent’s actions; shareholder goals

Question 48

Three approaches to minimizing this conflict (Agency Theory) of interest are _____.

Answer 48

``` Ignore if effect is minimal Use accountants, debt holders to monitor managers Provide incentives to managers Equity stakes Stock options Employee Stock Option Plan (ESOP) ```

Question 49

Corporate Governance is a set of ______ designed to handle issues arising from the separation of ownership and control.

Answer 49

laws, policies, incentives, and monitors