introduction to business finance

Question 1

What is finance?

Answer 1

The science and art of managing money

Question 2

What are the two broad categories of careers in finance?

Answer 2

• Financial services
• Managerial finance

Question 3

What does financial services involve?

Answer 3

The design and delivery of advice and financial products to individuals, businesses, and governments

Question 4

What is managerial finance concerned with?

Answer 4

The duties of the financial manager working in a business

Question 5

What is a sole proprietorship?

Answer 5

A business owned by one person who operates it for profit

Question 6

What percentage of all businesses are sole proprietorships?

Answer 6

About 73 percent

Question 7

What is a major drawback of sole proprietorships?

Answer 7

Unlimited liability

Question 8

What defines a partnership?

Answer 8

Two or more owners doing business together for profit

Question 9

What percentage of all businesses are partnerships?

Answer 9

About 7 percent

Question 10

What is a corporation?

Answer 10

An entity created by law with legal powers of an individual

Question 11

What percentage of total business revenues do corporations account for?

Answer 11

Nearly 90 percent

Question 12

What is limited liability?

Answer 12

Stockholders are not personally liable for the firm’s debts

Question 13

What is common stock?

Answer 13

The purest and most basic form of corporate ownership

Question 14

What do stockholders expect to earn from their investment?

Answer 14

• Dividends
• Gains through increases in share price

Question 15

What role does the board of directors play in a corporation?

Answer 15

Approves strategic goals, sets policy, and oversees corporate affairs

Question 16

What is the role of the CEO in a corporation?

Answer 16

Responsible for managing day-to-day operations and implementing board policies

Question 17

What are the other limited liability organizations mentioned?

Answer 17

• Limited partnership (LP)
• S corporation (S corp)
• Limited liability company (LLC)
• Limited liability partnership (LLP)

Question 18

Why study finance?

Answer 18

To understand financial manager activities and their impact on business decisions

Question 19

What are the three key questions every business must answer when starting?

Answer 19

• What long term investments should you take on?
• Where will you get long term financing?
• How will you manage everyday financing activities?

Question 20

What does the financial management function entail?

Answer 20

Managing cash, credit, financial planning, and capital expenditures

Question 21

What is financial planning?

Answer 21

Developing financial projections and plans

Question 22

What is investment project appraisal?

Answer 22

Evaluating investment projects and assessing risks

Question 23

What are financing decisions concerned with?

Answer 23

Identifying financing requirements and evaluating sources of finance

Question 24

What does financial control refer to?

Answer 24

Ensuring that plans are achieved once implemented

Question 25

True or False: The financial manager is typically directly involved in day-to-day decisions.

Answer 25

False

Question 26

What is capital market operations?

Answer 26

The finance function must raise funds from the capital markets and must understand how they work. ## Footnote This involves appreciating how finance can be raised through the markets, how securities are priced, and how markets react to investment and financing plans.

Question 27

What does financial control refer to?

Answer 27

Ways in which the plans are achieved once implemented. ## Footnote Managers ensure that things go according to plan.

Question 28

What are the three basic types of questions a financial manager must be concerned with?

Answer 28

* Capital budgeting * Capital structure * Working capital management

Question 29

What is capital budgeting?

Answer 29

The process of planning and managing a firm's long-term investments. ## Footnote It involves identifying investment opportunities that are worth more to the firm than they cost to acquire.

Question 30

What is the essence of capital budgeting?

Answer 30

Evaluating the size, timing, and risk of future cash flows.

Question 31

What does capital structure refer to?

Answer 31

The specific mixture of long-term debt and equity the firm uses to finance its operations.

Question 32

What are the two main concerns of a financial manager regarding capital structure?

Answer 32

* How much should the firm borrow * What are the least expensive sources of funds

Question 33

How does capital structure affect a firm?

Answer 33

It affects both the risk and value of the firm.

Question 34

What is working capital?

Answer 34

A firm's short-term assets and short-term liabilities.

Question 35

What is the primary focus of working capital management?

Answer 35

Ensuring the firm has sufficient resources to continue operations and avoid costly interruptions.

Question 36

What are some questions regarding working capital management?

Answer 36

* How much cash inventory should we keep on hand? * Should we sell on credit? What terms will we offer? * How will we obtain any needed short-term financing?

Question 37

Fill in the blank: The financial manager must evaluate the size, timing and ______ of future cash flows.

Answer 37

[risk]

Question 38

True or False: Capital structure determines how a firm's cash flow is divided between lenders and shareholders.

Answer 38

True

Question 39

What is the primary role of financial management?

Answer 39

To ensure effective planning, managing, and controlling of financial resources.