Lecture 1

Question 1

What did financial managers do

Answer 1

Invest or pay dividend to shareholders

Question 2

What is characteristic off partnerships and sole proprietorship

Answer 2

No employees q

Question 3

What is the investment decision on

Answer 3

Real assets that are tangible or intangible

Question 4

Real asset

Answer 4

Asset that can generate a return at some point

Question 5

Investment decision

Answer 5

Capital budgeting

Question 6

What is financial decision

Answer 6

Selling of financial asset of a company

Question 7

What is financial asset

Answer 7

Claims for a real asset

Question 8

Corporation

Answer 8

A business organised as a separate legal entity owned by shareholders

Question 9

What is the sum of all ownership value in corporation

Answer 9

Equity

Question 10

How to raise funds for corporation

Answer 10

No limits on shares so company can sell more shares

Question 11

What is a shareholder entitled to

Answer 11

Dividend payments

Question 12

What liability do shareholders have

Answer 12

Limited

Question 13

What is limited liability

Answer 13

Liability,loss that is proportional to to shareholders investment if company goes bust

Question 14

Types of corperations

Answer 14

Private / public

Question 15

Corporation benefits

Answer 15

Limited liability
Infinite lifespan
Ease of raising capital

Question 16

Corporation drawbacks

Answer 16

Double taxation
Agency problems

Question 17

What is double taxation

Answer 17

First company taxed then the person is taxed

Question 18

What is agency problem

Answer 18

Mamnager are agents for shareholders but the managers may act in their own intrest rather than maximising firms value

Question 19

5 step role to financial manager

Answer 19

Raise cash from investors
Invest cash in firm
Cash is generated
Cash is then reinvested or returned to investors

Question 20

Objective of corporate finance

Answer 20

Maximise value of the firm

Question 21

What is narrower objective in corporate finance

Answer 21

Maximise wealth of shareholders

Question 22

What can max profit cause

Answer 22

Ethical problems

Question 23

Stakeholders

Answer 23

Anyone with financial intrest in the firm

Question 24

What information do managers have advantage on

Answer 24

Stock prices and returns
Issues of shares
Dividends
Financing

Question 25

What costs do shareholders incur

Answer 25

Incur costs to monitor the managers and constrain their actions

Question 26

Goal of an annual meeting

Answer 26

Venue for stockholders to vote on managers and management decisions

Question 27

Problem with annual meetings

Answer 27

Power diluted Cost of attendance causes people to miss out Managers have advantage over proxies Large stockholders reluctance to get involved

Question 28

What is goal of board of directors

Answer 28

Represents stock holders and checks on management

Question 29

Problems with board of directors

Answer 29

Directors pay managers well Some directors don’t care CEO often handpicks directors

Question 30

What is the test for independent boards

Answer 30

Calpers test

Question 31

3 rules for calpers test

Answer 31

Are a majority of directors outside directors Is chairman independent of the company Are the compensation and audit committees composed of entirely outsiders

Question 32

What happens when managers do not fear stockholders

Answer 32

Over paid compensations Info fraud Self intrest Takeover defence Overpaying of takeovers