Week 1 - Introduction

Question 1

Identify who the financial manager is in the context of the course

Answer 1

CFO, Treasuer who work on aspects like capital expenditures, cash manager, credit manager

Question 2

Describe the 3 main questions that concern a financial manager

Answer 2

1. What long-term investments should the firm take on?
2. Where will we get long term financing to pay for these investments?/
3. How will we manage the everyday financial activities of the firm?

Question 3

Primary goal of the financial manager

Answer 3

to max value!
–> max shareholder value or owners equity/max share price or firm value

why? addressses cash flow, growth, timing of cash flows and risk of cash flows

Question 4

Sole Propritetorship

Answer 4

pros: easy, no regulations, owner keeps all profits
cons: limit to life of owner, difficult to sell

Question 5

Partnership

Answer 5

business owned by two or more co owners
pros: easy, more human and financial capital and taxed as personal income
cons: dissolves when one partner dies or sells, difficult to transfer ownership

general partner = TOTAL liability
limited partner = less liability

Question 6

Corporation

Answer 6

business created as a distinct legal entity owned by one or more individuals or entities
pros: unlimited life, easy to transfer ownership, limited liability, sometimes easier to raise capital
cons: harder to start and maintain, double taxation (its own taxes, dividends, personal income),
seperation of ownership and management

Question 7

Note on Double Taxation

Answer 7

• divident tax credits in Canada tend to largely offset this impact of double taxation
• small businesses can often achieve lower tax

Question 8

Seperation of Ownership and Management

logic behind selling stockks

Answer 8

pros: anyone can be an owner without managing the company
–> easier for firms to raise capital and investors can hold diverisfied portfolios
cons: owners are not present so conflict of interest is possible

Question 9

The Agency Relationship

Answer 9

principal hires an agent to represent their interests
eg: mortgage borrower (principal) and mortgage agent (agent)

Question 10

The Agency Problem

Answer 10

exists because of conflict of interest
eg: mortgage agent promotes an inferior product becuase they will make more money selling that product

Question 11

Agency Costs

direct

Answer 11

direct: expenditures that benefit managers but hurt shareholders or expenditures to monitor employees
eg: nepo hiring or hiring auditors to make sure funds are not being stolen

Question 12

Agency Costs

indirect

Answer 12

indirect costs: forgone opportunity that hurts shareholders but benefits managers/agents of the firm
eg: manager neglects telling her boss that her division be shut down because she likes her employees

Question 13

Addressing the agency problem

Answer 13

• BoD
• monitoring
• auditors, mystery shoppers, cameras
• very costly (direct cost)
• managerial compensation (xtra amount if designed to overcome the agency problem)
• corporate control (threat of takeover may result in better management) –> AFFECTS equity markets

Question 14

Describe the basic ways in which firms interact with financial markets and institutions

Answer 14

Raising Capital – Issuing stocks (equity financing) or bonds (debt financing) to raise funds.
Investing – Using financial markets to invest excess cash in short-term or long-term securities.
Managing Risk – Hedging risks through derivatives, insurance, or other financial instruments.
Banking Services – Using banks for loans, credit, and transaction services.
Mergers & Acquisitions – Engaging in financial markets for acquisitions, mergers, or restructuring.