Chapter 1

Question 1

What are the 3 types of organizations

Answer 1

1- Sole Proprietorship
2- Partnership
3- Corporations

Question 2

What do shareholders want management to do?

Answer 2

Maximize the value of shares = wealth of shareholders

Question 3

How can shareholders force managers to pursue the objective of maximizing the shareholders’ wealth
(3 ways)

Answer 3

Compensation plans
Board of directors
Takeovers

Question 4

What are 4 things about sole proprietorship?

Answer 4

1. Sole ownership of business
2. No partners, no shareholders
3. Unlimited liability
4. Owners and business pay taxes not separately

Question 5

What are the 3 things about a partnership?

Answer 5

1. Two or more owners
2. Unlimited liability
3. Owners and business pay taxes not separately

Question 6

What are 4 things about corporations?

Answer 6

1. Owned by shareholders
2. Shareholders have limited liability
3. Often separation of ownership and management
4. Owners and business pay taxes separately

Question 7

What is the agency problem?

Answer 7

Shareholders & managers’ interest not always aligned

Managers will not necessarily maximize shareholder wealth

Question 8

What is the role of a financial manager?

Answer 8

Stand between the firm’s real assets and financial markets

i.e., perform data analysis and advise senior managers on profit-maximizing ideas