Chapter 1

Question 1

What are the three concepts discussed in corporate finance?

Answer 1

1) Long term investments

2) Acquiring financing to pay for investments or bringing on owners

3) Managing everyday financial activities

Question 2

List the three types of questions a financial manager is concerned with.

Answer 2

1) Capital budgeting

2) Capital structure

3) Working capital management

Question 3

Define capital budgeting.

Answer 3

The process of planning and managing a firm’s long-term investments.

Question 4

A firm’s _____________ ____________ is the specific mixture of long-term debt and equity the firm uses to finance its operations.

Answer 4

capital structure

Question 5

T or F: Working capital focuses on short-term assets and liabilities.

Answer 5

True

Question 6

This is the simplest type of business to start and is owned by one person.

Answer 6

sole proprietorship

Question 7

What is the downside to a sole proprietorship?

Answer 7

The owner has unlimited liability to business debts and debtors can go after the proprietor’s personal assets to absolve debts.

Question 8

T or F: You can easily transfer ownership of a sole proprietorship.

Answer 8

False, it can be difficult since it requires the sale of the entire business.

Question 9

How do partnerships and sole proprietorships differ?

Answer 9

Partnerships involve two or more owners and they all share in gains/losses and own liability for debt of the business.

Question 10

This tool is used to determine how a partnership’s gains and losses are divided.

Answer 10

partnership agreement

Question 11

Briefly describe the difference between a general and limited parternship.

Answer 11

In a general partnership, all parties participate in the business and liability is shared amongst the partners.

Limited means one or more general partners run the business while others do not participate.

Question 12

T or F: A general partnership can be terminated when any partners wishes to sell out or dies.

Answer 12

True

Question 13

T or F: If a limited partner becomes too involved in a business, they can be deemed a general partner.

Answer 13

True

Question 14

A _______________ is a legal “person”, separate and distinct from its owners.

Answer 14

corporation

Question 15

List some things a corporation can do.

Answer 15

• Borrow money
• Own property
• Sue or be sued
• Enter into contracts
• Enter into a general or limited partnership
• Own stock in another corp

Question 16

What is required to form a corporation?

Answer 16

Articles of incorporation ( or a charter) and a set of bylaws.

Question 17

List what is included in the articles of incorporation.

Answer 17

• Name of corp
• Intended life of corp
• Number of shares to be issued

Question 18

Stockholders elect the __________ ___ ___________ who then select the managers in a corporation.

Answer 18

board of directors

Question 19

What is the role of a manager within a corporation?

Answer 19

Run the corporation’s affairs in the stockholder’s interest.

Question 20

T or F: Stockholders do not control the corporation.

Answer 20

False, they do because they elect the directors.

Question 21

What is the role of a treasurer?

Answer 21

Oversee cash and credit management, capital expenditures, and financial planning.

Question 22

What is the role of the controller?

Answer 22

Oversee taxes, cost and financial accounting, and data processing.

Question 23

What is the goal of financial management?

Answer 23

Maximize the current market value of the company’s stock.

Question 24

What was the intent behind the Sarbanes-Oxley Act of 2002?

Answer 24

To strengthen protection against accounting fraud and financial malpractice.

Question 25

The relationship between stockholders and management is called an ___________ _______________.

Answer 25

agency relationship

Question 26

The principle ________ another, the _______, to represent their interests in an agency relationship.

Answer 26

hires

agent

Question 27

What is the term for when a conflict of interest happens between the principal and the agent?

Answer 27

agency problem

Question 28

What are some common incentives that managers have to act in the interest of their stockholders?

Answer 28

• Compensation to increase share value
• Better job prospects (i.e. promotions and more competitive salaries)

Question 29

Sometimes managers are given the option to buy stock at a bargain price, called _____________ __________ ________.

Answer 29

restricted stock units (RSUs)

Question 30

One major advantage of ___________ is that ownership can be transferred quickly and easily.

Answer 30

corporations

Question 31

What is a primary market?

Answer 31

The original sale of securities by governments and corporations

Question 32

A secondary market involves the purchase/sale of securities _________ the original sale.

Answer 32

after

Question 33

List the two types of primary market transactions.

Answer 33

Public offerings

Private placements

Question 34

Why are secondary markets vital to large corporations?

Answer 34

Investors are more willing to purchase shares if there is a possibility of it to be resold in the future.

Question 35

What are over-the-counter (OTC) markets?

Answer 35

Dealer markets in stocks and long-term debt. Most trading takes place OTC and happens electronically.

Question 36

What are auction markets?

Answer 36

When stocks are bought and shared in a physical location and most of the buying/selling is done by the dealer.

Question 37

By law, public offerings of debt and equity must be registered with the ___________.

Answer 37

SEC

Question 38

What is the difference between dealer markets and auction markets?

Answer 38

Dealers buy and sell themselves whereas auction markets are meant to match buyers and sellers. Auction markets also have a physical location.

Question 39

Equity shares of most of the large firms in the US trade in organized ___________ markets.

Answer 39

auction

Question 40

List some of the larger organized auction markets.

Answer 40

NYSE (New York Stock Exchange)

NASDAQ

Tokyo Stock Exchange and London Stock Exchange are large foreign auction markets.

Question 41

Stocks that trade on an organized exchange are said to be __________ on that exchange.

Answer 41

listed

Question 42

T or F: To be listed on an organized auction market, you must meet minimum criteria.

Answer 42

True, this includes asset size and number of shareholders, for example.