Chapter 1 Flashcards
What are the three concepts discussed in corporate finance?
1) Long term investments
2) Acquiring financing to pay for investments or bringing on owners
3) Managing everyday financial activities
List the three types of questions a financial manager is concerned with.
1) Capital budgeting
2) Capital structure
3) Working capital management
Define capital budgeting.
The process of planning and managing a firm’s long-term investments.
A firm’s _____________ ____________ is the specific mixture of long-term debt and equity the firm uses to finance its operations.
capital structure
T or F: Working capital focuses on short-term assets and liabilities.
True
This is the simplest type of business to start and is owned by one person.
sole proprietorship
What is the downside to a sole proprietorship?
The owner has unlimited liability to business debts and debtors can go after the proprietor’s personal assets to absolve debts.
T or F: You can easily transfer ownership of a sole proprietorship.
False, it can be difficult since it requires the sale of the entire business.
How do partnerships and sole proprietorships differ?
Partnerships involve two or more owners and they all share in gains/losses and own liability for debt of the business.
This tool is used to determine how a partnership’s gains and losses are divided.
partnership agreement
Briefly describe the difference between a general and limited parternship.
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.
T or F: A general partnership can be terminated when any partners wishes to sell out or dies.
True
T or F: If a limited partner becomes too involved in a business, they can be deemed a general partner.
True
A _______________ is a legal “person”, separate and distinct from its owners.
corporation
List some things a corporation can do.
- Borrow money
- Own property
- Sue or be sued
- Enter into contracts
- Enter into a general or limited partnership
- Own stock in another corp
What is required to form a corporation?
Articles of incorporation ( or a charter) and a set of bylaws.
List what is included in the articles of incorporation.
- Name of corp
- Intended life of corp
- Number of shares to be issued
Stockholders elect the __________ ___ ___________ who then select the managers in a corporation.
board of directors
What is the role of a manager within a corporation?
Run the corporation’s affairs in the stockholder’s interest.
T or F: Stockholders do not control the corporation.
False, they do because they elect the directors.
What is the role of a treasurer?
Oversee cash and credit management, capital expenditures, and financial planning.
What is the role of the controller?
Oversee taxes, cost and financial accounting, and data processing.
What is the goal of financial management?
Maximize the current market value of the company’s stock.
What was the intent behind the Sarbanes-Oxley Act of 2002?
To strengthen protection against accounting fraud and financial malpractice.
The relationship between stockholders and management is called an ___________ _______________.
agency relationship
The principle ________ another, the _______, to represent their interests in an agency relationship.
hires
agent
What is the term for when a conflict of interest happens between the principal and the agent?
agency problem
What are some common incentives that managers have to act in the interest of their stockholders?
- Compensation to increase share value
- Better job prospects (i.e. promotions and more competitive salaries)
Sometimes managers are given the option to buy stock at a bargain price, called _____________ __________ ________.
restricted stock units (RSUs)
One major advantage of ___________ is that ownership can be transferred quickly and easily.
corporations
What is a primary market?
The original sale of securities by governments and corporations
A secondary market involves the purchase/sale of securities _________ the original sale.
after
List the two types of primary market transactions.
Public offerings
Private placements
Why are secondary markets vital to large corporations?
Investors are more willing to purchase shares if there is a possibility of it to be resold in the future.
What are over-the-counter (OTC) markets?
Dealer markets in stocks and long-term debt. Most trading takes place OTC and happens electronically.
What are auction markets?
When stocks are bought and shared in a physical location and most of the buying/selling is done by the dealer.
By law, public offerings of debt and equity must be registered with the ___________.
SEC
What is the difference between dealer markets and auction markets?
Dealers buy and sell themselves whereas auction markets are meant to match buyers and sellers. Auction markets also have a physical location.
Equity shares of most of the large firms in the US trade in organized ___________ markets.
auction
List some of the larger organized auction markets.
NYSE (New York Stock Exchange)
NASDAQ
Tokyo Stock Exchange and London Stock Exchange are large foreign auction markets.
Stocks that trade on an organized exchange are said to be __________ on that exchange.
listed
T or F: To be listed on an organized auction market, you must meet minimum criteria.
True, this includes asset size and number of shareholders, for example.
