chapter 1

Question 1

what are the 3 types of firms?

Answer 1

sole proprietorship
partner ship
corporation

Question 2

what is a sole proprietorship?

Answer 2

a business that is owned by one individual, but is not established as a separate legal entity

Question 3

who is responsible for the debts of a sole proprietor ship?

Answer 3

the owner is personally liable for the debts of the business

Question 4

what is a partnership?

Answer 4

it is like a sole proprietor ship but has more than one owner

Question 5

who is responsible for the debts of a partnership?

Answer 5

the owners of a partnership are liable for the debts of the business

Question 6

what is a corporation?

Answer 6

a corporation is established under the law as a separate legal entity

Question 7

are the owners responsible for a corporations debts?

Answer 7

the owners (shareholders) are not liable for the debt obligation of the corporation

Question 8

what are the 4 major ways in which the corporation differs from the partnership or sole proprietorship?

Answer 8

1) the corporation treats the taxations of the business separately from that of the owner

2) the corporation provides its owners with limited liability

3) the longevity of the corporation is independent of the lifespan of its owners

4) the corporation is generally better suited for raising large amounts of funds for investment in capital assets

Question 9

in a corporation are the ownership and control separate?

Answer 9

yes

Question 10

how is control appointed in a corporation?

Answer 10

the shareholders elect a board of directors who oversee the firms managers

Question 11

what determines how many votes you get to decide the board of directors?

Answer 11

how many shares of ownership you have in the company

Question 12

what are the three main tasks of financial managers?

Answer 12

making investment decisions (how they use their money)

making financing decisions (where their money comes from)

managing the firms cash flow

Question 13

what is the main reason why financial managers make the decisions they do?

Answer 13

shareholder wealth maximization

Question 14

what can cause a conflict with the goal of shareholder wealth maximization?

Answer 14

employees, customers, suppliers and society at large

Question 15

what are the 4 things that can come at at the expense of prioritizing short term gains through shareholder maximization?

Answer 15

employee satisfaction
product quality or customer service
the environment
long term company survival

Question 16

what is a problem that can come from the separation of ownership and control within a company?

Answer 16

managers may choose to act in their own self-interest rather in the best interest of the share holder

Question 17

what is the principal-agent problem?

Answer 17

the problems that may arise from the separation from ownership and control within a company

Question 18

what is an example of problems rising from ownership and control being separate in a corporation?

Answer 18

managers may fly private jets instead of commercial airlines, making the owners upset

Question 19

what is corporate bankruptcy?

Answer 19

when a debtor (the borrower) may take actions that are not in the creditors (lender) best interest and the creditor may have difficulty in monitoring the debtors actions

Question 20

what might a debtor do when facing bankruptcy?

Answer 20

the debtor might take risks and gambles in order to get all of the money back that they owe they creditor

Question 21

what is a stock market?

Answer 21

where the organized markets where shares of public companies are traded

Question 22

what do stock markets determine for stocks?

Answer 22

the markets determine a market price for the company’s shares and also provide investors with liquidity

Question 23

what makes an investment liquid?

Answer 23

how easily it is to sell it quickly and easily for the same price at which you could buy it

Question 24

when a corporation first sells new shares of stock to investors, what market does this transaction take place?

Answer 24

the primary market

Question 25

where does most trading of shares occur?

Answer 25

the secondary market

Question 26

what is the secondary market?

Answer 26

where investors buy and sell shares between themselves and does not bring any money to the corporations

Question 27

what is the bid price?

Answer 27

the highest price being quoted to buy a stock

Question 28

what is the ask price?

Answer 28

the lowest price being quoted to sell a stock

Question 29

what is the bid-ask spread?

Answer 29

when the bid and ask price are not equal so they trade cannot go through, one the ask and bid price are equal the transaction will go through