chapter 1

Question 1

What is an IPO ?

Answer 1

initial public offering is a way for firms to generate funds by selling shares to the general public

Question 2

what do companies do sometimes do when they start grow ?

Answer 2

start raise mire more funds from borrowing bank loans and by selling publicly traded bonds to investors eg Fedex.

Question 3

what must all companies do to stay successful ?

Answer 3

Good investment
decisions and financial decisions

Question 4

LVMH - agrees to pay 15.8 billion for Tiffany what type of decision is that and give it’s second name as well

Answer 4

investment decisions also knows as capital budgeting or capital expenditures

Question 5

what is Financing decisions?

Answer 5

Decision on the sources and amounts of financing

Question 6

What are equity investors?

Answer 6

investors who put up money for an exchange of shares of a firm, who contribute in equity financing

Question 7

What are debt investors ?

Answer 7

the investors are lenders who will be paid back in the future with a fixed interest added onto the repayment plan.

Question 8

what is the choice between debt and equity financing called ?

Answer 8

Capital structure decision

Question 9

what does the term capita refers to ?

Answer 9

a firms sources of long term financing

Question 10

A firm looking to raise long term financing is referred as ?

Answer 10

raising capital

Question 11

Capital budgeting or capital expenditure (CAPEX) decision

Answer 11

Decision to invest in tangible or intangible assets

Question 12

What are real assets

Answer 12

Assets used to produce goods and services

Question 13

What are financial assets

Answer 13

Financial claims to income generated by the firm’s real assets

Question 14

What do firms issue to investors when financing their investments

Answer 14

Financial assets eg - A share of a stock is a financial asset.

Question 15

Financial assets that can be purchased and traded by investors in the public markets are called ?

Answer 15

Securities

Question 16

financing decisions are less important than investments decisions so what do financial managers say ?

Answer 16

the value comes mainly from the investment side of the balance sheet.

Question 17

Microsoft shares - $230 each

7.56 billion shares outstanding calculate it’s market capitalisation

Answer 17

$230 x 7.56 =$1,739 billion

Question 18

What is a corporation

Answer 18

A business organised as a separate legal entity owned by stockholders

Question 19

What is a limited liability

Answer 19

The owners of a corporation are not personally liable for its obligations

Question 20

Do shareholders own real assets of a business or financial assets of a business?

Answer 20

Financial assets

Question 21

small businesses are often referred as ?

Answer 21

sole proprietorship/ mom and pop

Question 22

Advantage of a partnership

Answer 22

if the business runs into difficulties each partner can be held responsible for all the business’s debt - rather than one person taking the hit by themselves

unlike corporations do not have to pay income taxes the partners pay personal income taxes on their shares of the profits.

Question 23

In a limited partnership , partners classified as general or limited

Answer 23

limited partner are liable only for the money they invest and do not participate in management.

Question 24

What is a CFO

Answer 24

Chief financial officer

Question 25

What is a treasurer

Answer 25

Responsible for financing, cash management, and relationship with banks and other financial institutions

Question 26

Financial managers are responsible for ?

Answer 26

investment and financing decisions

Question 27

Define opportunity cost

Answer 27

the loss of other alternatives when one alternative is chosen.

Question 28

When a firm decides to reinvest cash what happens afterwards ?

Answer 28

the opportunity cost is the expected rate of return that shareholders could have obtained by investing in financial assets

Question 29

The minimum rate of return is called ?

Answer 29

Hurdle rate or opportunity cost of capital

Question 30

Define agency problem

Answer 30

managers are agents for stockholders and are tempted to act in their own interests rather than maximising value

Question 31

Define agency cost

Answer 31

Value lost from agency problems or from the cost of mitigating agency problems

Question 32

Define stakeholder

Answer 32

Anyone with a financial interest in the corporation

Question 33

How agency problems controlled ?

Answer 33

internal controls and decision making procedures to prevent wasteful spending/investment

Question 34

does a well designed composition scheme help alleviate agency problems yes or no

Answer 34

yes by encouraging managers to maximise shareholder wealth

Question 35

Define Corporate governance

Answer 35

The laws, regulations, institutions and corporate practices that protect shareholders and investors

Question 36

Element 2 of Corporate governance -the role of boards of directors

Answer 36

the board of directors appoints top managers including CFO and CEO and must approve important financial decisions .

Question 37

where does good Corporate governance relies in ?

Answer 37

relies in part on well designed management compensation package but there are other elements of good Corporate governance .

Question 38

Element 1 of Corporate governance - Legal requirements

Answer 38

Good governance requires laws and regulations that protect investors from self dealing by insiders , CEO and financial managers have a fiduciary duty to stockholders which is to act fairly and responsibly in the stockholder's interest.

Question 39

Element 3 of Corporate governance - Activist shareholders

Answer 39

institutional shareholders including pension funds have become more active in monitoring management and pushing for changes CEO have forced out as a result to this.

Question 40

Define Wall Street walk

Answer 40

Disgruntled shareholders can also take the Wall Street walk by selling out and moving on to other investments - Wall Street walk can send a powerful message if enough shareholders bail out , the stock price tumbles which damages top managers compensation and reputation

Question 41

Element 4 of corporate governance - takeovers

Answer 41

The wall street walk opens the door for takeovers - the further the stock price falls the easier it gets for another company to buy up the majority of shares and take over - old management will be replaced

Question 42

Element 5 of corporate governance - information for investors

Answer 42

corporate governance can not work unless outside investors get accurate and up to date information

Question 43

Responsibilities of the Financial Manager

Answer 43

- Buy assets that earn more cash than they cost -Choose long-term investments to increase firm value -Raise cheap external financing -Ensure efficient tax policy