Chapter 1

Question 1

What is the first question of finance?

Answer 1

What long-term investments should one take on? (What buildings, machines, etc)

Question 2

What is the second question of finance?

Answer 2

Where will you get the long-term financing to pay for your investments? (How do we raise capital)

Question 3

What is the third question of finance?

Answer 3

How will you manage your everyday financial activities, such as collection from customers nad paying suppliers.

Question 4

What is the answer to the first question of finance?

Answer 4

Capital budgeting

Question 5

What is the answer to the second question of finance?

Answer 5

Capital structure

Question 6

What is the answer to the third question of finance?

Answer 6

working capital

Question 7

What is capital budgeting

Answer 7

The process of planning and managing a firm’s long-term investments. (identifying investment opportunities that are worth more to the firm than they cost to acquire.)

Question 8

What is capital structure

Answer 8

the specific mixture of long-term debt and equity the firm uses to finance its operations (Long-term debt +preferred and common stock.)

Question 9

What is working capital

Answer 9

a firm’s short-term assets and liabilities

Question 10

What is a firm’s net working capital?

Answer 10

Current assets minus current liabilities

Question 11

What are the some questions that must be answered regarding working capital?

Answer 11

1. How much cash and inventory should we keep on hand?
2. Should we sell on credit to our customers
3. How will we obtain any needed short-term financing?

Question 12

A business owned by a single individual

Answer 12

Sole proprietorship

Question 13

A business formed by two or more individuals or entities

Answer 13

partnership

Question 14

A business created as a distinct legal entity owned by one or more individuals or parties

Answer 14

corporation

Question 15

What is a specific financial management goal

Answer 15

to maximize the current value per share of the existing stock (ethically and legally)

Question 16

What is the general goal of financial management?

Answer 16

Increase market value of existing owners’ equity

Question 17

What is the agency problem?

Answer 17

The possibility of conflict of interest between the owners and management of a firm

Question 18

Whether managers will act in the best interests of stockholders depends on two factors

Answer 18

1. How closely the management goals are aligned with stockholder goals
2. Can management be replaced if they do not pursue stockholder goals

Question 19

What is a primary market?

Answer 19

the original sale of securities by goverment and corporations

Question 20

The secondary market is

Answer 20

a market in which securities are bought and solf after the original sale

Question 21

What are the two types of primary market transactions corporations engage in?

Answer 21

public offerings and private placement

Question 22

What are the two types of secondary markets?

Answer 22

dealer and auction

Question 23

What is another term for dealer market?

Answer 23

over-the-counter