Chapter 1 - Book Flashcards
Primary goal of financial management decision making
Maximization of shareholder wealth as measured by the price of the firm’s stock
What has an important effect on the firm’s performance?
Agency relationships such as relationship with stockholders and managers and the relationship between owners and lenders give rise to certain agency problems and costs that will have an important effect on the firm’s performance.
What are the amount, timing, and risk of cash flow generated by a firm determined by?
They are determined by key financial management decisions including investment decisions, dividends, financing, and ownership structure decisions.
What are the three primary forms of business organizations
- sole proprietorship.
- -partnership - both limited and general
- corporation
______ have certain advantages over the other 2 forms of business organization especially for large businesses.
Corporation
Define corporation.
A legal person composed one or more actually individuals or legal entities.
The owners of a corporations are called _________
Stockholders or shareholders
The stockholders elect a ___________ that deals with broad policy matters, where as the day-to-day operations are supervised by the corporate officers
Boards of directors
Corporations issue ________ to investors who lend money to the corporation and _______ to investors who become owners
- debt security
- equity securities
The optimal form of an organization for business enterprise is influenced by _________
By factors such as
- cost
- complexity
- owner liability
- business continuity
- need for rising capital
- owners desire to maintain decision making authority.
- tax considerations
The finance function is usually headed by a _______
Vice President or chief financial officer (cfo)
The financial management responsibilities are often divided between ______
The controller and the treasurer
The controller has the responsibility for all
Accounting related activities
The treasurer is concerned with
The acquisition , custody, and expenditure of funds
Financial management is closely related to ________
Other areas of business decision making, particular accounting and economics
The finance profession offers a number of career opportunities _______
Both within the corporate finance function and the financial service sector
Important equation
Shareholder wealth = number of shares outstanding x market price per share
Shareholder wealth
Defined as the present value of the expected future returns to the owners of the firm. It is measured by the market value of the shareholders’ common stock holdings.
Corporation major benefit for individuals is limited ______ and ______
Liability and abilities to raise large amount of capital
Present value
Defined as the value today of some future payment or stream of payments evaluated at an appropriate discount rate
Discount rate
Takes into account the returns that are available from alternative investment opportunities during a specific (future) time period.
Risk
The greater the risk with associated with receiving future benefit, the lower the value investors place on the benefit
Stock prices
The measures of shareholder wealth
Market value
The price at which the stock trades in the marketplace, such as the New York stock exchange
Stakeholders
Include customers, employees, suppliers, and the communities in which they operate - and not just the interest of stockholders.
Agency relationships
Occur when one or more individuals (the principals) hire another individual (the agent) to perform a service on behalf of the principles
Agency cost
Are incurred by shareholders to immunize agency problems
Exercise price
Stock options granted by mangers entitle them to buy shares of the company at a particular price which is called exercise price
Profit
Earning or income
Book value
Reflects the historic cost of assets, not the earning capacity of those assets. Also, the book value does not consider the risk associated with the assets
Cash flow
Relates to the actual cash generated or paid by the firm
Partnership
Is a business organization in which two or more co-owners form a business normally with the intention to make a profit
General partnership
Each partner has unlimited liability for all of the obligations of the business
____% of all partnership in the us are general partnerships
23
Limited partnership
Usually involves one or more general partnership and one or more limited partners. Although the limited partners may limit their liability, the extent of the liability can vary and is set forth in the partnership agreement
The corporate form or business organizations has 4 major advtanges over sole proprietorship and partnerships
- limited liability
- Permanency
- flexibility
- ability to raise capital
