Chapter 1 Financial Manager and The Firm

Question 1

What is a stake holder?

Answer 1

Someone other than an owner who has a claim on the cash flows of the firm

Question 2

Working Capital Management

Answer 2

Determining how day-to-day financial matters should be managed so that the firm can pay its bills, and how surplus cash should be invested.

Question 3

Residual Cash Flows

Answer 3

the cash remaining after a firm has paid operating expenses and what it owes creditors and in taxes; can be distributed to the owners as a cash dividend or by repurchasing some shares, or reinvested in the business

Question 4

Bankruptcy

Answer 4

legally declaring inability of an individual or a company to pay its creditors

Question 5

What are the three fundemental decisions in financial management?

Answer 5

1. Capital Budgeting Decisions
2. Financing Decisions
3. Working Capital Management Decisions

Question 6

What do capital budgeting decisions adress?

Answer 6

Which productive assets the firm should purchase and how much money the firm can afford to spend.

Question 7

How do capital budgeting decsions dictate the success or failure of a business?

Answer 7

Capital assets generate most of the cash flows for the firm.
Capital assets are long term in nature.

Question 8

What do financing decisions determine for a business?

Answer 8

How a firm raises cash to pay for their investments.

Question 9

What is a tax deductible?

Answer 9

is a deduction that lowers a person’s tax liability by lowering their taxable income. Deductions are typically expenses that the taxpayer incurs during the year that can be applied against or subtracted from their gross income in order to figure out how much tax is owed.

Question 10

How do financing decisions affect the firm?

Answer 10

It will affect the taxes the firm pays and the probability of the firm going bankrupt.

Question 11

Net Working Capital

Answer 11

The difference between the firms total current assets and its total current liabilities.

Question 12

What are working capital management decisions?

Answer 12

Management of firms current assets.

Question 13

What are the treasurers duties in a firm?

Answer 13

The treasurer looks after the collection and disbursement of cash, investing excess cash so that it earns interest, raising new capital, handling foreign exchange transactions, and overseeing the firm’s pension fund managers. The treasurer also assists the CFO in handling important Wall Street relationships, such as those with investment bankers and credit rating agencies.

Question 14

What are the duties of the risk manager?

Answer 14

The risk manager monitors and manages the firm’s risk exposure in financial and commodity markets and the firm’s relationships with insurance providers.

Question 15

What are the duties of the controller?

Answer 15

The controller is really the firm’s chief accounting officer. The controller’s staff prepares the financial statements, maintains the firm’s financial and cost accounting systems, prepares the taxes, and works closely with the firm’s external auditors.

Question 16

What are the duties of an internal auditor?

Answer 16

The internal auditor is responsible for identifying and assessing major risks facing the firm and performing audits in areas where the firm might incur substantial losses. The internal auditor reports to the board of directors as well as the CFO.

Question 17

What are external auditors and what role do they play with a firm?

Answer 17

A licensed certified public accounting firm CPA firm that provides an independent annual audit of the firm’s financial statements.

Question 18

What is the audit committee and what role do they play with a firm?

Answer 18

A powerful subcommittee of the board of directors, has the responsibility of overseeing the accounting function and the preparation of the firm’s financial statements. In addition, the audit committee oversees or, if necessary, conducts investigations of significant fraud, theft, or malfeasance in the firm, especially if it is suspected that senior managers in the firm may be involved.

Question 19

What is the compliance and ethics directors three programs it must oversee?

Answer 19

(1) a compliance program that ensures that the firm complies with federal and state laws and regulations,
(2) an ethics program that promotes ethical conduct among executives and other employees, and
(3) a compliance hotline, which must include a whistleblower program.

Question 20

What are the three contributing factors affecting value of public companies stock?

Answer 20

(1) the size of the expected cash flows,
(2) the timing of the cash flows, and
(3) the riskiness of the cash flows.

Question 21

Agency Costs

Answer 21

Agency costs are the costs incurred because of conflicts of interest between a principal and an agent.

Question 22

What measures do companies take to make sure interests of management and stock holders align?

Answer 22

(1) board of directors,
(2) management compensation,
(3) managerial labor market,
(4) other managers,
(5) large stockholders,
(6) the takeover market, and
(7) the legal and regulatory environment.

Question 23

What type of management compensation plans exist to incentivize managers into acting for the best interest of stockholders?

Answer 23

(1) a base salary,
(2) a bonus based on accounting performance, and
(3) some compensation that is tied to the firm’s stock price.

Question 24

Information Asymmetry

Answer 24

exists when one party in a business transaction has information that is unavailable to the other parties in the transaction.