chapter 1 flashcards

Question 1

what two major decisions are made by finance managers ?

Answer 1

• Capital Budgeting/Investment Decision: a decision about which real assets the firm should acquire and how much to invest in these assets
• Financing Decision: a decision about how to raise the money there firm needs for its investments and operations

Question 2

what is the Investment Decision?

Answer 2

the financial manager needs to place a value on the uncertain future cash flows (benefits) generated by capital investment projects.

Question 3

what are the three things a financial manager needs to account for in order to place a value on the uncertain cash flows?

Answer 3

• amounts of the future cash flows
• timing of the future cash flows
• the risk of the future cash flows

Question 4

how is a project attractive financially?

Answer 4

if the project’s value is greater than its required investment

Question 5

what are the two things a financial manager can use to raise money for the investments and operations of the firm?

Answer 5

• internally generated funds
• external financing sources

Question 6

what are the two broad categories of external financing?

Answer 6

• debt financing
• equity financing

Question 7

what is the term called for the choice between debt and equity financing ?

Answer 7

Capital Structure Decision

Question 8

what are Real Assets??

Answer 8

assets used to produce goods and services

Question 9

what are Financial Assets?

Answer 9

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

Question 10

list examples of Real Assets?

Answer 10

machinery, factories, trademarks, and patents

Question 11

list examples of Financial Assets

Answer 11

share of stock, a bank loan

Question 12

what is a Corporation?

Answer 12

a business (separate legal entity) owned by the shareholders who are not personally liable for the business’s liabilities

Question 13

what’s another word for shareholders?

Answer 13

owners

Question 14

who runs corporations?

Answer 14

employees led by the CEO

Question 15

what’s a pro and con for corporations?

Answer 15

although the separation of ownership and control adds flexibility to the operation and gives permanence to the corporation, it also creates agency problems

Question 16

Corporation characteristics…

Answer 16

• shareholders can SELL shares (ownership)
• has a BOARD OF DIRECTORS elected by the shareholders
• must abide by the RULES of stock exchanges, accounting standards and securities laws
• TAXED TWICE-on the company profits and also in the hands of shareholders (dividends and/or capital gains)
• must share INFORMATION with the public

Question 17

whats a Sole Proprietorship ?

Answer 17

a business owned and operated by one individual who is personally liable for all the firm’s obligations

Question 18

whats a Partnership?

Answer 18

business owned by 2 or more people who are personally responsible for all of its liabilities.

Question 19

whats a Hybrid Form?

Answer 19

have characteristics of coproations and partnerships

Question 20

who is the Financial Manager?

Answer 20

anyone responsible for a significant coporate investment or financing decision

Question 21

what are the two broad categories under the Chief Financial Officer?

Answer 21

• Treasurer: responsible for cash managment, raising new capital and maintain relationship with banks and other investors
• Controller: responsible for preparing financial statements, managing internal accounting and taxes

Question 22

what are the goals of a Corporation?

Answer 22

• shareholders want managers to maximize market value of the corporation
• increasing market value increases shareholders wealth
• maximizing profit does not necessarily increase overall market value
• the objective should be to maximize the current market value

Question 23

what are Agency Problems?

Answer 23

in most large companies, the managers are not the owners and they may not always act in the best interest of the owners

Question 24

how are Agency Problems created?

Answer 24

when the personal gaols of these agents create conflict in their roles in the corporation

Question 25

list some ways Agency Problems can occur?

Answer 25

• managers may over indulge in unnecessary expenses
• they may shy away from attractive but risky projects
• they may engage in empire building

Question 26

how can Agency Problems be reduced?

Answer 26

• executive compensation
• corporate governance
• threat of takeovers
• specialist monitoring
• shareholder pressure

Question 27

using unethical means..

Answer 27

to increase share price will only lead to failure

Question 28

list some careers in finance?

Answer 28

• commercial banking
• corporate finance
• investment banking
• insurance industry

Question 29

CFO?

Answer 29

oversees Treasurer and Controller