chapter 1 - Goals and Governance of the Firm

Question 1

types of organization

Answer 1

• sole proprietorship
• patnership
• corporations

Question 2

sole proprietorship def

Answer 2

a business owned and operated by one individual who has no partners and no shareholders, and is personally liable for all the firm’s obligations

Question 3

partnerships def

Answer 3

a business owned by two or more people who are personally responsible for all its liabilities

Question 4

coporations def

Answer 4

a business owned by shareholders who have limited liability, often separation of ownership and management

Question 5

what shareholders want

Answer 5

they want to maximize the value of shares (increase the wealth of shareholders). However managers will not necessarily do that.

Question 6

how can shareholders force managers to maximize shareholders wealth ?

Answer 6

• compensation plan: give compensation to manager that incentives to keep shares price high
• board of directors:
  -takeovers

Question 7

agency problems def

Answer 7

conflict of interest between the firm’s owners and its managers

Question 8

what does a financial manager do?

Answer 8

stands between the firm’s real assets and financial markets/

Question 9

capital budgeting def

Answer 9

decision about which real assets the form should acquire (also called investment decision)

Question 10

financing decision def

Answer 10

decision on how to raise the money to pay for investments in real assets

Question 11

ethics and maximinzing value

Answer 11

• critical
• unwritten rules of behavior
  -reputation