Chapter 1 The Role of Managerial Finance

Question 1

finance

Answer 1

The science and art of managing money

Question 2

financial services

Answer 2

The area of finance concerned with the design and delivery of advice and financial products to individual, businesses, and governments.

Question 3

managerial finance

Answer 3

Concerns the duties of the financial manager in a business

Question 4

financial manager

Answer 4

Actively manages the financial affairs of all types of businesses, whether private or public, large or small, profit seeking or not for profit

Question 5

sole proprietorship

Answer 5

A business owned by one person and operated for his or her own profit

Question 6

unlimited liability

Answer 6

The condition of a sole proprietorship (or general partnership), giving creditors the right to make claims against the owner’s personal assets to recover debts owed by the business

Question 7

partnership

Answer 7

A business owned by two or more people and operated for profit

Question 8

articles of partnership

Answer 8

The written contract used to formally establish a business partnership

Question 9

corporation

Answer 9

An entity created by law

Question 10

stockholders

Answer 10

The owners of a corporation, whose ownership, or equity, takes the form of common stock, or less frequently, preferred stock

Question 11

limited liability

Answer 11

A legal provision that limits stockholders’ liability for a corporation’s debt to the amount they initially invested in the firm by purchasing stock.

Question 12

common stock

Answer 12

The purest and most basic form of corporate ownership

Question 13

dividends

Answer 13

Periodic distributions of cash to the stockholders of a firm

Question 14

board of directors

Answer 14

Group elected by the firm’s stockholders and typically responsible for approving strategic goals and plans, setting general policy, guiding corporate affairs, and approving major expenditures

Question 15

president or chief executive officer (CEO)

Answer 15

Corporate official responsible for managing the firm’s day-to-day operations and carrying out the policies established by the board of directors

Question 16

Limited partnership (LP)

Answer 16

A partnership in which one or more partners have limited liability as long as at least one partner (the general partner) has unlimited liability. The limited partners are passive investors that cannot take an active role in the firm’s management

Question 17

S corporation (S corp)

Answer 17

A tax-reporting entity that allows certain corporations with 100 or fewer stockholders to choose to be taxed as partnerships. Its stockholders receive the organizational benefits of a corporation and the tax advantages of a partnership.

Question 18

Limited liability company (LLC)

Answer 18

Permitted in most states, the LLC gives its owners limited liability and taxation as a partnership. But unlike an S corp, the LLC can own more than 80% of another corporation, and corporations, partnerships, of non-U.S. Residents can own LLC shares.

Question 19

Limited liability partnership (LLP)

Answer 19

Permitted in most states, LLP partners are liable for their own acts of malpractice, but not for those of other partners. The LLP is taxed as a partnership and is frequently used by legal and accounting professionals

Question 20

earning per share (EPS)

Answer 20

The amount earned during the period on behalf of each outstanding share of common stock, calculated by dividing the period’s total earnings available for the firm’s common stockholders by the number of shares of common stock outstanding

Question 21

risk

Answer 21

The chance that actual outcomes may differ from those expected

Question 22

risk averse

Answer 22

Requiring compensation to bear risk

Question 23

stakeholders

Answer 23

Groups such as employees, customers, suppliers, creditors, owners, and others who have a direct economic link to the firm

Question 24

business ethics

Answer 24

Standards of conduct or moral judgement that apply to persons engaged in commerce

Question 25

treasurer

Answer 25

The firm’s chief financial manager, who manages the firm’s cash, oversees its pension plans, and manages key risks

Question 26

controller

Answer 26

The firm’s chief accountant, who is responsible for the firm’s accounting activities, such as corporate accounting, tax management, financial accounting, and cost accounting

Question 27

foreign exchange manager

Answer 27

The manager responsible for managing and monitoring the firm’s exposure to loss from currency fluctuations

Question 28

marginal cost-benefit analysis

Answer 28

Economic principle that states that financial decisions should be made and actions taken only when the added benefits exceeded the added costs

Question 29

accrual basis

Answer 29

In preparation of financial statements, recognizes expenses when they are incurred

Question 30

cash basis

Answer 30

Recognizes revenues and expenses only with respect to actual inflows and outflows of cash

Question 31

corporate governance

Answer 31

The rules, processes, and laws by which companies are operated, controlled, and regulated

Question 32

individual investors

Answer 32

Investors who own relatively small quantities of shares so as to meet personal investment goals

Question 33

institutional investors

Answer 33

Investment professionals such as banks, insurance companies, mutual funds, and pension funds that are paid to manage and hold large quantities of securities on behalf of others

Question 34

Sarbanes-Oxley Act of 2002 (SOX)

Answer 34

An act aimed at eliminating corporate disclosure and conflict of interest problems. Contains provisions about corporate financial disclosures and the relationships among corporations, analysts, auditors, attorneys, directors, officers, and shareholders.

Question 35

principal-agent relationship

Answer 35

An arrangement in which an agent acts on the behalf of a principal. For example, shareholders of a company (principals) elect management (agents) on their behalf.

Question 36

agency problems

Answer 36

Problems that arise when managers place personal goals ahead of shareholders

Question 37

agency costs

Answer 37

Costs arising from agency problems that are borne by shareholders and represent a loss of shareholder wealth

Question 38

incentive plan

Answer 38

Management compensation plans that tie management compensation to share price; one example involves the granting of stock options

Question 39

stock options

Answer 39

Options extended by the firm that allow management to benefit from increases in stock prices over time

Question 40

performance plans

Answer 40

Plans that tie management compensation to measures such as EPS or growth in EPS. Performance shares, cash bonuses, or both are used as compensation under these plans.

Question 41

performance shares

Answer 41

Shares of stock given to management for meeting stated performance goals.

Question 42

cash bonuses

Answer 42

Cash paid to management for achieving certain performance goals