Chapter One Flashcards
Management Finance
assists in the management of a firm’s short-term assets and liabilities, and works to ensure that they have sufficient cash on hand to pay their current obligations as they become due. (Operating, investing, financing)
Financial markets + institutions
focuses on participants and conditions in the financial marketplace (example: interest rates)
Investments
assists individuals in determining the optimal composition of their investment portfolios.
Financial Services
focuses on the management of money for (or by) firms and individuals.
Business Ethics
this code of behavior specifies how the firm and its employees will treat employees and stakeholders.
Shareholder wealth maximization
the goal of financial management is measured by the effect of a decision or an action on the price of the firm’s common stock.
Limited liability
this benefit is conferred by the corporate form of organization in which an investor’s personal responsibility for the debts of the business are limited to the amount the investor has invested in the firm.
Stakeholder
this term describes individuals and groups, both internal and external to the company, whose support is critical to the success of the organization.
Double taxation of dividends
this is a disadvantage of the corporate organization since it requires taxes to be levied on both the income of the firm and the dividend income earned by its stakeholders.
Limited partner
this member of partnership has the privilege of not having personal assets at risk in the event of the failure of the partnership
Value
this is the worth of a good or service as established by the discounted and current value of the item’s cash flows.
Corporation
this state-created entity is authorized to conduct business and offer its owners an investment with an unlimited life.
Treasurer
in large organizations, this officeholder supervises the firm’s credit and inventory managers, as well as the director of capital budgeting, and reports to the firm’s chief financial officer. (CFO)
Finance
it addresses how financial resources are obtained, allocated, and managed by a person, a business organization, or a governmental entity.
Which of the following characteristics belong to a limited liability company?
- owners with limited liability and possibly significant input into the daily management of the firm ✅
- might be an S corporation (a special case with a limited number of shareholders)
- profits taxed only at the individual level, not at the business level
- subject to double taxation
Business #1: Bob started a tutoring website. After a few months, a publishing company filed a lawsuit against his company for copyright infringement. Bob had to close the business and sell all of the business’s assets and his car in order to settle the lawsuit. This is an example of:
A proprietorship
Bob’s business is an example of a proprietorship, with its potential for unlimited liability for the debts of the business. Bob’s management decisions and the unlimited liability of the business led to the loss of the business and his car (a personal asset).
Proprietorship
an unincorporated business owned and run by one individual with no distinction between the business
Business #1: Bob started a tutoring website. After a few months, a publishing company filed a lawsuit against his company for copyright infringement. Bob had to close the business and sell all of the business’s assets and his car in order to settle the lawsuit.
a corporation
Corporations are required to release quarterly and annual information on the company’s performance, employment, finances, and taxes to state and federal authorities. According to the Sarbanes-Oxley Act of 2002, both the chief executive officer (CEO) and the chief financial officer (CFO) are required to certify the accuracy of the information contained in the firm’s financial statements, reports, press releases, and any other public announcement.
the owners of a corporation are the ____. The primary goal of the corporate management team is to ____ the shareholders’ wealth by _____ the ______ over the long run.
- shareholders of the company
- maximize
- maximizing
- company’s stock price
Krit Corp. is a U.S. manufacturing company based in the Midwest. As an investor, Beth bought 225 shares of stock in Krit Corp. The stock price of Krit Corp. is currently trading at $30.00 per share. Beth’s total wealth in Krit Corp. is:
$6,750.00
Shareholder’s wealth = number of shares owned x market price per share
225 shares x $30.00 = $6,750
Capital budgeting
decisions determine which projects a firm will undertake and what assets it will require to generate future cash flows
Capital structure
decisions determine the mix of debt and equity financing a firm uses to acquire its assets and fund its operations.
Dividend policy
decisions become necessary when a firm becomes sufficiently profitable to begin returning funds to shareholders. These decisions address concerns about how much of the firm’s earnings should be paid to its shareholders and how much should be retained to fund future investments.
If the managers of Wellington Industries decided to retain 75% of this year’s after-tax earnings and use the funds to purchase additional assets, what type of managerial decision are they making?
Dividend policy
Most executives believe that they and their firms behave in an ethical manner and that it is in their best interests to do so. How can a firm’s ethical conduct increase its long-term profitability?
Ethical corporate behavior builds public trust and encourages the use of good corporate governance. Both increase the likelihood that creditors and investors will want to invest in the firm, which in turn increases the availability of financial capital.
A collection of business firms, usually with a financial institution at the lead, designed to provide the integrated production and sale of the organization’s products is called ________.
an industrial group
