Exam 1 Review

Question 1

Someone who oversees treasurer and controller, responsible for capital budgeting, capital structure and managing every day liquidity (i.e. working capital) plus they work with CEO to meet the ultimate goal: Maximize current value of the company’s stock price

Answer 1

CFO (Chief Financial Officer)

Question 2

How does information transfer within a company (list 4 positions and their order)

Answer 2

CFO, then CEO, then board of directions, then shareholders (AKA ultimate group of power)

Question 3

Single or double tax for sole proprietorship, partnership, and corporation?

Answer 3

Sole proprietorship and partnership = single tax

Corporation = double tax

Question 4

Order of easiest to hardest to attain capital (3 types of businesses)

Answer 4

Corporation = easiest
Partnership = 2nd easiest
Sole Proprietorship = least easy

Question 5

Limited life or Unlimited Life for 3 types of businesses

Answer 5

Sole Proprietorship and Partnership = Limited Life

Corporation = Unlimited Life

Question 6

The “BLANK” is when the principal (shareholders) hires an agent (CEO) to represent higher interests

Answer 6

Agency Relationship

Question 7

Conflict of interest between principal and agent

Answer 7

Agency conflict

Question 8

Indirect (opportunity costs), cost from monitoring (i.e. paying outside auditors and/or paying board of directors), wasteful spending, and taking on bad investment.

Answer 8

Agency Costs

Question 9

Managerial compensation, proxy fights (i.e. when shareholders articulate need of change to board of directors), threat of takeover, independent board directors.

Answer 9

Agency Potential Solutions

Question 10

Original sale of securities by corporations and governments. (IPO) Initial Public Offering.

Answer 10

Primary Market

Question 11

Securities bought and sold after the original sale

Answer 11

Secondary Market

Question 12

Liabilities + Stockholders’ equity =

Answer 12

Assets

Question 13

Assets are listed in order of “BLANK” liquidity.

Answer 13

decreasing

Question 14

Ability to convert to cash quickly w/out significant loss in value.

Answer 14

Liquidity

Question 15

Liquid assets typically earn a “BLANK” return.

Answer 15

lower

Question 16

Current Assets - Current Liabilities (AKA “BLANK”) = “BLANK”

Answer 16

financial buffer, NWC (Networking Capital)

Question 17

Difference between total assets and total liabilities

Answer 17

Shareholder Equity (Stockholder’s Equity is also an acceptable answer because the terms are interchangeable)

Question 18

“BLANK” value is the net value of a firm’s assets found on its balance sheet, and it is roughly equal to the total amount all shareholders would get if they liquidated the company. “BLANK” value is the company’s worth based on the total value of its outstanding shares in the market, which is its market capitalization.

Answer 18

Book, Market

Question 19

% of total assets represents

Answer 19

Balance Sheet

Question 20

% of sales represents

Answer 20

Income statement

Question 21

The “BLANK” identity is an expression that shows a company’s return on equity (ROE) can be represented as a product of three other ratios: the profit margin, the total asset turnover, and the equity multiplier.

Answer 21

DuPont

Question 22

When shareholders articulate need of change to board of directors

Answer 22

Proxy fights