FM chatper 1 flashcards
What is the primary goal of financial management?
To maximize shareholder wealth.
What does financial management ensure?
Efficient use of resources and capital.
What are the advantages of incorporating a business?
Unlimited life, limited liability for shareholders, easier access to capital markets.
What are the disadvantages of corporations?
Double taxation and complex regulatory requirements.
What is a common stock?
An equity instrument representing ownership with voting rights.
What is a preferred stock?
An equity instrument with fixed dividends but no voting rights.
Name two types of short-term debt instruments.
Treasury bills and commercial papers.
Name two types of long-term debt instruments.
Corporate bonds and mortgages.
What is a primary market?
A market where new securities are issued.
What is a secondary market?
A market where existing securities are traded.
What is the difference between money and capital markets?
Money markets deal with short-term debt, while capital markets handle long-term debt and equity.
What is the agency problem?
Conflicts of interest between shareholders (principals) and managers (agents).
What are direct costs of the agency problem?
Corporate expenditures benefiting managers and monitoring costs.
What are indirect costs of the agency problem?
Lost investment opportunities due to conflicts between shareholders and managers.
What are some solutions to the agency problem?
Performance-based compensation, shareholder activism, independent board of directors.
