Goals and Governance of the Firm CHP1

Question 1

Investment or Capital budgeting decision

Answer 1

Decision about what real assets the firm should acquire and how much to invest into the assets (looks at cash flows)

Question 2

Financing Decision

Answer 2

Decision about how to raise money the firm needs for its investments and operations (generated internal funds or external debt and equity financing)

Question 3

Real Assets

Answer 3

Assets used to produce goods and services (machinery, factories, patents, trademarks)

Question 4

Financial Assets

Answer 4

Financial claims to the income generated by the firms real asserts (share of stock, bank loan)

Question 5

What is A Corporation?

Answer 5

• a separate legal entity or business owned by shareholders
• has a board of directors elected by shareholders
• taxed twice (on company profit and shareholders dividends/ capital gain)

Question 6

WHat is a Sole proprietorship

Answer 6

business owned by a single individual and is fully liable

Question 7

What is a Partnership

Answer 7

busines owned by two or more people who are fully liable

Question 8

What are the goals of the coporations?

Answer 8

• shareholders want managers to maximize market value of the firm
• maximizing profit does not always mean increasing overall markt value

Question 9

What are the Agency Problems

Answer 9

managers are usauallly not the owner of the company and may not always act in the best interest of the owners(shareholders
- personal manager goals may cause conflicts

Question 10

How are Agency problems reduced?

Answer 10

executive compensation
corporate governance (rules in place)
Threat of takeover- another company purchasing the company
shareholder pressure