Module 1 Flashcards
The firm can be thought of as a ______________ of policies.
nexus
The firm exists to create value for _____________________.
stakeholders
An advantage of organizing a firm as a corporation is that taxes are paid at the shareholder level.
False
Profit maximization may not lead to the highest possible share price for at least three reasons They are,
profits not always available to shareholders, timing, risk
Suppose a project under consideration will earn returns equal to current investments but its expected returns are less certain (i.e., riskier). Financial managers would accept this project for investment.
false
What are the advantages of the corporate form of business organization?
ease of raising additional funds, easy transfer of ownership, limited liability, perpetual life
Limited liability means that owners of a business are not personally liable for all of its debts – owners can only lose the lessor of the value of their investment or $100,000.
false
Shareholders get any assets or cash flows of the corporation that remain after all other debts have been paid.
true
We can think of equity as a degree of ownership in any asset after subtracting all debts associated with that asset. Shareholder equity is calculated as Total Assets minus Total Liabilities
assets
By law, the board of directors makes decisions as as fiduciary on behalf of company executives.
false
The board makes decisions concerning the hiring and firing of personnel, dividend policies and payouts, and executive compensation.
true
The separation of ownership (shareholders) and control (managers) in larger corporations with many shareholders can lead to conflicts of interest between managers and owners.
true
The CEO of Audi was arrested in connection with the investigation Audi cheated on emissions tests. After viewing the three videos, what would you tell your daughter?
conflicts of interest can lead managers to act in ways that can destroy shareholder value
Amazon and Walmart are examples of corporations because
they are controlled by managers acting as agents for shareholders who have limited liability
The goal of maximizing shareholder wealth can be expressed in several equivalent ways (select all correct answers)
maximizing the market capitalization of the firm, long-term value of stock, shareholder returns
Profit maximization may not lead to the highest possible share price because (check all correct)
Profit maximization fails to account for risk – extremely profitable opportunities may be too risky, Timing is important—the receipt of funds sooner rather than later is preferred. Time is money! , Profits do not necessarily result in cash flows available to stockholders. There is a difference in accounting values and cash flows.
Shareholders are also known as the residual owners of the firm’s cash flows - they only get paid after other stakeholders are content.
false
Once a firm decides to accept a project, then the financial manager must decide where to get the money to pay for the project.
Funding for a project can be simplified from
equity, debt
The difference between … and … is referred to as Net Working Capital
short term assets/short-term liabilities
BNSF projects must be expected to earn at least what rate of return to be funded (implemented)?
9%
The shadow banking system refers to ______________________ involved in facilitating the creation of credit, that is lending, much like traditional banks but are not subject to regulatory oversight.
financial intermediaries
From investors’ perspectives, the role of capital markets is to be an efficient market that allocates funds to their most productive uses.
true
