Unit 1 Concepts Flashcards
What are the three types of financial management decisions? For each type of decision, give an example of a business transaction that would be relevant.
- Capital budgeting: Walmart, deciding whether to open another store would be an important capital budgeting decision.
- Capital structure: Walmart increasing their dividend.
- Working capital management. Short term investment in seasonal employees
What are the four primary disadvantages of the sole proprietorship and partnership forms of business organization? What benefits are there to these types of business organizations as opposed to the corporate form?
Cons: Limited Liablitly, More Resposiblity, Taxed Directly
Pros: No dual taxation, More Cut of Profit
What is the primary disadvantage of the corporate form of organization? Name at least two advantages of a corporate organization.
Con: Double Taxation
Pros: Ownership can be transferred (Stock) & Corp. borrows debt in its own name so there is limited liability
In response to the Sarbanes-Oxley Act, many small firms in the United States have opted to “go dark” and delist their stock. Why might a company choose this route? What are the costs of “going dark”?
They would choose this route to avoid cost. The only costs are that they will no longer have stock or be publicly traded.
In a large corporation, what are the two distinct groups that report to the chief financial officer? Which group is the focus of corporate finance?
Treasurer Group
Controller Group
The Treasurer Group is more of the focus.
What goal should always motivate the actions of a firm’s financial manager?
Maximize Shareholder Wealth
Who owns a corporation? Describe the process whereby the owners control the firm’s management. What is the main reason that an agency relationship exists in the corporate form of organization? In this context, what kinds of problems can arise?
- Shareholders Own Firm - They elect officers - Who elect Managers
- Management may act in its own best interest. May not try to maximize shareholder gain.
You’ve probably noticed coverage in the financial press of an initial public offering (IPO) of a company’s securities. Is an IPO a primary market transaction or a secondary market transaction?
Primary Market
What does it mean when we say the New York Stock Exchange is an auction market? How are auction markets different from dealer markets? What kind of market is Nasdaq?
Auction Markets (People Meet Prices) take place in person Dealer Markets (Dealers set prices) happen online. NASDAQ is a electronic dealer market.
Suppose you were the financial manager of a not-for-profit business (a not-for-profit hospital, perhaps). What kinds of goals do you think would be appropriate?
Provide goods and services at cheapest price.
Evaluate the following statement: Managers should not focus on the current stock value because doing so will lead to an overemphasis on short-term profits at the expense of long-term profits.
That is why, it is usually said that the managers should not pay attention to the short term prices of the stocks or the portfolio. If they do so they will be surrendering the longterm profits to the short term gains.
Can our goal of maximizing the value of the stock conflict with other goals, such as avoiding unethical or illegal behavior? In particular, do you think subjects like customer and employee safety, the environment, and the general good of society fit in this framework, or are they essentially ignored? Think of some specific scenarios to illustrate your answer.
Yes, the goal of profit Maximization can conflict with long term value creation. . Hence, if factors like ESG aren’t taken into account, one can’t think of sustainable growth.
Would our goal of maximizing the value of the stock be different if we were thinking about financial management in a foreign country? Why or why not?
It does not. The ultimate goal is always maxing out profit
Suppose you own stock in a company. The current price per share is $25. Another company has just announced that it wants to buy your company and will pay $35 per share to acquire all the outstanding stock. Your company’s management immediately begins fighting off this hostile bid. Is management acting in the shareholders’ best interests? Why or why not?
Management is not acting in the shareholder’s best interest, since the new company that wants to purchases the shares that could ultimately increase the companies’ financial wealth since the bidding company is clearly able to afford all the outstanding shares at a price of $35 each.
Corporate ownership varies around the world. Historically individuals have owned the majority of shares in public corporations in the United States. In Germany and Japan, however, banks, other large financial institutions, and other companies own most of the stock in public corporations. Do you think agency problems are likely to be more or less severe in Germany and Japan than in the United States? Why? Over the last few decades, large financial institutions such as mutual funds and pension funds have been becoming the dominant owners of stock in the United States, and these institutions are becoming more active in corporate affairs. What are the implications of this trend for agency problems and corporate control?
It is likely the smaller the country the less problems.
