BSNS 114 final exam Questions And Correct
Answers, With Complete Verified Solution. 119 Q&A
The objective of a business
To maximise the value of the business by maximising stockholder wealth. (as share
price increases stockholder wealth increases)
Three ways to maximise firm value
Investment decision, financing decision, working capital management decision
The investment decision is about
Acquiring profitable assets
The financing decision is about
How to finance production and development
The working capital management decision is about
having enough inventory to produce your product or service
Accounts receivable
the money you should receive from selling resources but you haven't received the
money yet
What does the working capital management decision deal with
day-to-day financial matters and effect current assets and current liabilities
What does the investment decision deal with
they determine what long term productive assets the firm will purchase
What does the financing decision deal with
they determine the mix of debt and equity that will be used to finance the firms long term
productive assets
Accounts payable
Goods you have but have not paid for
Sole propriertorship
a type of business where one person is responsible for providing capital and managing
the business
Advantages of Sole Proprietorship
simple to establish, least expensive and regulated, no sharing profit or loss, taxed once
as personal income, no separation between ownership and management
Disadvantages of Sole Proprietorship
Limited access to capital
Costly to transfer ownership
Unlimited liability
Partnership
a business owned by two or more people
General partnership
all of the partners are owners and active in managing business- all liable for everything
Limited partnership
has limited partners who are owners but not managers and general partners (limited
partners are only liable for what they put into the business)
Advantages of partnership
, Two or more owners, More capital available, Relatively easy to start, Income taxed once
as personal income
Disadvantages of partnership
Unlimited liability
Partnership dissolves when one partner dies or wishes to sell
Difficult to transfer ownership
Corporation
A business that is owned by many investors.
Advantages of a corporation
Limited liability
Separation of ownership and management (someone can increase the value of the
business on your behalf)
Transfer of ownership is easy
Easier to raise capital
Disadvantages of a corporation
Separation of ownership and management (agency problem)
Taxation (income taxed at the corporate rate)
Costly to establish and register
Agency problem
the possibility of conflict of interest between the stockholders and management of a firm
because firm manager will not always work to increase firm value
Managers can make decisions that hurt firm value
Shareholders want to be profitable even if it is risky opposed to managers who want to
play is safe to still have a job
Managers can lie to shareholders
They can hold back good/bad news about the company, fabricate accounting
statements and financial reports
Managers can waste firm resources
to satisfy personal needs
Theory: Shareholders annual meeting
Shareholders gather to evaluate managers performance
In practice: shareholders annual meeting
it is too costly for shareholders to go, when large shareholders with significant holding
are dissatisfied they sell their stock and move on
In theory; board of directors
body that oversees all significant business transactions and management of the firm
In practice: board of directors
they often fail at their assigned role which is to protect interests of shareholder because
they work very little and often cannot challenge the power of managers
in theory: compensation plan
tying compensation to performance review (i.e. if company does well their is an increase
in salary)
In practice: compensation plan
it may induce managers to take company killing risks
Debt-holder (bondholders)
Answers, With Complete Verified Solution. 119 Q&A
The objective of a business
To maximise the value of the business by maximising stockholder wealth. (as share
price increases stockholder wealth increases)
Three ways to maximise firm value
Investment decision, financing decision, working capital management decision
The investment decision is about
Acquiring profitable assets
The financing decision is about
How to finance production and development
The working capital management decision is about
having enough inventory to produce your product or service
Accounts receivable
the money you should receive from selling resources but you haven't received the
money yet
What does the working capital management decision deal with
day-to-day financial matters and effect current assets and current liabilities
What does the investment decision deal with
they determine what long term productive assets the firm will purchase
What does the financing decision deal with
they determine the mix of debt and equity that will be used to finance the firms long term
productive assets
Accounts payable
Goods you have but have not paid for
Sole propriertorship
a type of business where one person is responsible for providing capital and managing
the business
Advantages of Sole Proprietorship
simple to establish, least expensive and regulated, no sharing profit or loss, taxed once
as personal income, no separation between ownership and management
Disadvantages of Sole Proprietorship
Limited access to capital
Costly to transfer ownership
Unlimited liability
Partnership
a business owned by two or more people
General partnership
all of the partners are owners and active in managing business- all liable for everything
Limited partnership
has limited partners who are owners but not managers and general partners (limited
partners are only liable for what they put into the business)
Advantages of partnership
, Two or more owners, More capital available, Relatively easy to start, Income taxed once
as personal income
Disadvantages of partnership
Unlimited liability
Partnership dissolves when one partner dies or wishes to sell
Difficult to transfer ownership
Corporation
A business that is owned by many investors.
Advantages of a corporation
Limited liability
Separation of ownership and management (someone can increase the value of the
business on your behalf)
Transfer of ownership is easy
Easier to raise capital
Disadvantages of a corporation
Separation of ownership and management (agency problem)
Taxation (income taxed at the corporate rate)
Costly to establish and register
Agency problem
the possibility of conflict of interest between the stockholders and management of a firm
because firm manager will not always work to increase firm value
Managers can make decisions that hurt firm value
Shareholders want to be profitable even if it is risky opposed to managers who want to
play is safe to still have a job
Managers can lie to shareholders
They can hold back good/bad news about the company, fabricate accounting
statements and financial reports
Managers can waste firm resources
to satisfy personal needs
Theory: Shareholders annual meeting
Shareholders gather to evaluate managers performance
In practice: shareholders annual meeting
it is too costly for shareholders to go, when large shareholders with significant holding
are dissatisfied they sell their stock and move on
In theory; board of directors
body that oversees all significant business transactions and management of the firm
In practice: board of directors
they often fail at their assigned role which is to protect interests of shareholder because
they work very little and often cannot challenge the power of managers
in theory: compensation plan
tying compensation to performance review (i.e. if company does well their is an increase
in salary)
In practice: compensation plan
it may induce managers to take company killing risks
Debt-holder (bondholders)
