Financial Management
The two basic sources of funds for all businesses are debt and equity. - ANSWER:
What are the two basic sources of funds for all businesses?
It is the management of current assets, such as inventory, and current liabilities, such
as money owed to suppliers. - ANSWER: What is working capital management?
A profitable firm is able to generate more than enough cash through its productive
assets to cover its operating expenses, taxes, and payments to creditors. Unprofitable
firms fail to do this, and therefore they may be forced to declare bankruptcy. -
ANSWER: Explain the difference between profitable and unprofitable firms.
Financial managers are most concerned about the capital budgeting decision, the
financing decision, and the working capital decision. - ANSWER: What are the three
major decisions that most concern financial managers?
A firm should undertake a capital project only if the value of its future cash flows
exceeds the cost of the project. - ANSWER: What is the general decision rule for a firm
considering undertaking a project? Give a real-life example.
Capital structure shows how a company is financed; it is the mix of debt and equity on
the liability side of the balance sheet. It is important as it affects the risk and the value of
the company. In general, companies with higher debt-to-equity proportions are riskier
because debt comes with legal obligations to pay periodic payments to creditors and to
repay the principal at the end. - ANSWER: What is capital structure and why is it
important to a company?
Working capital management is the day-to-day management of a firm's current assets
and liabilities to make sure that there is enough cash to cover operating expenses and
there is spare cash to earn interest. The financial manager has to make decisions about
the inventory levels or terms of collecting payments (receivables) from customers. -
ANSWER: What is working capital management and what are some of the working
capital decisions that a financial manager faces?
The three forms of business organization we discussed are sole proprietorship,
partnership, and corporation. - ANSWER: What are the three forms of business
organization discussed in this chapter?
Advantages:
•It is the easiest business type to start.
,•It is the least regulated.
•Owners keep all the profits and do not have to share the decision-making authority with
anyone.
•All income is taxed as personal income which is usually in a lower tax bracket than
corporate income.
Disadvantages:
•The proprietor has an unlimited liability for all business debt and financial obligations of
the firm.
•The amount of capital that can be invested in the firm is limited by the proprietor's
wealth.
•It is difficult to transfer ownership (requires sale of the business). - ANSWER: What are
the advantages and disadvantages of a sole proprietorship?
A partnership consists of two or more owners legally joined together to manage a
business. The major disadvantage to partnerships is that all partners have unlimited
liability for the organization's debts and legal obligations no matter what stake they have
in the business. One way to avoid this is to form a limited partnership in which only
general partners have unlimited liability and limited partners are only responsible for
business obligations up to the amount of capital they contributed to the partnership. -
ANSWER: What is a partnership and what is the biggest disadvantage of this business
organization? How can it be avoided?
The owners of a corporation are its stockholders or shareholders, and the evidence of
their ownership is represented by shares of common stock. Other types of ownership do
exist and include preferred stock. - ANSWER: Who are the owners in a corporation and
how is their ownership represented?
Limited Liability for a stockholder means that the stockholder's legal liability extends
only to the capital contributed or the amount invested. - ANSWER: Explain what is
meant by stockholders' limited liability.
The owners of a corporation are subject to double taxation—first at the corporate level
and then again at a personal level when they are given dividends. - ANSWER: What is
double taxation?
Most lawyers, accountants, and doctors form what are known as limited liability
partnerships. These formations combine the tax advantages of partnerships with the
limited liability of corporations. - ANSWER: What is the business organization form
preferred by most physicians lawyers, and accountants, and why?
The most important governing body within an organization is the board of directors. Its
main role is to represent the shareholders. The board also hires (and occasionally fires)
the CEO and advises him or her on major decisions. - ANSWER: What is the most
important governing body within a business organization? What responsibilities does it
have?
, An independent CPA firm that performs an audit of a firm ensures that the financial
numbers are reasonably accurate, that accounting principles have been adhered to year
after year and not in a manner that distorts the firm's performance, and that the
accounting principles used are in accordance with generally accepted accounting
principles (GAAP). - ANSWER: Almost all public companies hire a certified public
accounting firm to perform an independent audit of the financial statements. What
exactly does an audit mean?
•It is difficult to determine what is meant by profits.
•It does not address the size and timing of cash flows—it does not account for the time
value of money.
•It ignores the uncertainty of risk of cash flows. - ANSWER: What are some of the
drawbacks to setting profit maximization as the main goal of a company?
The appropriate goal of financial managers should be to maximize the current value of
the firm's stock price. Managers' decisions affect the stock price in many ways as the
value of the stock is determined by the future cash flows the firm can generate.
Managers can affect the cash flows by, for example, selecting what products or services
to produce, what type of assets to purchase, or what advertising campaign to
undertake. - ANSWER: What is the appropriate goal of financial managers? Can
managers' decisions affect this goal in any way? If so how?
The following factors affect the stock price: the firm, the economy, economic shocks, the
business environment, expected cash flows, and current market conditions. - ANSWER:
What are the major factors affecting stock price?
Agency relationships develop when a principal hires an agent to perform some service
or represent the firm. An agency conflict arises when the agent's interests and
behaviors are at odds with those of the principal. Agency conflicts can be reduced
through the following three mechanisms: management compensation, control of the
firm, and the board of directors. - ANSWER: What is an agency relationship and what is
an agency conflict? How can agency conflicts be reduced in a corporation?
If the stock price falls below its maximum potential price, it attracts corporate raiders,
who look for fundamentally sound but poorly managed companies they can buy, turn
around, and sell for a handsome profit. - ANSWER: What starts to happen when if a firm
is poorly managed and its stock price falls substantially below its maximum?
Some of the regulations include:
a.The majority of board members must be outsiders.
b.A separation of the CEO and chairman of the board positions is recommended.
c.The CEO and CFO must certify all financial statements. - ANSWER: What are some
of the regulations pertaining to boards of directors that were put in place to reduce
agency conflicts?
The two basic sources of funds for all businesses are debt and equity. - ANSWER:
What are the two basic sources of funds for all businesses?
It is the management of current assets, such as inventory, and current liabilities, such
as money owed to suppliers. - ANSWER: What is working capital management?
A profitable firm is able to generate more than enough cash through its productive
assets to cover its operating expenses, taxes, and payments to creditors. Unprofitable
firms fail to do this, and therefore they may be forced to declare bankruptcy. -
ANSWER: Explain the difference between profitable and unprofitable firms.
Financial managers are most concerned about the capital budgeting decision, the
financing decision, and the working capital decision. - ANSWER: What are the three
major decisions that most concern financial managers?
A firm should undertake a capital project only if the value of its future cash flows
exceeds the cost of the project. - ANSWER: What is the general decision rule for a firm
considering undertaking a project? Give a real-life example.
Capital structure shows how a company is financed; it is the mix of debt and equity on
the liability side of the balance sheet. It is important as it affects the risk and the value of
the company. In general, companies with higher debt-to-equity proportions are riskier
because debt comes with legal obligations to pay periodic payments to creditors and to
repay the principal at the end. - ANSWER: What is capital structure and why is it
important to a company?
Working capital management is the day-to-day management of a firm's current assets
and liabilities to make sure that there is enough cash to cover operating expenses and
there is spare cash to earn interest. The financial manager has to make decisions about
the inventory levels or terms of collecting payments (receivables) from customers. -
ANSWER: What is working capital management and what are some of the working
capital decisions that a financial manager faces?
The three forms of business organization we discussed are sole proprietorship,
partnership, and corporation. - ANSWER: What are the three forms of business
organization discussed in this chapter?
Advantages:
•It is the easiest business type to start.
,•It is the least regulated.
•Owners keep all the profits and do not have to share the decision-making authority with
anyone.
•All income is taxed as personal income which is usually in a lower tax bracket than
corporate income.
Disadvantages:
•The proprietor has an unlimited liability for all business debt and financial obligations of
the firm.
•The amount of capital that can be invested in the firm is limited by the proprietor's
wealth.
•It is difficult to transfer ownership (requires sale of the business). - ANSWER: What are
the advantages and disadvantages of a sole proprietorship?
A partnership consists of two or more owners legally joined together to manage a
business. The major disadvantage to partnerships is that all partners have unlimited
liability for the organization's debts and legal obligations no matter what stake they have
in the business. One way to avoid this is to form a limited partnership in which only
general partners have unlimited liability and limited partners are only responsible for
business obligations up to the amount of capital they contributed to the partnership. -
ANSWER: What is a partnership and what is the biggest disadvantage of this business
organization? How can it be avoided?
The owners of a corporation are its stockholders or shareholders, and the evidence of
their ownership is represented by shares of common stock. Other types of ownership do
exist and include preferred stock. - ANSWER: Who are the owners in a corporation and
how is their ownership represented?
Limited Liability for a stockholder means that the stockholder's legal liability extends
only to the capital contributed or the amount invested. - ANSWER: Explain what is
meant by stockholders' limited liability.
The owners of a corporation are subject to double taxation—first at the corporate level
and then again at a personal level when they are given dividends. - ANSWER: What is
double taxation?
Most lawyers, accountants, and doctors form what are known as limited liability
partnerships. These formations combine the tax advantages of partnerships with the
limited liability of corporations. - ANSWER: What is the business organization form
preferred by most physicians lawyers, and accountants, and why?
The most important governing body within an organization is the board of directors. Its
main role is to represent the shareholders. The board also hires (and occasionally fires)
the CEO and advises him or her on major decisions. - ANSWER: What is the most
important governing body within a business organization? What responsibilities does it
have?
, An independent CPA firm that performs an audit of a firm ensures that the financial
numbers are reasonably accurate, that accounting principles have been adhered to year
after year and not in a manner that distorts the firm's performance, and that the
accounting principles used are in accordance with generally accepted accounting
principles (GAAP). - ANSWER: Almost all public companies hire a certified public
accounting firm to perform an independent audit of the financial statements. What
exactly does an audit mean?
•It is difficult to determine what is meant by profits.
•It does not address the size and timing of cash flows—it does not account for the time
value of money.
•It ignores the uncertainty of risk of cash flows. - ANSWER: What are some of the
drawbacks to setting profit maximization as the main goal of a company?
The appropriate goal of financial managers should be to maximize the current value of
the firm's stock price. Managers' decisions affect the stock price in many ways as the
value of the stock is determined by the future cash flows the firm can generate.
Managers can affect the cash flows by, for example, selecting what products or services
to produce, what type of assets to purchase, or what advertising campaign to
undertake. - ANSWER: What is the appropriate goal of financial managers? Can
managers' decisions affect this goal in any way? If so how?
The following factors affect the stock price: the firm, the economy, economic shocks, the
business environment, expected cash flows, and current market conditions. - ANSWER:
What are the major factors affecting stock price?
Agency relationships develop when a principal hires an agent to perform some service
or represent the firm. An agency conflict arises when the agent's interests and
behaviors are at odds with those of the principal. Agency conflicts can be reduced
through the following three mechanisms: management compensation, control of the
firm, and the board of directors. - ANSWER: What is an agency relationship and what is
an agency conflict? How can agency conflicts be reduced in a corporation?
If the stock price falls below its maximum potential price, it attracts corporate raiders,
who look for fundamentally sound but poorly managed companies they can buy, turn
around, and sell for a handsome profit. - ANSWER: What starts to happen when if a firm
is poorly managed and its stock price falls substantially below its maximum?
Some of the regulations include:
a.The majority of board members must be outsiders.
b.A separation of the CEO and chairman of the board positions is recommended.
c.The CEO and CFO must certify all financial statements. - ANSWER: What are some
of the regulations pertaining to boards of directors that were put in place to reduce
agency conflicts?
