chapter 1. Finance 350

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chapter 1. Finance 350
2010-06-10 03:45:20
inancial mgmt decision process ownerships corporations agency problems primary vs secondary mkts auction vs dealer mkts not profit firm goals international firm goals

chapter 1: inancial mgmt decision process; ownerships; corporations; agency problems; primary vs. secondary mkts; auction vs. dealer mkts; not-for-profit firm goals; international firm goals
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  1. Three types of financial management decisions?
    Capital Budgeting (deciding on whether to expand a manufacturing plant)

    Capital Structure (deciding whether to issue new equity and use the proceeds to retire outstanding debt)

    Working capital management (modifying the firm's credit collection policy with its customers)
  2. Four primary disadvantages to the sole proprietorship and partnership forms of business organization?
    Unlimited liability

    Limited life

    Difficulty in transferring ownership

    Hard to raise capital funds
  3. Benefits to sole proprietorship and partnership as opposed to the corporate form?

    less regulation

    the owners are also the managers

    sometimes personal tax rates are better than corporate tax rates
  4. Primary disadvantage of the corporate form of an
    Double taxation to shareholders of distributed earnings and dividends
  5. Advantages of corporate organization
    Limited liability

    ease of transferability

    ability to raise capital

    and unlimited life
  6. 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?
    • The treasurer’s office and the controller’s office report
    • directly to the chief financial officer.

    • The controller’s office handles cost and financial accounting, tax management, and management information systems.
    • The treasurer’s office is responsible for cash and credit management,
    • capital budgeting, and financial planning.
  7. What goal should always motivate the actions of the firm’s financial manager?
    • To maximize the current market value (share price) of the
    • equity of the firm (whether it’s publicly traded or not)
  8. 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?
    • In the corporate form of ownership, the shareholders are the owners of the firm. The shareholders elect the directors of the corporation, who in turn appoint the
    • firm’s management.

    • This separation of ownership from control in the corporate form of organization is what causes agency problems to exist. Management may act in its own or someone else’s best interests, rather than those of the
    • shareholders. If such events occur, they may contradict the goal of maximizing the share price of the equity of the firm.
  9. Is an initial public offering (IPO) a primary-market transaction or a secondary-market transaction?
  10. What does it mean when we say the NY Stock Exchange is an auction market? How are auction markets different from dealer markets? What kind of market is NASDAQ?
    • Auction markets – brokers and agents meet at a physical location (the exchange) to buy and sell their assets. Dealer markets like NASDAQ represent dealers
    • operating in dispersed locales who buy and sell assets themselves, usually communicating with other dealers electronically or literally over the counter.
  11. Financial manager of a not-for-profit business. What kind of goals do you think would be appropriate?
    Many different goals are conceivable. One ex is revenue minimization; i.e., providing their goods and services to society at the lowest possible cost. Another might be to observe that even a not-for-profit business has equity… therefore goal may be to maximize the value of the equity
  12. 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?
    The goal will be the same, but the best course of action toward that goal may require adjustments due different social, political, and economic climates.
  13. capital budgeting
    The process of planning and managing a firm's long-term investments
  14. Capital Structure
    the mixture of debt and equity maintained by a firm
  15. Working capital
    a firm's shot-term assets and liabilities
  16. sole proprietorship


    A business owned by a single individual

    A business formed by two or more individuals or entities

    A business created as a distinct legal entity owned by one or more individuals or entities
  17. agency problem
    The possibility of conflict of interest between the owners and management of a firm
  18. stakeholder
    someone other than a stockholder or creditor who potentially has a claim on the cash flows of the firm
  19. primary market
    corporation is the seller, and the transaction raises money for the corporation. Corporation engage in two types of primary market transactions: public offerings and private placements.
  20. secondary markets
    transaction involves one owner or creditor selling to another. It is therefore the secondary markets that provide the means for transferring ownership of corporate securities