Foundations of Financial Mgmt: Ch 1-2

What is the primary goal of financial management? Maximizing shareholder wealth.
In the past the study of finance has included: mergers and acquisitions and raising capital and bankruptcy.
Professor Merton Miller received the Nobel prize in economics for his work on: capital structure theory
Professors Harry Markowitz and William Sharpe received their Nobel prize in economics for their contributions to the: theories of risk-return and portfolio theory.
Proper risk-return management means that: The firm must determine an appropriate trade-off between risk and return.
One of the major disadvantages of a sole proprietorship is: that there is unlimited liability to the owner.
One of the major advantages of a sole proprietorship is: low operating costs.
The partnership form of an organization: avoids the double taxation of earnings and dividends found in the corporate form of organization.
Characteristics of a corporation: owned by stockholders who enjoy the privilege of limited liability. easily divisible between owners. a separate legal entity with perpetual life.
A Subchapter S corporation: has all the organizational benefits of a corporation and its income is only taxed once.
Corporate governance the relationship and exercise of oversight by the board of directors of the company.
Agency theory examines the relationship between owners of the firm and the managers of the firm.
Agency theory would imply that conflicts are more likely to occur between management and shareholders when the chairman of the board is also the chief executive officer (CEO).
Agency problems are least likely to arise in which organizational form? sole proprietorship
The increasing percentage ownership of public corporations by institutional investors has created more pressure on public companies to manage their firms more efficiently.
The Sarbanes-Oxley Act was passed in an effort to control corrupt corporate behavior.
A financial manager’s goal of maximizing current or short-term earnings may not be appropriate because: it fails to consider the timing of the benefits. increased earnings may be accompanied by unacceptably higher levels of risk. earnings are subjective
they can be defined in various ways such as accounting or economic earnings.
Maximization of shareholder wealth is a concept in which optimally increasing the long-term value of the firm is emphasized
Which of the following is not a true statement about the goal of maximizing shareholder wealth? It is a short-run point of view which takes risk into account
As mergers acquisitions, and restructuring have increased in importance, agency theory has become more important in assessing whether, shareholder goals are truly being achieved by managers in the long run.
Insider trading occurs when: someone has information not available to the public which they use to profit from trading in stocks.
The major difficulty in most insider-trading cases has been that inside trades have not been legally well defined.
Money markets would include which of the following securities? treasury bills and commercial paper.
Capital markets do not include which of the following securities: commercial paper
When a corporation uses the financial markets to raise new funds the sale of securities is made in the, primary market.
The financial markets allocate capital to corporations by reflecting expectations of the market participants in the prices of the corporations.
A corporate buy-back – or the repurchasing of shares – is an example of balance sheet restructuring.
The internationalization of the financial markets has allowed firms such as McDonalds to raise capital around the world.
Increased productivity due to technology has helped to keep corporate costs in check.
The entity that is responsible for establishing the allocation and cost of capital is investors
Benefits of social responsibility often include Better reputation
Regarding risk levels – financial managers should evaluate investor’s desire for risk
Insider trading The ability to make profits on financial securities because of having Knowledge not available to the public.
Articles of Partnership An agreement of partners specifying the ownership interest of a company
Sole Proprietorship A form of organization that represents single person ownership and offers the advantages of simplicity of decision making and low organizational and operating costs.
Corporation Separate legal entity owned by shareholders who only have limited liability.
Capital Structure Theory The study of the relative importance of debt and equity.
Agency Theory Examines the relationship between the owners of the firm and the managers of the firm.
Subchapter S corporation A form of ownership, in which profit is taxed as direct income to the stockholders and thus is only taxed once.
Partnership A form of ownership that carries unlimited liability to the owners and where the profits are taxed at individual tax rates of the owners.
Financial Capital This form of capital is found on the balance sheet under long-term liabilities and equity.
Inflation The purchasing power of the dollar shrinks over time.Primary Market, A market where the securities being traded are new public offerings.
Money Market Securities with a maturity of less than 1 year
Restructuring Redeploying the asset and liability structure of the firm.
Disinflation A leveling off or slowing down of price increases.
Capital Market Market composed of common stock, preferred stock, commercial and government bonds and other long-term securities.
Secondary Market This market trades previously issued securities.
Real Capital The high inflation rates of the 1980s caused this form of capital to hold its value better than other forms of capital during this time period.

Leave a Reply

Your email address will not be published. Required fields are marked *