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Finance Flashcards

FINANCE CH. 1

In the past, the study of finance has included -All of the options-mergers and acquisitions.-raising capital.-bankruptcy.
Agency theory would imply that conflicts are more likely to occur between management and shareholders when the chairman of the board of directors is also the chief executive officer (CEO).
Institutional investors are important in today’s business world because -All of the options-as large investors, they have more say in how businesses are managed.-as a group they can vote large blocks of stock for the election of board members.-they have a fiduciary responsibility to the workers and investors that they represent to see that the firms they own are managed in an ethical way.
The financial markets allocate capital to corporations by reflecting expectations of the market participants in the price of the corporation’s stock.
Companies that have higher risk than a competitor in the same industry will generally have -All of the options-to pay a higher interest rate than its competitors.-a higher cost of funds than its competitors.-a lower relative stock price than its competitors.
Proper risk-return management means that the firm must determine an appropriate trade-off between risk and return.
Money markets include which of the following securities? Treasury bills and commercial paper.
The partnership form of an organization avoids the double taxation of earnings and dividends found in the corporate form of organization.
Sole proprietorship means single-person ownership and offers the advantages of simplicity of decision making and low organizational and operating costs. TRUE
Corporate governance is the relationship and exercise of oversight by the board of directors of the company
Many companies such as Tyco, Enron, and WorldCom that suffered financial distress in the late 1990s and early 2000s -All of the options are true.-went bankrupt.-committed fraud.-had failed corporate governance oversight.
The partnership form of an organization avoids the double taxation of earnings and dividends found in the corporate form of organization.
One of the major advantages of a sole proprietorship is low operating costs.
One of the major disadvantages of a sole proprietorship is that there is unlimited liability to the owner.
What should be the primary goal of financial management? Maximizing shareholder wealth
A financial manager’s goal of maximizing current or short-term earnings may not be appropriate because -All of the options are true.-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.-it fails to consider the timing when shareholders want increased earnings and may instead consider the manager’s own goals.
In terms of revenues and profits, the corporation is by far the most important form of business organization in the United States. TRUE
A corporation is -All of the above-owned by stockholders who enjoy the privilege of limited liability.-a separate legal entity with unlimited life.-easily divisible between owners.
Institutional investors have had increasing influence over corporations with their ability to vote with large blocks of stock and replace poorly performing boards of directors. TRUE

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