An Introduction to the Foundations of Financial Management

Vocabulary practice cards covering key concepts, foundational principles, organizational forms, and finance roles from Chapter 1 of Foundations of Finance.

Maximizing Shareholder Wealth

The primary goal of the firm, which is achieved by maximizing the market price of the existing common stock.

Incremental Cash Flow

The difference between the projected cash flows if a project is selected versus what they will be if the project is not selected.

Opportunity Cost

The cost of making a choice in terms of the next best alternative that must be forgone.

Risk-Return Trade-off

The financial principle that investors will not take on additional risk unless they expect to be compensated with additional expected return, receiving compensation both for delaying consumption and for taking on added risk.

Efficient Market

A market in which the prices of all traded assets fully reflect all available information at any moment in time.

Agency Problem

A conflict of interest resulting from the separation of management and ownership, where managers may make decisions that are inconsistent with maximizing shareholder wealth.

Capital Budgeting Decision

The financial management decision process concerning what long-term investments the firm should undertake.

Capital Structure Decision

The financial management decision process concerning how the firm should raise money to fund its long-term investments.

Working Capital Management Decision

The financial management decision process concerning how cash flows arising from day-to-day operations should be managed.

Finance Area Organizational Structure

The corporate operational division under the CEO where financial, strategic, and cash flow responsibilities are delegated to the CFO, Treasurer, and Controller.

Sole Proprietorship

A business form owned by an individual who maintains title to assets and profits, characterized by unlimited liability and termination upon owner death or choice.

General Partnership

A business structure in which two or more co-owners are each fully responsible for all liabilities incurred by the partnership.

Limited Partnership

A partnership where one or more partners have limited liability restricted to their invested capital, requiring at least one general partner with unlimited liability.

Corporation

A legal business entity operating separate and apart from its owners, providing limited liability to shareholders and unlimited life, but subject to double taxation.

Double Taxation

A taxation structure where corporate earnings are taxed at the corporate level and taxed again at the personal level when distributed to shareholders as dividends.

S-Corporation

A hybrid corporate form that offers limited liability and pass-through partnership taxation, restricted to a maximum of 100 human owners.

Limited Liability Company (LLC)

A hybrid business entity offering limited liability and pass-through taxation like a partnership, without restrictions on owner corporate status or state-level qualification rules.

Treasurer

A financial officer under the CFO whose duties include cash management, credit management, capital expenditures, raising capital, financial planning, and management of foreign currencies.

Controller

A financial officer under the CFO whose duties include taxes, financial statements, cost accounting, and data processing.