Introduction to Finance

What are the three major areas in finance?

Investment, Corporate Finance, Capital Markets and Financial Institutions.

What is the primary reason for investment?

To increase wealth for future consumption.

What is capital budgeting?

The process of determining which long-term investments or projects the business should undertake.

What distinguishes the primary market from the secondary market?

Primary market is where companies raise funds; secondary market is where investors trade their financial assets.

What is the main advantage of a sole proprietorship?

Easiest to start and least regulated.

What is the disadvantage of a partnership?

Unlimited liability.

What advantage does a corporation have over a sole proprietorship?

Limited liability.

Who is typically the top financial manager in a firm?

The Chief Financial Officer (CFO).

What is the goal of financial management?

Maximize the current value of the company’s stock.

Define agency relationship.

A situation where a principal hires an agent to represent their interests.

What is the agency problem?

The conflict of interest between the principal and agent.

How can managerial compensation align management and stockholder interests?

Incentives need to be structured carefully to align interests.

What is the threat of takeover in corporate control?

It may result in better management.

What are financial intermediaries?

Institutions that act as intermediaries between investors and companies.

What do we call the process of managing day-to-day finances of a firm?

Working capital management.

What are financial assets?

Instruments that represent a claim to the ownership of an asset, such as stocks and bonds.

Explain the difference between general and limited partnerships.

In a general partnership, all partners share responsibility; in a limited partnership, one or more partners have limited liability.

What is the tax implication for corporations?

Double taxation; income is taxed at the corporate rate and dividends taxed at the personal rate.

What is portfolio management?

The process of managing a group of investments to achieve specific investment goals.

What are the advantages of a corporation?

Limited liability, unlimited life, easy transfer of ownership, and easier capital raising.