Chapter 1 Financial Management

What claimant is paid last?

owners

Hillary Rotteneggs wishes to form a company that will specialize in toxic waste removal and storage. Which type of business form would be most advantageous?

a corporation due to it’s limited liability

An important advantage a general partner usually has is

a share of the profits that are not taxed until received by the partner

Larger corporate profit and cash inflows than what had been expected usually

mean a higher stock price

In a large corporation, the controller reports to the

chief financial officer

What is correct about limited partners?

they have limited liability

Current profit maximization:

is a goal that does not consider future cash flows or risk

With respect to cash:

you would agree to pay some given amount of cash in the future rather than the same given amount to be paid now

Managerial finance is:

decision making aimed at obtaining and allocating the firm's scarce financial capital so as to maximize stockholder wealth

The role of the financial manager:

dealing with converting financial resources such as equity and debt capital into products and services that have market value

Financial function includes:

determining the firm's investment, financing, dividend, capital structure, and working capital policies

Financial management requires:

use of accounting and economic knowledge

Accounting in finance includes basic financial statements like:

the balance sheet, the income statement, and the statement of cash

flows

Economics provides the manager with:

more theoretical concepts as to how resources are allocated in a market system and how microeconomic and macroeconomic factors influence the manager's allocation function at the firm level

Corporate financial management:

deals with planning, organizing, controlling, and managing the firm's financial resources to maximize profits and increase long-term shareholder value

Financial markets and institutions:

concerns jobs that channel funds through the economic system such as careers in banking, insurance, the brokering of stocks and bonds, and real estate

Jobs in investments:

deal with the efficient allocation of money wealth to various financial assets.

Most fertile areas for career opportunities today are found in:

investments and financial markets fields

Profit-Oriented Firms:

are organized by function designated areas comprised of similar job duties headed by a vice-president or coordinator

Specialization and division of labor:

reduce costs of production and are the reasons firms organize by function

The goal of the firm and financial manager:

is to maximize the value of the resources that stockholders have committed to the firm

Firm value:

is determined by what the market is willing to pay for the firm's net worth (assets less liabilities)

Increase in value translate to:

increases in stockholder wealth

A convenient proxy for firm value and wealth is given by:

the current dollar value of the firm's stock on the open market

How do you get the market value of the firm?

multiplying the number of shares of stock outstanding x the current market price

Stock price maximization is the same thing as:

stockholder wealth maximization

The three determinants of a firm’s stock price are:

magnitude of the expected cash flows to be generated by the stock, the timing of the cash flows, the risk or uncertainty associated with receiving the cash flows

An increase in stock price happens when:

any event that increases and/or speeds up the receipt of expected cash flows

A reduce in stock prices happens when:

any event or financial decision that increases the risk associated with receipt of expected cash flows

Profit maximization overlooks:

the time value of money, emphasizes accrual earnings as opposed to cash flow, ignores risk

Profit maximization:

is an accounting construct derived by subtracting expenses from revenues

Financial managers:

act as agents for the stockholders who are principals

Financial decisions:

should be consistent with the best interests of the stockholders so that the agent-principal relationship is maintained

Agency problem:

happens when there is a violation of the agent-principal alliance

Agency costs include:

financial monitoring costs such as audits, performance bonds placed on managers, and employee stock option plans

Limited partnership:

made up of general and limited partners

General partners:

actively participate in the management of the business

Limited partners:

contribute capital and share in the profits but take no part in running the business

Limited liablity partnerships:

general partnerships that are allowed to operate like a corporation, with the limited liability features of a corporation

S Corporation:

do not pay income tax themselves, instead they pass their income through to the owners who report it on their individual tax returns

Professional Corporations PCs:

provide “professional services” such as medical, legal, accounting, or architectural services. only members of the profession may be shareholders in the corporation

Benefit Corporations:

can pursue goals beyond maximizing shareholder value, they can apply for a charter that provides societal, environmental, and transparency goals in addition to profit for the owners

Limited Liability Companies LLCs:

hybrids between partnerships and corporations, they pass their profits and losses through to their owners without taxation of the LLC itself like partnerships, and they provide limited liability for their owners like corporations

The financial bubble:

an economic period in which the price of an asset increases drastically and exceeds the fundamental value of the asset and then it’s followed by a drastic contraction

Long-term strategic planning and forecasting are:

important duties of financial management

Maximizing wealth:

increasing the value of the firm, which is ultimately determined by what the market is willing to pay for the firm’s net worth

Stock prices increase:

due to events that increase or speed up the receipt of expected cash flows

Stock prices decrease:

due to events or financial decisions that increase the risk associated with receipt of expected cash flows

Sole proprietorship:

very easy to form and give you complete control of your business, automatically this if you do business activities and do not register as any other kind of business, the most widely used

As a sole proprietor:

your business assets and liabilities are not separated from your personal assets/liabilities, unlimited liability

Partnerships:

liable for the activities of the business as a whole and file their profits/losses on their personal tax returns