Finance quiz 1

What is the goal of Financial Management?

The goal of financial management is to maximize shareholder wealth. Profit maximization is limited because it is vague, ignores the timing of cash flows, and does not consider risk. It may also focus on short-term results. In contrast, maximizing shareholder wealth considers long-term value, risk, and future expectations.

What are the 3 financial management decisions

The three financial management decisions are capital budgeting, which involves long-term investment decisions, capital structure, which refers to how the firm is financed through debt and equity, and working capital management, which deals with short-term assets and liabilities such as cash and inventory.

What is the Agency problem

The agency problem is the conflict of interest between shareholders and managers. It exists because ownership and control are separated in a corporation. Managers may act in their own interest, such as avoiding risk or using company resources for personal benefit. This problem can be reduced through incentives, monitoring, and the threat of takeover.

What is a sole proprietorship and its limitation?

A sole proprietorship is a business owned by one person. Its main limitation is unlimited liability, meaning the owner is personally responsible for all debts

What is a partnership and its limitation?

A partnership is a business owned by two or more people. Its main limitation is shared liability and potential conflicts between partners.

What is a corporation + advantage + disadvantage?

A corporation is a separate legal entity from its owners. Its advantages include limited liability and the ability to raise large amounts of capital. However, it may face an agency problem due to separation of ownership and control.

What are the three types of business organization?

• Sole proprietorship

• Partnership

• Corporation

What is the difference between primary and secondary markets?

In the primary market, the company receives money from selling new securities. In the secondary market, investors trade existing securities, so the company does not receive funds. Secondary markets provide liquidity and price discovery.

What is the difference between money and capital markets?

Money markets deal with short-term securities (less than one year), while capital markets deal with long-term securities.

Cash flow v. profit?

Financial management focuses on cash flow rather than profit because cash flow represents real money coming in and out of the business, while profit is based on accounting rules and may not reflect actual value.- cash flow is better because it reflects real value

Shareholders vs. stakeholders?

Shareholders are the owners of the company, while stakeholders include all parties affected by the business such as employees and customers. Financial management focuses on shareholders because they own the firm and take the financial risk.”

Auction vs Dealer?

• Auction → buyers & sellers directly

• Dealer → trade through dealers

Money vs Capital Markets?

Money markets deal with short-term securities, while capital markets deal with long-term securities.

Financial Institutions?

Financial institutions, such as banks and insurance companies, act as intermediaries that connect savers and borrowers.