Chap 1 Concepts

1.1 What do you call the specific mixture of long-term debt and equity that a firm chooses to use?

A capital structure, the financial manager has two concerns in this area. What is the best mixture of debt and equity; and what are the least expensive sources of funds for the firm.

1.2 What are the primary advantages and disadvantages of a sole proprietorship compared and partnerships?

Advantages - Easy to start up, all income is taxed as personal income, owners get all the profits. Disadvantages - unlimited liability for business debts on the part of the owners, limited life for the business, and difficulty transferring ownership.

1.1 What is the Capital Budgeting Decision?

Choosing investment opportunities that are worth more to the firm then they cost to acquire. The essence of capital budgeting is evaluating the size, timing, and risk of future cash flows.

1.2 What are the three forms of business organization?

Sole proprietorship, partnership, corporation

1.2 Why is the Corporate form superior when it comes to raising cash?

The corporate form is superior due to the relative ease of transferring ownership, the limited liability of business debts, and the unlimited life of the business.

1.3 What is the goal of financial management?

The goal of financial management is to maximize the current value per share of the existing stock.

1.3 Can you give a definition of corporate finance?

The inter-related relationship of the performance of a companies stock and its business decisions?

1.3 What are some shortcomings of the goal of profit maximization?

We could maximize profits in the short term by deferring mateniance, letting inventories run low, and by taking other short term cost costing measures all of which will hurt the companies long term value.

1.1 Into what category of financial management does cash management fall?

Working Capital Management

What is a dealer management market? How do dealer and auction markets differ?

Dealers generally speaking buy and sell for themselves and dealer markets don't usually have a central location. Auction markets differ from dealer markets in two ways. First an auction market of exchange has a physical location (like wall street). Second in a dealer market most of the time

1.4 What incentives do managers in large companies have to maximize share value?

First managerial compensation, particularly at the top, is usually tied to financial performance in general and often to share value in particular The second incentive related to job prospects. Better performers generally get promoted and those with good reputations and job history demand higher salaries in the labor market.

1.2 What is the difference between a general and a limited partnership?

In a limited partnership the limited partner is only responsible for what they have contributed already and are not responsible for any business debts. In a general partnership all partners have theoretical unlimited liability.

1.4 What are agency problems and how do they come about? What are agency costs?

An agency problem is a conflict of interest and they come about when there is a conflict of interest between the principal and the agent. Agency costs refers to the costs of the conflict of interest between stock holders and management.

1.4 What is an agency relationship?

a relationship when someone (principal) hires another (the agent) to represent his or her interests.