FINC 361 Part 1

What are the advantages and disadvantages of increasing the options granted to​ CEOs?

The advantages are​ that, since options increase in value when the​ firm's stock price​ increases, the​ CEO's wealth and incentives will be more closely tied to the​ shareholders' wealth. The disadvantage is that option grants can increase a​ CEO's incentives to game the system by timing the release of information to fit the option granting schedule or to artificially smooth earnings.

Which of the following is typically the major factor in limiting the growth of sole​ proprietorships?

The amount of money that can be raised by such firms is limited by the fact that the single owner must make good on all debts

Every public company is required to produce quarterly and annual financial statements. Those statements​ are: ​(Select all the choices that​ apply.) A. The statement of financial position. B. The income statement. C. The statement of cash flows. D. The statement of​ stockholders' equity. E. The statement of​ stockholders' liabilities.

A, B, C, D

What checks are there on the accuracy of these​ statements? ​(Select all the choices that​ apply.) A. Public companies must use a common set of rules and standard format when they prepare their reports. B. Corporations are required to hire a neutral​ party, known as an​ auditor, to check the annual financial​ statements, ensure that the statements are prepared according to GAAP and provide evidence to support the reliability of the information. C. In addition to the​ auditor's role in reviewing the financial​ statements, the​ Sarbanes-Oxley Act requires both the CEO and the CFO to personally attest to the accuracy of the financial statements presented to shareholders and to sign a statement to that effect. D. When an auditor is not​ available, a​ corporation's CFO or the CEO can certify that financial statements are prepared according to GAAP.

A,B,C

What are the main advantages of organizing a firm as a​ corporation? The advantages​ are: ​(Select all the choices that​ apply.) A. There is no limit on the number of owners a corporation may​ have, thus allowing the corporation to raise substantial amounts of capital. B. The life of the business can continue beyond the death of any of the owners. C. The corporation can use the assets of the owners to pay for corporate liabilities. This attracts smaller investors to the corporation. D. The liability of the owners is limited to the amount of their investment in the firm.

A,B,D

Examples of agency problems​ are: ​ (Select all the choices that​ apply.) A. Excessive perquisite consumption. B. Strict internal control mechanisms. C. Value destroying acquisitions. D. Ability of managers to own the​ company's shares.

A,C

The disadvantages​ of a corp. are: ​(Select all the choices that​ apply.) A. Income to a corporation is subject to double​ taxation, once at the corporate level and again when received by the owners in the form of a dividend. B.The life of the business usually ends with the death of any of the owners. C. The corporation is more complicated and more expensive to set up than other business entities. D. Corporate liabilities can be passed on to the​ shareholders, thus making stock ownership primarily the realm of wealthy investors.

A,C

How are lenders part of corporate​ governance? ​(Select the best choice​ below.) A. They help managers look for positive NPV investments. B. They monitor management by checking and enforcing covenants. C. They restrict credit and thus force managers to report more accurately.

B (covenants)

Joe is a general partner in a limited partnership​ firm, while Jane is a limited partner in the same firm. Which of the following statements regarding their respective relationships to the firm is​ correct? A. Jane is legally involved in the managerial decision making of the firm. B. Withdrawal of Jane from the partnership will dissolve the partnership. C. Jane's liability for the​ firm's debts consists solely of her investment in the firm. D. Joe has no management authority within the partnership.

C

Which of the following is NOT a function of the board of​ directors? A.answering to shareholders of the company B.monitoring the performance of the company C.day−to-day running of the company D.determining how top executives should be compensated

C

In most​ corporations, the owners exercise direct control of a corporation.

False

What is the financial cycle

In the financial​ cycle, money flows from savers and investors to companies who use that money to fund growth through new products. Financial institutions connect the money with ideas and assist in returning the profits back to the investors. In the financial​ cycle, companies generate profits and wages and interest which then flow back to the savers and investors.

What role do investment banks play in the​ economy?

Investment banks advise companies in major financial transactions such as buying or selling companies or divisions. Investment banks assist companies in raising capital by issue of stocks and bonds on behalf of corporate clients.

A typical company has many types of​ shareholders, from individuals holding a few​ shares, to large institutions that hold very large numbers of shares. How does a financial manager ensure that the priorities and concerns of such disparate stockholders are​ met?

In​ general, all shareholders will agree that they are better off if the financial manager works to maximize the value of their investment.

What is the major advantage corporations have over other business​ entities?

It is easier for a corporation to raise capital than other forms of businesses. A​ corporation's shares can be freely traded among its shareholders. A corporation is treated as a separate legal entity for tax and legal purposes.

Which organizational forms give their owners limited​ liability?

Limited partnership for limited partners only. & Corporation.

Corporate managers work for the owners of the corporation.​ Consequently, they should make decisions that are in the interests of the​ owners, rather than in their own interests. What strategies are available to shareholders to help ensure that managers are motivated to act this​ way?

Mount hostile takeovers. Ensure that underperforming managers are fired. Ensure that employees are paid with company stock​ and/or stock options. Write contracts that ensure that the interests of the managers and shareholders are closely aligned.

What are some of the similarities and differences among mutual​ funds, pension​ funds, and hedge​ funds?

Mutual​ funds, pension funds and hedge funds are all financial institutions involved with helping savers and investors reach their financial goals. Unlike mutual funds and pension funds which serve investors of all​ means, hedge funds are primarily designed for wealthy investors and endowments. Pension​ funds, which are similar to mutual funds in that they buy​ stocks, bonds and other financial instruments on behalf of its​ investors, is primarily concerned with providing retirement income. Mutual funds allow investments to be accumulated and withdrawn for a variety of financial goals.

What is the role of the board of directors in corporate​ governance?

The board of directors is the primary internal control mechanism and the FIRST line of defense to prevent​ fraud, agency​ conflicts, and mismanagement. The board is empowered to hire and fire​ managers, set compensation​ contracts, approve major investment​ decisions, etc.

What are the advantages and disadvantages of the corporate organizational​ structure?

The corporate organizational form allows those who have the capital to fund an enterprise to be different from those who have the expertise to manage the enterprise. The critical separation of management and ownership allows a wide class of investors to share the risk of the enterprise. The separation of management and ownership comes at a cost—the managers will act in their own best​ interests, not in the best interests of the shareholders who own the firm.

Corporations have come to dominate the business world through their ability to raise large amounts of capital by sale of ownership shares to anonymous outside investors

True

Over four−fifths of all U.S. business revenue is generated by which type of​ firms?

corporations

What is the most common type of firms in the United States and the​ world?

sole proprietorships