Chapter 1 Finance

Working capital management decisions help to determine:

how a firm's day-to-day financial matters should be managed.

The cash remaining with the firm after paying its operating expenses, making payments to creditors, and taxes is called:

residual cash flows.

Stakeholder

someone who has a claim on the cash flows of the firm.

Which of the following is a stakeholder?

An employee, A lender,The IRS, ETC

Which of the following owners is protected by limited liability?

Owner of a corporation

Which of the following organizational forms is subject to the Securities and Exchange Commission (SEC) regulations?

Public corporation

Deciding whether or not to spend $5 million to purchase a new piece of equipment is an example of a working capital decision faced by a financial manager.

Purchase of equipment is an investment in fixed assets. . Working capital management decisions deal with day-to-day financial matters and affect current assets, current liabilities, and net working capital.

Which of the following is an appropriate goal for a firm?

Stockholder's wealth maximization

A good capital budgeting or investment decision is one in which the benefits are worth more to the firm than the cost of the asset.

True

Corporations hold the majority of all business assets and generate the majority of business revenues and profits in the United States.

True

Privately held corporations are allowed to have stockholders.

True

The financial manager is responsible for making decisions that are in the best interests of the firm's owners.

True

Unlimited liability means that the owner of a firm is responsible for paying all the bills of the firm.

True

Which of the following mechanisms can help to align the behavior of managers with the goals of stockholders?

Well-designed management compensation Managerial labor market An independent board of directors

Financial markets in which equity and debt instruments with maturities greater than one year are traded are called:

capital markets

The owners of a _____ have limited liability for financial obligations.

corporation

Investors determine the value of a firm's stock based on the firm's

expected cash flows. Investors determine the value of a firm's stock based on the size of expected cash flows, the timing of the cash flows and the riskiness of the cash flows.

Capital budgeting decisions generally impact more on:

the asset portion of the balance sheet.

A good capital budgeting decision is:

one in which the benefits of the project are more than the cost of the asset.

The owners of a firm are unaffected by agency costs.

False

Which of the following cannot be engaged in managing the business?

A limited partner

A trademark is an example of:

An intangible asset

Which of the following is a basic source of funds for a firm?

Debt and Equity

An agency conflict can arise when the agent of the firm is the sole owner of the firm.

False

Capital assets are generally short term in nature.

False

Deciding whether or not to spend $5 million to purchase a new piece of equipment is an example of a working capital decision faced by a financial manager.

False

General partners in a business have limited liability with regard to their firm's obligations.

False

The dollar difference between a firm's total current assets and total liabilities is called its net working capital.

False

The primary goal of any firm should be to minimize expenses.

False The primary goal of any firm should be to maximize the current value of the firm's stock. Minimizing expenses, such as reducing research and development expenses, do not necessarily increase the value of the firm.

Maximizing revenue should be the goal of the firm.

Flase

Cash flows to stakeholders of a firm include

interest and principal payments.

Current liabilities are liabilities that

must be paid within a year.

When analysts and investors determine the value of a firm's stock, they should consider:

the size of the expected cash flows associated with owning the stock. the timing of the cash flows. the riskiness of the cash flows.

One reason for the existence of agency problems between managers and stockholders is that:

there is a significant degree of separation between management and ownership.

The capital budgeting decision process addresses

which productive assets a firm should purchase.