Finance 325 Chs. 1-3, 5-6

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

Agency Problems are those between the stockholders (principal) and management (agent). They come about when management doesn't have the stockholder's interest as their own. An agency cost is the cost of the conflict of interest between the two parties (lost opportunities or corporate expenditure benefitting management but costing the stockholders)

Why should financial managers strive to maximize the current value per share of the existing stock? Doing so guarantees the company will grow in size at the maximum possible rate. A. Doing so increases employee salaries. B. Because they have been hired to represent the interests of the current shareholders. C. Because this will increase the current dividends per share. D. Because managers often receive shares of stock as part of their compensation. E. Doing so guarantees the company will grow in size at the maximum possible rate.

B.

Which one of the following is an unintended result of the Sarbanes-Oxley Act? A. More detailed and accurate financial reporting. B. Increased management awareness of internal controls. C. Corporations delisting from major exchanges. D. Increased responsibility for corporate officers. E. Identification of internal control weaknesses.

C.

Which term is defined as the management of a firm's long-term investments?

Capital Budgeting

which term is defined as the mixture of a firm's debt and equity financing?

Capital Structure

What are corporate finance's three main areas of concern?

Capital budgeting: What long-term investments should the firm take? Capital structure: Where will the firm get the long-term financing to pay for its investments? In other words, what mixture of debt and equity should the firm use to fund operations? Working capital management: How should the firm manage its everyday financial activities?

Which one business types is best suited to raising large amounts of capital?

Corporations

Financial managers should primarily focus on the interests of: A. Stakeholders. B. The vice president of finance. C. Their immediate supervisor. D. Shareholders. E. The board of directors.

D.

Which one of the following best illustrates that the management of a firm is adhering to the goal of financial management? A. Decrease in the per unit production costs. B. Increase in the number of shares outstanding. C. Decrease in the net working capital. D. Increase in the market value per share. E. Increase in the amount of the quarterly dividend.

D.

Which one of the following is an agency cost? Accepting an investment opportunity that will add value to the firm. A. Accepting an investment opportunity that will add value to the firm. B. Increasing the quarterly dividend. C. Investing in a new project that creates firm value. D. Hiring outside accountants to audit the company's financial statements. E. Closing a division of the firm that is operating at a loss.

D.

The Sarbanes-Oxley Act of 2002 is a governmental response to: A. Decreasing corporate profits. B. The terrorists attacks on 9/11/2001. C. A weakening economy. D. Deregulation of the stock exchanges. E. Management greed and abuses.

E.

What is an agency relationship?

The relationship between the stockholders and management

The balance sheet is a:

snapshot of the firm

A business created as a distinct legal entity and treated as a legal "person" is called a: Corporation. Sole proprietorship. General partnership. Limited partnership. Unlimited liability company.

Corporation