Finance Chapter 1 Essay
Explain what capital structure management is and give three examples of capital structure decisions.
Capital structure management relates to the debt-equity mix of a firm. Decisions in this area include: decisions related to the target debt-equity mix, the source of debt financing, the methods used to issue debt and equity, and how debt holders and shareholders should be compensated.
Assume a firm has both a controller and a treasurer. Identify the types of responsibilities each should have an explain why their duties should be separated as you suggest.
The key point that students need to include in their answer is that the responsibility for the firm's cash must be separated from the accounting functions which record the cash transactions. The treasurer should be responsible for the cash management, credit management, capital expenditures, and financial planning. The controller should oversee the financial and cost accounting, data processing, and tax management.
Give an example of a situation where the management of a firm is acting in a manner that is contrary to the principal goal of financial management.
The primary goal of financial management is to maximize the current value of the existing stock. Any management action that is contrary to this goal would be an acceptable answer.
Explain the primary goal of the Sarbanes-Oxley Act in 2002 and discuss whether or not this act appears to be effectively meeting that goal.
The primary goal of the Sarbanes-Oxley Act was to strengthen the protection against corporate accounting fraud and financial malpractice. The act is probably effective for those firms to "go dark", avoid public offerings, or be listed on foreign exchanges rather than US exchanges.
Give an example of a potential agency problem for a corporation and identify means by which the firm can help reduce or eliminate that problem.
Students answers will vary but most should address the potential conflict between the managers and the owners of a firm. The primary means of eliminating that potential conflict is to reward managers when they adopt policies preferred by shareholders and punish managers who ignore shareholder interests.
Which type of financial market, dealer or auction, is best suited to expanding internationally and why?
A dealer market is best suited to international expansion because it is all electronic. An auction market is less adaptable to international expansion because it requires a physical trading floor.
Todd wants to start his own business and is debating between organizing the business as a sole proprietorship or a corporation. Explain the pros and cons of both forms of business organization.
Sole Proprietorship: Pros- Easy to form, least regulated, owner receives all the profits as personal income, difficult to transfer ownership Cons- Unlimited personal liability, limited life, equity limited to personal resources Corporation: Pros- Unlimited life, limited liability, own legal identity, relatively easy transfer of ownership if publicly traded, easier access to capital Cons- More difficult to form, more regulation, double taxation
List three decisions that a financial manager makes that would fall under the category of working capital management.
Working capital management is the management of a firm's current accounts. Decisions related to these accounts include, determining which customers will receive credit and what the credit terms will be, determining which inventory to purchase and how much inventory to keep on hand, deciding when to pay a supplier, and deciding how beset to manage the firm's cash.