Chapter 1 – Goals of Financial Management

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Issues of corporate governance are problems related to:
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Agency theory
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Agency theory
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examines the relationship between the owners and the managers of the firm
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Some of the drawbacks of profit maximization as the primary goal of the firm
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1. change in profit may represent a change in risk 2. maximizing profits fails to consider the timing of benefits 3. it is impossible to accurately measure the key variable, which is profit
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Capital Structure Theory
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the study of the relative importance of debt and equity
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Financial capital (money) is used to purchase real capital (long-term plant and equipment)
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True
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The ultimate measure of performance for a firm is what the firm earns
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False The ultimate measure is not how much the firm earns but how valuable these earnings are to investors
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Financial managers must know how to interpret a company’s financial statements in order to:
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1. use these statements in allocating the firm’s financial resources 2. to generate the best return possible in the long run
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The financial manager should attempt to maximize the wealth of the firm’s shareholders through achieving the highest possible value for the firm
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True This is Shareholder wealth maximization
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A corporation differs from a sole proprietorship and partnership in that:
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1. it is a legal entity unto itself 2. formed through Articles of incorporation 3. Sale of shares in public financial markets 4. possible double taxation of earnings
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A firm may go to the markets to raise financial capital by:
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1. selling common stock 2. issuing bonds 3. issuing short term notes
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Money markets
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Markets dealing with short-term securities that have a life of one year or less
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Capital markets
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Markets where securities have a life of more than one year. Intermediate markets are 1-10 years and long term markets are greater than 10 years.
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Allocation of capital in the financial markets is based on:
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the risk-return trade off
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The field of finance is closely related to economics and accounting
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True
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Profit maximization is the primary goal of the firm
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False Profit maximization has short term perspective. Shareholder wealth maximization is the primary goal of a for-profit firm
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The growth of the global company has lead to the growth of global fund raising as companies search for low-priced sources of fund on international money and capital markets
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True
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The goal of shareholder wealth maximization can be consistent with a concern for social responsibility for the firm by adopting policies that maximize values in the market
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True
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Daily activities of the financial manager:
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1. credit management 2. inventory control 3. receipt and disbursement of funds
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Occasional activities of the financial manager:
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1. stock issue 2. bond issue. 3. capital budgeting 4. dividend decision
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Major drawback of sole proprietorship is unlimited liablility
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True
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Inflation is not a key variable in financial decisions
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False Inflation has always been a key variable in financial decisions
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When a corporation uses the financial markets to raise new funds called and Initial Public Offering (IPO), the sale of securities is made in the:
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Primary Market
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Securities sold to the public are continually changing in the
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Secondary Market
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Insider Trading
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Occurs when someone has information that is not available to the public and then uses it to profit from trading in a company’s publicly traded securities. This is an illegal practice protected against by the Securities and Exchange Commission (SEC)
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Financial markets
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The meeting place for people, corporations, and institutions that either need money or have money to lend or invest.
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Due to internationalization, future financial managers will need to understand:
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1. international capital flows 2. computerized electronic funds transfer systems 3. foreign currency hedging strategies
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Restructuring a business can result in:
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1. selling of low-profit-margin divisions 2. removal of current managers 3. changes in firm’s capital structure
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The Public Company Accounting Oversight Board was established by the Sarbanes-Oxley Act of 2002
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True
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Dodd-Frank Act (Wall Street Reform and Consumer Protection Act of 2010)
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Purports to promote financial stability by improving accountability and transparency in the overall financial system, protecting taxpayers by improving the stability of large, diversified financial institutions, and protecting consumers form abusive practices in the financial services industry.
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The corporation’s Board of directors is ultimately responsible for managing shareholder’s interests
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True

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