Exam 1 - LSUS MBA 702 Questions
and All Correct Answers.
Residual Claim - Answer Equity Holder's Claim (Shareholder's Claim)
What are the 3 basic questions Financial Managers must answer? - Answer 1. What long-
term investments should the firm choose?
2. How should the firm raise funds for the selected investments?
3. How should the short-term assets be managed and financed?
What are the 2 sides of the balance sheet model? - Answer Left: Total value of assets
(current assets, fixed assets)
Right: Total firm value to investors (current liabilities, long-term debt, shareholders' equity)
What is the difference between current assets and fixed assets? - Answer Fixed assets - last a
long time (buildings)
Current assets - have short lives (inventory)
What are the 2 types of fixed assets? - Answer Tangible - machinery & equipment
Intangible - patents & trademarks
Net working capital - Answer measure of one or more important measures for the short-
term liquidity.
current assets - current liabilities = net working capital
Current liability - Answer short-term debt
What is the difference between short-term and long-term debt? - Answer Short term debt
must be repaid within 1 year.
Long-term debt does not need repayment within a year
Shareholders' equity - Answer value of assets - debt of the firm = shareholders' equity
What is the financial manager's primary goal? - Answer To increase the value of the firm by:
,1. selecting value creating projects
2. making smart financing decisions
What do the controller and treasurer handle? - Answer Controller: cost & financial
accounting, tax payments, and management information systems
Treasurer: cash & credit, financial planning, capital expenditures
What are the 3 major forms of business organizations? - Answer 1. sole partnership
2. partnership
3. corporation
Sole proprietorship - Answer A business owned by one person
What are the 2 categories of partnerships? - Answer 1. general partnerships
2. limited partnerships
Partnership - Answer a business owned by two or more people
General partnership - Answer all partners agree to provide some fraction of the work and
cash to share the profits and losses.
Partners are personally liable for all debts of the business for unlimited liabilities.
Limited partnership - Answer permit the liability of some of the partners to be limited to the
amount of cash each has contributed to the partnership.
Requires:
1. at least one partner be a general partner
2. limited partners do not participate in managing the business
Corporation - Answer distinct legal entity
owners (stockholders) usually not directly involved in business decisions
How do financial managers create value? - Answer 1. Try to buy assets that generate more
cash than they cost
, 2. Sell bonds, stocks, and other financial instruments that raise more cash than they cost
Is cash flow or net income more important and why? - Answer Cash flow
Net income can be manipulated by managers
What is the cycle of cash flow? - Answer a. cash is invested in the assets of the firm (firm
issues securities)
b. financial market will inject capital into the firm
c. cash is generated by the firm for good value enhancing products
d. taxes are paid to the government
e. shareholders receive cash in the form of dividends
f. some cash is retained and reinvested into the firm/project
What is the goal of financial management?
A. Maximize profit
B. Minimize costs
C. Maximize market share
D. Maximize shareholder wealth - Answer D. Maximize shareholder wealth
Agency relationship - Answer the relationship between stockholders (principals) and
management (agents)
Agency Cost - Answer the costs of the conflict of interest between stockholders and
management
Direct agency costs - Answer Corporate expenditure that benefits management but costs
stockholders
ex: purchase of something by management that can't be justified from a risk-return standpoint
and monitoring costs
Indirect agency costs - Answer management's tendency to forgo risky or expensive projects
that could be justified from a risk-return standpoint.
Why does the agent problem exist? - Answer 1. Expensive perquisites - managers may want
to get high compensation
and All Correct Answers.
Residual Claim - Answer Equity Holder's Claim (Shareholder's Claim)
What are the 3 basic questions Financial Managers must answer? - Answer 1. What long-
term investments should the firm choose?
2. How should the firm raise funds for the selected investments?
3. How should the short-term assets be managed and financed?
What are the 2 sides of the balance sheet model? - Answer Left: Total value of assets
(current assets, fixed assets)
Right: Total firm value to investors (current liabilities, long-term debt, shareholders' equity)
What is the difference between current assets and fixed assets? - Answer Fixed assets - last a
long time (buildings)
Current assets - have short lives (inventory)
What are the 2 types of fixed assets? - Answer Tangible - machinery & equipment
Intangible - patents & trademarks
Net working capital - Answer measure of one or more important measures for the short-
term liquidity.
current assets - current liabilities = net working capital
Current liability - Answer short-term debt
What is the difference between short-term and long-term debt? - Answer Short term debt
must be repaid within 1 year.
Long-term debt does not need repayment within a year
Shareholders' equity - Answer value of assets - debt of the firm = shareholders' equity
What is the financial manager's primary goal? - Answer To increase the value of the firm by:
,1. selecting value creating projects
2. making smart financing decisions
What do the controller and treasurer handle? - Answer Controller: cost & financial
accounting, tax payments, and management information systems
Treasurer: cash & credit, financial planning, capital expenditures
What are the 3 major forms of business organizations? - Answer 1. sole partnership
2. partnership
3. corporation
Sole proprietorship - Answer A business owned by one person
What are the 2 categories of partnerships? - Answer 1. general partnerships
2. limited partnerships
Partnership - Answer a business owned by two or more people
General partnership - Answer all partners agree to provide some fraction of the work and
cash to share the profits and losses.
Partners are personally liable for all debts of the business for unlimited liabilities.
Limited partnership - Answer permit the liability of some of the partners to be limited to the
amount of cash each has contributed to the partnership.
Requires:
1. at least one partner be a general partner
2. limited partners do not participate in managing the business
Corporation - Answer distinct legal entity
owners (stockholders) usually not directly involved in business decisions
How do financial managers create value? - Answer 1. Try to buy assets that generate more
cash than they cost
, 2. Sell bonds, stocks, and other financial instruments that raise more cash than they cost
Is cash flow or net income more important and why? - Answer Cash flow
Net income can be manipulated by managers
What is the cycle of cash flow? - Answer a. cash is invested in the assets of the firm (firm
issues securities)
b. financial market will inject capital into the firm
c. cash is generated by the firm for good value enhancing products
d. taxes are paid to the government
e. shareholders receive cash in the form of dividends
f. some cash is retained and reinvested into the firm/project
What is the goal of financial management?
A. Maximize profit
B. Minimize costs
C. Maximize market share
D. Maximize shareholder wealth - Answer D. Maximize shareholder wealth
Agency relationship - Answer the relationship between stockholders (principals) and
management (agents)
Agency Cost - Answer the costs of the conflict of interest between stockholders and
management
Direct agency costs - Answer Corporate expenditure that benefits management but costs
stockholders
ex: purchase of something by management that can't be justified from a risk-return standpoint
and monitoring costs
Indirect agency costs - Answer management's tendency to forgo risky or expensive projects
that could be justified from a risk-return standpoint.
Why does the agent problem exist? - Answer 1. Expensive perquisites - managers may want
to get high compensation
