FINE 3010 Exam 1 2026 – Study Guide and Practice
Questions
finance - correct answer ✔✔ how people allocate scarce resources over time
three basic types of financial decisions - correct answer ✔✔ - Consumption vs. saving decisions
- Investment decisions
- Financing decisions
consumption vs saving decisions - correct answer ✔✔ How much current wealth we should
spend vs. save. If we spend it today, we won't have the money in the future, and we can't earn
interest on it.
investment decisions - correct answer ✔✔ • If you decide to save some of your wealth, what do
you do with it? Savings account? Stocks? Bonds? Mutual funds? Real estate?
• If you are a decision maker in a firm, what projects do you invest in?
financing decisions - correct answer ✔✔ • How should you use other people's money to
execute your consumption and investment decisions? Buy vs. lease? Cash or credit?
• If you are a decision maker for a firm, do you use internal or external funds? Debt or equity?
Private or public financing sources?
corporate structures - correct answer ✔✔ partnership, sole proprietorship, corporation
sole proprietorship - correct answer ✔✔ Owner of the firm also is the person running the firm.
- Unlimited Liability: anything the entrepreneur has can be seized to pay off the firm's debt.=
Personal Bankruptcy.
,- Profits are taxed as personal income
partnership - correct answer ✔✔ Two or more people join together to jointly own and run a
firm:
- Unlimited Liability
- Profits are shared according to a pre-determined formula.
- Profits are taxed as personal income.
Usual structure of partnerships:
- General Partners
- Limited Partners (llp or llc)
- For example, the hedge fund company...
unlimited liability - correct answer ✔✔ anything the partners have can be seized to payoff the
firm's deb
general partners - correct answer ✔✔ managed the business and have unlimited liability for its
debts.
limited partners - correct answer ✔✔ are liable for the money they invest and do not
participate in the management.
corporation - correct answer ✔✔ Separation of ownership and management.
- Most of the large firms that we know, IBM, GE etc. are corporations.
Stockholders: own the firm, BUT do not run the firm
- Limited Liability: Loss is limited to what they put in.
Managers: run the firm, BUT do not own the firm.
corporate tax on profits+ personal tax on dividends
, advantages of a corporation - correct answer ✔✔ Limited Liability.
Easier Transfer of ownership.
Ability to raise money
disadvantages of a corporation - correct answer ✔✔ Double taxation
separation of ownership and control
- Agency Problems: different objectives!
---> Managers vs. stockholders.
agency problem - correct answer ✔✔ Managers are agents for stockholders and are tempted to
act in their own interests rather than maximizing value
agency cost - correct answer ✔✔ Value lost from agency problems or from the cost of
mitigating agency problems
goals of financial management - correct answer ✔✔ Once we have separated ownership from
control, we have to think carefully about what goals might we give our managers.
What do we want them to (try to) do?
- Examples/possibilities?
To whom do managers ultimately answer?
Given the answer to the above, what is the most appropriate goal to give managers?
who is the financial manager - correct answer ✔✔ chief financial officer--> treasurer &
controller
chief financial officer (CFO) - correct answer ✔✔ Supervises all financial functions and sets
overall financial strategy
Questions
finance - correct answer ✔✔ how people allocate scarce resources over time
three basic types of financial decisions - correct answer ✔✔ - Consumption vs. saving decisions
- Investment decisions
- Financing decisions
consumption vs saving decisions - correct answer ✔✔ How much current wealth we should
spend vs. save. If we spend it today, we won't have the money in the future, and we can't earn
interest on it.
investment decisions - correct answer ✔✔ • If you decide to save some of your wealth, what do
you do with it? Savings account? Stocks? Bonds? Mutual funds? Real estate?
• If you are a decision maker in a firm, what projects do you invest in?
financing decisions - correct answer ✔✔ • How should you use other people's money to
execute your consumption and investment decisions? Buy vs. lease? Cash or credit?
• If you are a decision maker for a firm, do you use internal or external funds? Debt or equity?
Private or public financing sources?
corporate structures - correct answer ✔✔ partnership, sole proprietorship, corporation
sole proprietorship - correct answer ✔✔ Owner of the firm also is the person running the firm.
- Unlimited Liability: anything the entrepreneur has can be seized to pay off the firm's debt.=
Personal Bankruptcy.
,- Profits are taxed as personal income
partnership - correct answer ✔✔ Two or more people join together to jointly own and run a
firm:
- Unlimited Liability
- Profits are shared according to a pre-determined formula.
- Profits are taxed as personal income.
Usual structure of partnerships:
- General Partners
- Limited Partners (llp or llc)
- For example, the hedge fund company...
unlimited liability - correct answer ✔✔ anything the partners have can be seized to payoff the
firm's deb
general partners - correct answer ✔✔ managed the business and have unlimited liability for its
debts.
limited partners - correct answer ✔✔ are liable for the money they invest and do not
participate in the management.
corporation - correct answer ✔✔ Separation of ownership and management.
- Most of the large firms that we know, IBM, GE etc. are corporations.
Stockholders: own the firm, BUT do not run the firm
- Limited Liability: Loss is limited to what they put in.
Managers: run the firm, BUT do not own the firm.
corporate tax on profits+ personal tax on dividends
, advantages of a corporation - correct answer ✔✔ Limited Liability.
Easier Transfer of ownership.
Ability to raise money
disadvantages of a corporation - correct answer ✔✔ Double taxation
separation of ownership and control
- Agency Problems: different objectives!
---> Managers vs. stockholders.
agency problem - correct answer ✔✔ Managers are agents for stockholders and are tempted to
act in their own interests rather than maximizing value
agency cost - correct answer ✔✔ Value lost from agency problems or from the cost of
mitigating agency problems
goals of financial management - correct answer ✔✔ Once we have separated ownership from
control, we have to think carefully about what goals might we give our managers.
What do we want them to (try to) do?
- Examples/possibilities?
To whom do managers ultimately answer?
Given the answer to the above, what is the most appropriate goal to give managers?
who is the financial manager - correct answer ✔✔ chief financial officer--> treasurer &
controller
chief financial officer (CFO) - correct answer ✔✔ Supervises all financial functions and sets
overall financial strategy
