FNAN 320 EXAM 1 STUDY GUIDE
Capital Structure - Answers - refers to the specific mixture of long-term debt and equity
the firm uses to finance its operations
Forms of business ownership (advantages and disadvantages) - Answers - Sole
Proprietorship: This is a business owned by one person. the simplest kind of business
to start. the sole proprietor keeps all profits but has unlimited liability. The business =
The owner. All business income is seen as personal income.
Partnership: Similar to a sole proprietorship but has two or more owners. all partners
share the gains or losses. all have unlimited liability not just the particular share. The
gains and losses are divided in the partnership agreement. The disadvantages and
advantages are the same as that of a sole proprietorship such as income is taxed as
personal income and cheap to form. each owner has unlimited liability and can only
raise equity by the amount of wealth each owner has.
Corporation: a corperation in the united states is considered a legal person. the
advantages of a corporation is the liabilities are limited to what each owner has put into
the company and the corporation has unlimited life. corporations can also sell shares of
stock. the disadvantages is the income for the owners is basically double taxed. the
income is taxed as a corporation as well as income tax when the owners are paid out.
dividends, however, are not taxed.
Agency Conflicts - Answers - the possibility of conflict of interest between the owners
and management of a firm. Ex) suppose you hire someone to sell your car and you
agree to pay her a flat fee when she sells the care. the agents incentive in this case is to
make the sale, not necessarily to get you the best price. if you paid a commission of say
10 percent of the sales price instead of a flat fee then this problem might not exist.
Primary goal of financial management - Answers - the most common goal of financial
management is to maximize profits. the goal of financial managers in corporations is to
make decisions for the stockholders. "in the point of view of the stockholders, what is
the best financial move?"
Sarbanes-Oxley - Answers - Created in 2002 this act is intended to strengthen
protection against corporate accounting fraud and financial malpractice. The officers
must sign and personally check the annual report.
Net working capital - Answers - current assets minus current liabilities. If assets are
higher than liabilities that means within the next 12 months we will have a positive inflow
of cash because the cash available over the next 12 months exceeds the cash that
must be paid.
Capital Structure - Answers - refers to the specific mixture of long-term debt and equity
the firm uses to finance its operations
Forms of business ownership (advantages and disadvantages) - Answers - Sole
Proprietorship: This is a business owned by one person. the simplest kind of business
to start. the sole proprietor keeps all profits but has unlimited liability. The business =
The owner. All business income is seen as personal income.
Partnership: Similar to a sole proprietorship but has two or more owners. all partners
share the gains or losses. all have unlimited liability not just the particular share. The
gains and losses are divided in the partnership agreement. The disadvantages and
advantages are the same as that of a sole proprietorship such as income is taxed as
personal income and cheap to form. each owner has unlimited liability and can only
raise equity by the amount of wealth each owner has.
Corporation: a corperation in the united states is considered a legal person. the
advantages of a corporation is the liabilities are limited to what each owner has put into
the company and the corporation has unlimited life. corporations can also sell shares of
stock. the disadvantages is the income for the owners is basically double taxed. the
income is taxed as a corporation as well as income tax when the owners are paid out.
dividends, however, are not taxed.
Agency Conflicts - Answers - the possibility of conflict of interest between the owners
and management of a firm. Ex) suppose you hire someone to sell your car and you
agree to pay her a flat fee when she sells the care. the agents incentive in this case is to
make the sale, not necessarily to get you the best price. if you paid a commission of say
10 percent of the sales price instead of a flat fee then this problem might not exist.
Primary goal of financial management - Answers - the most common goal of financial
management is to maximize profits. the goal of financial managers in corporations is to
make decisions for the stockholders. "in the point of view of the stockholders, what is
the best financial move?"
Sarbanes-Oxley - Answers - Created in 2002 this act is intended to strengthen
protection against corporate accounting fraud and financial malpractice. The officers
must sign and personally check the annual report.
Net working capital - Answers - current assets minus current liabilities. If assets are
higher than liabilities that means within the next 12 months we will have a positive inflow
of cash because the cash available over the next 12 months exceeds the cash that
must be paid.
