FINANCIAL MANAGEMENT EXAM 1 ESSENTIAL
STUDY QUESTIONS AND ANSWERS
◉ Three Components of Finance.
Answer: 1. Capital Budgeting
2. Capital Structure
3. Working Capital Management
◉ Capital Budgeting.
Answer: What are we going to put our money into? What
investments should the firm undertake?
The decision making process used to analyze potential investments
in fixed assets.
Ex: Introducing a product to a firm.
◉ Capital Structure.
Answer: How should the firm raise money to fund these long term
investments? The mix of long-term sources of funds used by the
firm.
Ex: How to finance the development and production of a product.
◉ Working Capital Management.
,Answer: How can the firm best manage the cash-flows as they arise
day to day? It is the management of day-to-day operations and
decisions that relate to working capital and short term financing.
Ex: How much inventory to hold in stock.
◉ Financial Markets.
Answer: Mechanisms that allow people to easily buy and sell
financial claims, institutions that facilitate financial transactions.
◉ Sole Proprietorship.
Answer: Definition: A business owned by a single individual who is
entitled to all profits and all debt (money that have been borrowed
and must be paid back.
◉ Overview of Sole Proprietorship.
Answer: 1. One owner
2. Liable for debt (if the business is being sued, so is the owner).
3. Owner manages firm
4. Ownership change dissolves the firm
5. Very limited access to capital (they invest their own funds and
borrow from bank).
6. Personal Taxation
,◉ Partnership (2).
Answer: Parntershipl: an association of two or more persons who
come together as co-owners for the purpose of operating a business
for profit.
Limited: a partnership in which one or more of the partners have
limited liability that is restricted to the amount of capital her or she
invests in the partnership.
◉ Partnership Overall.
Answer: 1. Unlimited partners
2. Unlimited Liability
3. Owners manage firm
4. Ownership change dissolves firm
5. Very limited access to capital
6. Personal taxation
◉ Limited Partnership Overall.
Answer: 1. One GP and unlimited partners.
2. GP unlimited liability, LP liable for only what they invest.
3. GP manages firm, LP no role in management
4. GP change can dissolve firm, but LP can change freely
5. Limited access to capital
6. Personal Taxation
, ◉ Corporation.
Answer: A business entity that legally functions separate and apart
from the owners. Owners are the shareholders and stockholders.
Their goal is to maximize the total market value of the firm's
common stock.
◉ Corporation Overall.
Answer: 1. Unlimited Partners
2. No liability for firm's debts
3. Owners don't manage firm, but they have owners stake.
4. Change in ownership don't dissolve the firm
5. Unlimited access to capital
6. Double taxation
◉ Double Taxation.
Answer: Earning taxed on a corporate level and dividends taxed on a
personal level.
When profit is earned, the profit is taxed first and then pays some of
that profit back to the shareholders then the shareholders pay a
personal tax on those dividends second.
◉ Equity.
STUDY QUESTIONS AND ANSWERS
◉ Three Components of Finance.
Answer: 1. Capital Budgeting
2. Capital Structure
3. Working Capital Management
◉ Capital Budgeting.
Answer: What are we going to put our money into? What
investments should the firm undertake?
The decision making process used to analyze potential investments
in fixed assets.
Ex: Introducing a product to a firm.
◉ Capital Structure.
Answer: How should the firm raise money to fund these long term
investments? The mix of long-term sources of funds used by the
firm.
Ex: How to finance the development and production of a product.
◉ Working Capital Management.
,Answer: How can the firm best manage the cash-flows as they arise
day to day? It is the management of day-to-day operations and
decisions that relate to working capital and short term financing.
Ex: How much inventory to hold in stock.
◉ Financial Markets.
Answer: Mechanisms that allow people to easily buy and sell
financial claims, institutions that facilitate financial transactions.
◉ Sole Proprietorship.
Answer: Definition: A business owned by a single individual who is
entitled to all profits and all debt (money that have been borrowed
and must be paid back.
◉ Overview of Sole Proprietorship.
Answer: 1. One owner
2. Liable for debt (if the business is being sued, so is the owner).
3. Owner manages firm
4. Ownership change dissolves the firm
5. Very limited access to capital (they invest their own funds and
borrow from bank).
6. Personal Taxation
,◉ Partnership (2).
Answer: Parntershipl: an association of two or more persons who
come together as co-owners for the purpose of operating a business
for profit.
Limited: a partnership in which one or more of the partners have
limited liability that is restricted to the amount of capital her or she
invests in the partnership.
◉ Partnership Overall.
Answer: 1. Unlimited partners
2. Unlimited Liability
3. Owners manage firm
4. Ownership change dissolves firm
5. Very limited access to capital
6. Personal taxation
◉ Limited Partnership Overall.
Answer: 1. One GP and unlimited partners.
2. GP unlimited liability, LP liable for only what they invest.
3. GP manages firm, LP no role in management
4. GP change can dissolve firm, but LP can change freely
5. Limited access to capital
6. Personal Taxation
, ◉ Corporation.
Answer: A business entity that legally functions separate and apart
from the owners. Owners are the shareholders and stockholders.
Their goal is to maximize the total market value of the firm's
common stock.
◉ Corporation Overall.
Answer: 1. Unlimited Partners
2. No liability for firm's debts
3. Owners don't manage firm, but they have owners stake.
4. Change in ownership don't dissolve the firm
5. Unlimited access to capital
6. Double taxation
◉ Double Taxation.
Answer: Earning taxed on a corporate level and dividends taxed on a
personal level.
When profit is earned, the profit is taxed first and then pays some of
that profit back to the shareholders then the shareholders pay a
personal tax on those dividends second.
◉ Equity.
