Bus1 170 Fundemantal of Finance Midterm 1
Questions and Answers Grade A+ 2023
Chapter 1 NOTE: add chapter homework. - -
-What is Finance? - -How well capital and investments are managed.
-Finance stems from? - -Grew out of Economics and Accounting, requires knowledge of both
Economics and Accounting.
-Economist view on assets? - -argues that asset's value is based on the future cash flows the
assets will provide.
-Describe Accounting? - -Provides information regarding the likely size of the cash flows.
-Who controls accounting department? - -Chief Financial Officer (CFO).
-What is Sarbanes-Oxley Act? - -A law passed by congress that requires the CEO and CFO to
certify that their firm's financial statements are accurate.
-What three areas in Finance are taught in Universities? - -Corporate Finance, Capital Markets,
and Investments.
-What is another name for Corporate Finance? - -Financial Management
-What Financial Management does? - -Decides how much/types of assets to acquire and how to
raise the capital needed. Same for profit/non-profit firms.
-Capital Market - -Where interest rates, stock and bond price, are determinated.
Note: includes; stock market, bond market, and money market (bank institution/FEDS,
loan/debts etc)
They also study institutions/banks/FEDs/SEC etc..
-Investments - -Decisions concerning stocks and bonds:
1) Security Analysis: finding proper value of individual securities.
2) Portfolio Theory: studies ways of how to structure "baskets" of stocks and bonds, diversify
risks.
3) Market Analysis:
.....a) Is the stock value too high or low?
.....b) Behavioral Finance: is there a bubble? Or, an irrational low pessimism?
Note: Individual, basket, and the whole market.
,-What is the relationship between economics, finance, and accounting? - -Finance grew out of
Economics and Accounting, Finance Management utilize both.
-Who are the top two governing positions in an organization? - -Board of Director.
Chief Executive Officer. (CEO, who also sits at the BOD).
-What is the CFO, where does this individual fit into the corporate hierarchy, and what are some
of his or her responsibilities? - -Chief Financial Officer (CFO) is a senior vice president and the
third-ranking individual, controls the Accounting and Finance department department, credit
policy, acquisition decisions, and investor relationships (stockholders and press).
Think: non-operating decisions, equity concerns, what to do with the money not needed for
operational activities.
-Who is the COO? Where does this individual fit into the corporate hierarchy, and what are some
of his or her responsibilities? - -Chief Operating Officer (COO), the firm's president. Focus on
internal environment. Direct operations, manufacturing, marketing, HR, and sales. This class will
focus on CFO, not COO.
-Does it make sense for non-profit org., such as Hospitals and Universities to have a CFO's? - -
Yes, they, as well as profit org., have liability towards potential fraud, imposed by Sarbanes-
Oxley Act.
-What three finance areas is this book covering? Are they independent of each other? - -1)
Financial Management: see above.
2) Capital Market
3) Investments
They are interrelated. Example: Banking is studied under Capital market, however, in order to
lend money, they need to understand Financial Management (how well capital and investments
are managed)
-Sarbanes-Oxley Act - -A law passed by congress that requires the CEO and CFO to certify that
their firm's financial statements are accurate.
-What jobs are in Finance? - -Banking, Investments, Insurance, corporations, and the
government.
-How does Finance affect stakeholders? - -Marketing needs approval from CFO, so
understanding and bridge with them, they save time and resources while planing a campaign.
Individuals needs to understand Finance, today, because firms are no longer providing
investment service, it's up to the individual to diversify their pension assets.
-FORMS OF BUSINESS ORG. - -Their are four main forms, however, 80% of businesses are
done by corporations.
, -Proprietorship - -A form of business org..
An unincorporated business owned by one individual.
3 Pro: easy & inexpensive to form, few gov. regulations, and low income tax.
3 Con: Unlimited personal liability (invest $10k, but lawsuit $1M), life of business = life of
owner, investors will change structure.
-Partnership - -A form of business org..
An unincorporated business owned by two or more persons.
A legal arrangement. Easy and inexpensive to form, taxed individually. Liability is
interdependent. Hard to raise capital.
-C Corporation & S Corporation - -A form of business org..
A Legal entity created by a state, separated and distinct from its owners and managers, having
unlimited life, easy transferability of ownership, and limited liability.
Owners can only loose money invested. Easier to raise capital. Higher taxes. Earnings are taxed,
dividens taxed again.
S Corporations are taxed like partnership, but limits stockholders to 100. Once large enough,
public announcement as a C corporation.
-Limited Liability Company & Limited Liability Partnership - -LLC, a hybrid of Partnership and
Corporation, but does not include the professional firms below.
LLP is similar to LLC, but used for professional firms in the field of accounting, law, and
architecture. It has limited liability like a corporate, but is taxed like Partnership. Their control of
the firm is determined by the investment they made, which determines their voting power. It is
popular, but doesn't attract capital as easy like a Corporation does.
-How to choose form of the firm: - -1) Corporate have limited liability but high tax. The lower
the risk is, the higher is its value.
2) The firms value depends on its growth, raising capital increases chance of growth, hence
corporations have a higher growth opportunity.
3) The value of a firm depends on its liquidity, the time it takes to sell assets into cash at a fair
market value.
-What are the key differences between Proprietorship, Partnership, and Corporations? - -See
above.
-How are LLC and LLP related to the other three forms? - -See above.
-Why is S Corporation an advantage over C corporation? - -See above.
Questions and Answers Grade A+ 2023
Chapter 1 NOTE: add chapter homework. - -
-What is Finance? - -How well capital and investments are managed.
-Finance stems from? - -Grew out of Economics and Accounting, requires knowledge of both
Economics and Accounting.
-Economist view on assets? - -argues that asset's value is based on the future cash flows the
assets will provide.
-Describe Accounting? - -Provides information regarding the likely size of the cash flows.
-Who controls accounting department? - -Chief Financial Officer (CFO).
-What is Sarbanes-Oxley Act? - -A law passed by congress that requires the CEO and CFO to
certify that their firm's financial statements are accurate.
-What three areas in Finance are taught in Universities? - -Corporate Finance, Capital Markets,
and Investments.
-What is another name for Corporate Finance? - -Financial Management
-What Financial Management does? - -Decides how much/types of assets to acquire and how to
raise the capital needed. Same for profit/non-profit firms.
-Capital Market - -Where interest rates, stock and bond price, are determinated.
Note: includes; stock market, bond market, and money market (bank institution/FEDS,
loan/debts etc)
They also study institutions/banks/FEDs/SEC etc..
-Investments - -Decisions concerning stocks and bonds:
1) Security Analysis: finding proper value of individual securities.
2) Portfolio Theory: studies ways of how to structure "baskets" of stocks and bonds, diversify
risks.
3) Market Analysis:
.....a) Is the stock value too high or low?
.....b) Behavioral Finance: is there a bubble? Or, an irrational low pessimism?
Note: Individual, basket, and the whole market.
,-What is the relationship between economics, finance, and accounting? - -Finance grew out of
Economics and Accounting, Finance Management utilize both.
-Who are the top two governing positions in an organization? - -Board of Director.
Chief Executive Officer. (CEO, who also sits at the BOD).
-What is the CFO, where does this individual fit into the corporate hierarchy, and what are some
of his or her responsibilities? - -Chief Financial Officer (CFO) is a senior vice president and the
third-ranking individual, controls the Accounting and Finance department department, credit
policy, acquisition decisions, and investor relationships (stockholders and press).
Think: non-operating decisions, equity concerns, what to do with the money not needed for
operational activities.
-Who is the COO? Where does this individual fit into the corporate hierarchy, and what are some
of his or her responsibilities? - -Chief Operating Officer (COO), the firm's president. Focus on
internal environment. Direct operations, manufacturing, marketing, HR, and sales. This class will
focus on CFO, not COO.
-Does it make sense for non-profit org., such as Hospitals and Universities to have a CFO's? - -
Yes, they, as well as profit org., have liability towards potential fraud, imposed by Sarbanes-
Oxley Act.
-What three finance areas is this book covering? Are they independent of each other? - -1)
Financial Management: see above.
2) Capital Market
3) Investments
They are interrelated. Example: Banking is studied under Capital market, however, in order to
lend money, they need to understand Financial Management (how well capital and investments
are managed)
-Sarbanes-Oxley Act - -A law passed by congress that requires the CEO and CFO to certify that
their firm's financial statements are accurate.
-What jobs are in Finance? - -Banking, Investments, Insurance, corporations, and the
government.
-How does Finance affect stakeholders? - -Marketing needs approval from CFO, so
understanding and bridge with them, they save time and resources while planing a campaign.
Individuals needs to understand Finance, today, because firms are no longer providing
investment service, it's up to the individual to diversify their pension assets.
-FORMS OF BUSINESS ORG. - -Their are four main forms, however, 80% of businesses are
done by corporations.
, -Proprietorship - -A form of business org..
An unincorporated business owned by one individual.
3 Pro: easy & inexpensive to form, few gov. regulations, and low income tax.
3 Con: Unlimited personal liability (invest $10k, but lawsuit $1M), life of business = life of
owner, investors will change structure.
-Partnership - -A form of business org..
An unincorporated business owned by two or more persons.
A legal arrangement. Easy and inexpensive to form, taxed individually. Liability is
interdependent. Hard to raise capital.
-C Corporation & S Corporation - -A form of business org..
A Legal entity created by a state, separated and distinct from its owners and managers, having
unlimited life, easy transferability of ownership, and limited liability.
Owners can only loose money invested. Easier to raise capital. Higher taxes. Earnings are taxed,
dividens taxed again.
S Corporations are taxed like partnership, but limits stockholders to 100. Once large enough,
public announcement as a C corporation.
-Limited Liability Company & Limited Liability Partnership - -LLC, a hybrid of Partnership and
Corporation, but does not include the professional firms below.
LLP is similar to LLC, but used for professional firms in the field of accounting, law, and
architecture. It has limited liability like a corporate, but is taxed like Partnership. Their control of
the firm is determined by the investment they made, which determines their voting power. It is
popular, but doesn't attract capital as easy like a Corporation does.
-How to choose form of the firm: - -1) Corporate have limited liability but high tax. The lower
the risk is, the higher is its value.
2) The firms value depends on its growth, raising capital increases chance of growth, hence
corporations have a higher growth opportunity.
3) The value of a firm depends on its liquidity, the time it takes to sell assets into cash at a fair
market value.
-What are the key differences between Proprietorship, Partnership, and Corporations? - -See
above.
-How are LLC and LLP related to the other three forms? - -See above.
-Why is S Corporation an advantage over C corporation? - -See above.
