BA 323 - Nielander - Exam One (Chapters 1-3,16,17) Questions With Complete Solutions.

Capital Structure - - the mixture of debt and equity maintained by a firm - Two concerns: How much to borrow, least expensive sources of funds for the firm Capital Budgeting - - the process of planning and managing a firm's long-term investments - Evaluating Time, Size risk of an expenditure Working Capital Management - - How do we manage the day-to-day finances of the firm? - Ensures we have enough resources to continue operations without interruptions Order of Financial Management Decisions - 1. Capital Structure 2. Capital Budgeting 3. Working Capital Management The Agency Problem - - the possibility of conflict of interest between the stockholders and management of a firm Two ways to fix the problem: Managerial compensation is tied to stock value, Control of the firm the stockholders can get rid of management through a "proxy fight" Sarbanes-Oxley Act - - Driven by Corporate Scandals - Intended to strengthen protection against accounting fraud Operating Cash Flow - - cash generated from a firm's normal business activities, tells us if inflows cover outflows - Equation: EBIT + Dep - Taxescash flow from assets - - total of cash flow to creditors and stockholders, consisting of: operating cash flow, capital spending, and change in net working capital - Equation: CFA = OCF - Net capital spending - change in NWC cash flow to creditors - interest paid - net new borrowing Cash flow from stockholders - Dividends paid - net new equity raised Market Value - - The amount you could realistically sell an asset for today - Managers and investors want to know this because its not on the balance sheet Book Value - - The amount an asset costs a company to purchase - GAAP has assets recorded at "historic cost" so its kept at book value Cash Outflows - - Payments of accounts payable - Wages, Taxes, other expenses - Capital expenditures - Long Term Financing Why do we hold on to Cash? - - Speculative and precautionary motives - Transaction Motives