MBA 702 - Exam 1
Capital Budgeting - ANS What long-term investments should you take on? What lines of
business will you be in and what sorts of buildings, machinery, and equipment will you need?
Capital Structure - ANS Where will you get the long-term financing to pay for your investment?
Will you bring in other owners or will you borrow the money?
Working Capital Management - ANS How will you manage your everyday financial activities
such as collecting from customers and paying suppliers?
Treasurer - ANS Oversees cash management, credit management, capital expenditures, and
financial planning
Controller - ANS Oversees taxes, cost accounting, financial accounting and data processing
Three major forms of business organization in the United States - ANS Sole Proprietorship,
Partnership, Corporation
Sole Proprietorship - ANS A business owned by one person. This is the simplest type of
business to start. It is the least regulated form of organization. There is no distinction between
personal and business income, so all business income is taxed as personal income.
Partnership - ANS A business with two or more owners. In a general partnership, all the
partners share in gains or losses, and all have unlimited liability for all debts. In a limited
partnership, one or more general partners will run the business and have unlimited liability, but
there will also be one or more limited partners who do not actively participate in the business
Corporation - ANS A legal "person" separate and distinct from its owners. Can borrow money
and own property, can sue and be sued, and can enter into contracts. Most important form in
terms of size.
Advantages of Sole Proprietorship - ANS Easiest to start
Least regulated
Single owner keeps all the profits
Taxed once as personal income
Disadvantages of Sole Proprietorship - ANS Limited to life of owner
Equity capital limited to owner's personal wealth
Unlimited liability
Difficult to sell ownership interest
, Advantages of Partnership - ANS Two or more owners
More capital available
Relatively easy to start
Income taxed once as personal income
Disadvantages of Partnership - ANS Unlimited liability
- General partnership
- Limited partnership
Partnership dissolves when one partner dies or wishes to sell
Difficult to transfer ownership
Advantages of a Corporation - ANS Limited liability
Unlimited life
Separation of ownership and management
Transfer of ownership is easy
Easier to raise capital
Disadvantages of a Corporation - ANS Double taxation (income taxed at the corporate rate and
then dividends taxed at the personal rate)
What is the goal of financial management? - ANS Maximize the current value of the stock (per
share of the existing stock)
Agency Relationship - ANS - The relationship between stockholders and management
- Principal hires an agent to represent his/her interests
- Stockholders (principals) hire managers (agents) to run the company
Agency Problem - ANS Conflict of interest between principal and agent
Agency Cost - ANS Refers to the costs of the conflict of interest between stockholders and
management
Direct Agency Costs - ANS the purchase of something by management that can't be justified
from a risk-return standpoint, and monitoring costs.
Indirect Agency Costs - ANS management's tendency to forgo risky or expensive projects that
could be justified from a risk-return standpoint.
Financial Markets - ANS Primary market and secondary market
Primary Market - ANS securities are sold by the company
Capital Budgeting - ANS What long-term investments should you take on? What lines of
business will you be in and what sorts of buildings, machinery, and equipment will you need?
Capital Structure - ANS Where will you get the long-term financing to pay for your investment?
Will you bring in other owners or will you borrow the money?
Working Capital Management - ANS How will you manage your everyday financial activities
such as collecting from customers and paying suppliers?
Treasurer - ANS Oversees cash management, credit management, capital expenditures, and
financial planning
Controller - ANS Oversees taxes, cost accounting, financial accounting and data processing
Three major forms of business organization in the United States - ANS Sole Proprietorship,
Partnership, Corporation
Sole Proprietorship - ANS A business owned by one person. This is the simplest type of
business to start. It is the least regulated form of organization. There is no distinction between
personal and business income, so all business income is taxed as personal income.
Partnership - ANS A business with two or more owners. In a general partnership, all the
partners share in gains or losses, and all have unlimited liability for all debts. In a limited
partnership, one or more general partners will run the business and have unlimited liability, but
there will also be one or more limited partners who do not actively participate in the business
Corporation - ANS A legal "person" separate and distinct from its owners. Can borrow money
and own property, can sue and be sued, and can enter into contracts. Most important form in
terms of size.
Advantages of Sole Proprietorship - ANS Easiest to start
Least regulated
Single owner keeps all the profits
Taxed once as personal income
Disadvantages of Sole Proprietorship - ANS Limited to life of owner
Equity capital limited to owner's personal wealth
Unlimited liability
Difficult to sell ownership interest
, Advantages of Partnership - ANS Two or more owners
More capital available
Relatively easy to start
Income taxed once as personal income
Disadvantages of Partnership - ANS Unlimited liability
- General partnership
- Limited partnership
Partnership dissolves when one partner dies or wishes to sell
Difficult to transfer ownership
Advantages of a Corporation - ANS Limited liability
Unlimited life
Separation of ownership and management
Transfer of ownership is easy
Easier to raise capital
Disadvantages of a Corporation - ANS Double taxation (income taxed at the corporate rate and
then dividends taxed at the personal rate)
What is the goal of financial management? - ANS Maximize the current value of the stock (per
share of the existing stock)
Agency Relationship - ANS - The relationship between stockholders and management
- Principal hires an agent to represent his/her interests
- Stockholders (principals) hire managers (agents) to run the company
Agency Problem - ANS Conflict of interest between principal and agent
Agency Cost - ANS Refers to the costs of the conflict of interest between stockholders and
management
Direct Agency Costs - ANS the purchase of something by management that can't be justified
from a risk-return standpoint, and monitoring costs.
Indirect Agency Costs - ANS management's tendency to forgo risky or expensive projects that
could be justified from a risk-return standpoint.
Financial Markets - ANS Primary market and secondary market
Primary Market - ANS securities are sold by the company
