financial management exam 1 Answered Correctly!!!
1. 3 traditional areas of finance -Financial Institutions: banks, exchanges, SEC
-Investments: instruments->asset pricing (study of
risk)
-Corporate Finance: fin mgmt.->capital
budgeting+struc- ture
2. capital budgeting the process of planning and managing a firm's
long-term investments
projects; what to take on
3. capital structure the mixture of debt and equity maintained by a
firm how to finance decisions payout policy
4. financial management the job of managing a firm's resources so it can
meet its
goals and objectives
5. typical issues facing a 1) What projects should we invest in? (capital
financial manager budget- ing)
2) How do we value the "capital"? (capital
structure)
3) Daily finance decisions: pricing, inventory,
employment (working capital management)
6. maximization of wealth the creation of as much wealth as possible with the
avail-
able resources
do all firms maximize wealth?
they try
7. time value of money the opportunity cost of tying up funds in projects,
stocks,
or other assets
, financial management exam 1 Answered Correctly!!!
8. opportunity cost the cost of the next best alternative
9. sunk cost a cost that has already been committed and
cannot be recovered
, financial management exam 1 Answered Correctly!!!
10. expected return vs. risk trade off the concept that greater risk should be
rewarded with a
higher return risk
vs. return
11. what is risk the likelihood that actual outcomes ditter from the
ex- pected
-volatility exs.
investing instartups company
going bankrupt stocks
12. leverage the concept of how much debt a firm issues for its
pro- jects
-allows you to do things you wouldn't be able to
13. diversification the idea of removing risk from a portfolio of
stocks or other investments
exs.
-stocks
-bonds
-real estate
14. 3 basic forms of business 1. sole proprietorship
organi- zation 2. partnership
3. corporation
-rougly 80% of all businesses in US are sole
proprietor- ships
-rougly 80% of all business is conducted by
corporations
15. Sole Proprietorship an unincorporated business owned by one
individual 16.
, financial management exam 1 Answered Correctly!!!
3 advantages of and 3 disadvan-
PROS:
tages of a sole -easy + inexpensive to form
proprietorship -few regulations
-avoid corporate income tax CONS:
-diflcult to raise large amounts of capital
-unlimited personal liability for personal debts
-limited life
17. partnership two or more persons associate to conduct a non-
corpo- rate business
-general and limited
18. general vs limited partnership general: whoevers engaged in mgmt of operations
and
bears liab.
limited: can be involved in mgmt but limited liab. for
debts; only what they put in
19. 2 advantages and 4 PROS:
disadvan- tages of a -easy to form
partnership -avoid corporate income tax
CONS:
-unlimited liability
-limited life
-diflcult to transfer ownership
-diflcult raising large amounts of money
20. corporation a legal entity created by a state, it is separate and
distinct from its owners and managers
21. 3 advantages and 2 PROS:
disadvan- tages to a -most you can lose is what you invested (limited
corporation
1. 3 traditional areas of finance -Financial Institutions: banks, exchanges, SEC
-Investments: instruments->asset pricing (study of
risk)
-Corporate Finance: fin mgmt.->capital
budgeting+struc- ture
2. capital budgeting the process of planning and managing a firm's
long-term investments
projects; what to take on
3. capital structure the mixture of debt and equity maintained by a
firm how to finance decisions payout policy
4. financial management the job of managing a firm's resources so it can
meet its
goals and objectives
5. typical issues facing a 1) What projects should we invest in? (capital
financial manager budget- ing)
2) How do we value the "capital"? (capital
structure)
3) Daily finance decisions: pricing, inventory,
employment (working capital management)
6. maximization of wealth the creation of as much wealth as possible with the
avail-
able resources
do all firms maximize wealth?
they try
7. time value of money the opportunity cost of tying up funds in projects,
stocks,
or other assets
, financial management exam 1 Answered Correctly!!!
8. opportunity cost the cost of the next best alternative
9. sunk cost a cost that has already been committed and
cannot be recovered
, financial management exam 1 Answered Correctly!!!
10. expected return vs. risk trade off the concept that greater risk should be
rewarded with a
higher return risk
vs. return
11. what is risk the likelihood that actual outcomes ditter from the
ex- pected
-volatility exs.
investing instartups company
going bankrupt stocks
12. leverage the concept of how much debt a firm issues for its
pro- jects
-allows you to do things you wouldn't be able to
13. diversification the idea of removing risk from a portfolio of
stocks or other investments
exs.
-stocks
-bonds
-real estate
14. 3 basic forms of business 1. sole proprietorship
organi- zation 2. partnership
3. corporation
-rougly 80% of all businesses in US are sole
proprietor- ships
-rougly 80% of all business is conducted by
corporations
15. Sole Proprietorship an unincorporated business owned by one
individual 16.
, financial management exam 1 Answered Correctly!!!
3 advantages of and 3 disadvan-
PROS:
tages of a sole -easy + inexpensive to form
proprietorship -few regulations
-avoid corporate income tax CONS:
-diflcult to raise large amounts of capital
-unlimited personal liability for personal debts
-limited life
17. partnership two or more persons associate to conduct a non-
corpo- rate business
-general and limited
18. general vs limited partnership general: whoevers engaged in mgmt of operations
and
bears liab.
limited: can be involved in mgmt but limited liab. for
debts; only what they put in
19. 2 advantages and 4 PROS:
disadvan- tages of a -easy to form
partnership -avoid corporate income tax
CONS:
-unlimited liability
-limited life
-diflcult to transfer ownership
-diflcult raising large amounts of money
20. corporation a legal entity created by a state, it is separate and
distinct from its owners and managers
21. 3 advantages and 2 PROS:
disadvan- tages to a -most you can lose is what you invested (limited
corporation
