FINANCIAL MANAGEMENT EXAM 1 TERMS (CHAPTERS 1-4) QUESTIONS AND ANSWERS

FINANCIAL MANAGEMENT EXAM 1
TERMS (CHAPTERS 1-4) QUESTIONS
AND ANSWERS
financevf-vfanswer--canvfbevfdefinedvfasvfthevfsciencevfandvfartvfofvfmanagingvfmoney.

financialvfservicesvf-vfanswer--
isvfthevfareavfofvffinancevfconcernedvfwithvfthevfdesignvfandvfdeliveryvfofvfadvicevfandvffinanc
ialvfproductsvftovfindividuals,vfbusinesses,vfandvfgovernments.

managerialvffinancevf-vfanswer--
isvfconcernedvfwithvfthevfdutiesvfofvfthevffinancialvfmanagervfworkingvfinvfavfbusiness.

financialvfmanagersvf-vfanswer--
administervfthevffinancialvfaffairsvfofvfallvftypesvfofvfbusinesses—
privatevfandvfpublic,vflargevfandvfsmall,vfprofit-seekingvfandvfnot-for-profit.

SolevfProprietorshipvf-vfanswer--
isvfavfbusinessvfownedvfbyvfonevfpersonvfandvfoperatedvfforvfhisvforvfhervfownvfprofit.

partnershipvf-vfanswer--
isvfavfbusinessvfownedvfbyvftwovforvfmorevfpeoplevfandvfoperatedvfforvfprofit.

corporationvf-vfanswer--
isvfanvfentityvfcreatedvfbyvflaw.vfCorporationsvfhavevfthevflegalvfpowersvfofvfanvfindividualvfinv
fthatvfitvfcanvfsuevfandvfbevfsued,vfmakevfandvfbevfpartyvftovfcontracts,vfandvfacquirevfpropert

yvfinvfitsvfownvfname.

stakeholdersvf-vfanswer--
arevfgroupsvfsuchvfasvfemployees,vfcustomers,vfsuppliers,vfcreditors,vfowners,vfandvfother
svfwhovfhavevfavfdirectvfeconomicvflinkvftovfthevffirm

businessvfethicsvf-vfanswer--
arevfthevfstandardsvfofvfconductvforvfmoralvfjudgmentvfthatvfapplyvftovfpersonsvfengagedvfinv
fcommerce



Marginalvfcost-benefitvfanalysisvf-vfanswer--
isvfthevfeconomicvfprinciplevfthatvfstatesvfthatvffinancialvfdecisionsvfshouldvfbevfmadevfandvf
actionsvftakenvfonlyvfwhenvfthevfaddedvfbenefitsvfexceedvfthevfaddedvfcosts

corporatevfgovernancevf-vfanswer--
refersvftovfthevfrules,vfprocesses,vfandvflawsvfbyvfwhichvfcompaniesvfarevfoperated,vfcontrol
led,vfandvfregulated.

, individualvfinvestorsvf-vfanswer--
arevfinvestorsvfwhovfownvfrelativelyvfsmallvfquantitiesvfofvfsharesvfsovfasvftovfmeetvfpersonal
vfinvestmentvfgoals.



institutionalvfinvestorsvf-vfanswer--
arevfinvestmentvfprofessionals,vfsuchvfasvfbanks,vfinsurancevfcompanies,vfmutualvffunds,v
fandvfpensionvffunds,vfthatvfarevfpaidvftovfmanagevfandvfholdvflargevfquantitiesvfofvfsecuritie

svfonvfbehalfvfofvfothers

principle-agentvfrelationshipvf-vfanswer--
isvfanvfarrangementvfinvfwhichvfanvfagentvfactsvfonvfthevfbehalfvfofvfavfprincipal.vfForvfexampl
e,vfshareholdersvfofvfavfcompanyvf(principals)vfelectvfmanagementvf(agents)vftovfactvfonvfth
eirvfbehalf.

Agencyvfproblemsvf-vfanswer--
arisevfwhenvfmanagersvfplacevfpersonalvfgoalsvfaheadvfofvfthevfgoalsvfofvfshareholders.

Agencyvfcostsvf-vfanswer--
arisevffromvfagencyvfproblemsvfthatvfarevfbornevfbyvfshareholdersvfandvfrepresentvfavflossvf
ofvfshareholdervfwealth.

Incentivevfplansvf-vfanswer--
arevfmanagementvfcompensationvfplansvfthatvftievfmanagementvfcompensationvftovfshare
vfprice;vfonevfexamplevfinvolvesvfthevfgrantingvfofvfstockvfoptions.



performancevfplansvf-vfanswer--
tievfmanagementvfcompensationvftovfmeasuresvfsuchvfasvfEPSvforvfgrowthvfinvfEPS.vfPerfo
rmancevfsharesvfand/
orvfcashvfbonusesvfarevfusedvfasvfcompensationvfundervfthesevfplans.

intermediariesvf-vfanswer--
financialvfinstitutionsvfarevf____vfthatvfchannelvfthevfsavingsvfofvfindividuals,vfbusinesses,vf
andvfgovernmentsvfintovfloansvforvfinvestments.

CommercialvfBanksvf-vfanswer--
arevfinstitutionsvfthatvfprovidevfsaversvfwithvfavfsecurevfplacevftovfinvestvftheirvffundsvfandvfth
atvfoffervfloansvftovfindividualvfandvfbusinessvfborrowers.

InvestmentvfBanksvf-vfanswer--
arevfinstitutionsvfthatvfassistvfcompaniesvfinvfraisingvfcapital,vfadvisevffirmsvfonvfmajorvftran
sactionsvfsuchvfasvfmergersvforvffinancialvfrestructurings,vfandvfengagevfinvftradingvfandvfm
arketvfmakingvfactivities.

Glass-SteagallvfActvf-vfanswer--
wasvfanvfactvfofvfCongressvfinvf1933vfthatvfcreatedvfthevffederalvfdepositvfinsurancevfprogra
mvfandvfseparatedvfthevfactivitiesvfofvfcommercialvfandvfinvestmentvfbanks.

ShadowvfBankingvfSystemvf-vfanswer--
describesvfavfgroupvfofvfinstitutionsvfthatvfengagevfinvflendingvfactivities,vfmuchvflikevftraditi