FIN 341 EXAM 1 DR. EDUARDO QUESTIONS &
ANSWERS
What is the goal of the firm? - Answers -Profit maximization.
Focus on growth, earnings, per share, and market share.
What is the goal of financial management? - Answers -To create value for investors. /
Maximize stockholder wealth
Stock holders are looking for a return on their investment after investing their own cash
in to the company.
What do financial managers focus on? - Answers -Decisions relating to:
How much and what types of assets to acquire.
How to raise the capital needed to purchase assets.
How to run the firm so as to maximize its value.
What determines price of stock? - Answers -Cash flows
Managerial actions, combined with the economy, taxes, and political conditions =
Influence the level of riskiness of the company's future cash flows.
EXAMPLE: The higher expected cash flows and the lower perceived risk = Higher stock
price
What should managers do with cash flows? - Answers -Monitor cash flows for not just
in short term, but in the long term.
Monitor actual cash inflows against cash outflows.
Forecast cash inflows against cash outflows.
What is the difference between true and perceived cash flows? - Answers -"True"
expected and "True" risk cash flows
True = Cash flows and risk that investors would expect if they had all of the information
that existed about a company
"Perceived" expected and "Perceived" risk
Perceived = What investors expect given the limited information they have.
, What are the characteristics of cash flows? - Answers -Cash sales generate immediate
cash inflow.
Credit sales do not generate immediate cash flow until the receivable is fulfilled
How can you solve or lessen conflict between managers and shareholders? - Answers
-Shareholders are mostly institutional investors nowadays.
Institutional money have the ability to influence a firms' operations.
If a firm does badly, top executives can be forced out due to poor corporate
performance.
If firm stock is undervalued, corporate raiders will see it as a bargain and attempt to
capture the firm in a hostile takeover.
In terms how to lessen the conflict, The situation gives managers a strong incentive to
take actions to maximize their stock's price.
"If you want to keep your job, never let your stock become a bargain."
How can a hostile takeover happen? - Answers -If intrinsic value is higher but actual
price is low, a raider may swoop in, buy the company at a bargain price, and fire the
managers.
A statement of a firm's financial position at a specific point in time.
DEFINITION - Answers -Balance Sheet
What is on the left side of a balance sheet? - Answers -Assets
What is on the right side of a balance sheet? - Answers -Liabilities
Stockholders' Equity
Long Term Debt
Assets are divided into two major categories on a balance sheet. What are they? -
Answers -Current assets = Assets that are to be paid off within one year
Fixed (long-term) assets = Assets that are to be paid off longer than one year (Plant and
Equipment)
What is included in long-term debt? - Answers -Bonds that mature in more than one
year.
ANSWERS
What is the goal of the firm? - Answers -Profit maximization.
Focus on growth, earnings, per share, and market share.
What is the goal of financial management? - Answers -To create value for investors. /
Maximize stockholder wealth
Stock holders are looking for a return on their investment after investing their own cash
in to the company.
What do financial managers focus on? - Answers -Decisions relating to:
How much and what types of assets to acquire.
How to raise the capital needed to purchase assets.
How to run the firm so as to maximize its value.
What determines price of stock? - Answers -Cash flows
Managerial actions, combined with the economy, taxes, and political conditions =
Influence the level of riskiness of the company's future cash flows.
EXAMPLE: The higher expected cash flows and the lower perceived risk = Higher stock
price
What should managers do with cash flows? - Answers -Monitor cash flows for not just
in short term, but in the long term.
Monitor actual cash inflows against cash outflows.
Forecast cash inflows against cash outflows.
What is the difference between true and perceived cash flows? - Answers -"True"
expected and "True" risk cash flows
True = Cash flows and risk that investors would expect if they had all of the information
that existed about a company
"Perceived" expected and "Perceived" risk
Perceived = What investors expect given the limited information they have.
, What are the characteristics of cash flows? - Answers -Cash sales generate immediate
cash inflow.
Credit sales do not generate immediate cash flow until the receivable is fulfilled
How can you solve or lessen conflict between managers and shareholders? - Answers
-Shareholders are mostly institutional investors nowadays.
Institutional money have the ability to influence a firms' operations.
If a firm does badly, top executives can be forced out due to poor corporate
performance.
If firm stock is undervalued, corporate raiders will see it as a bargain and attempt to
capture the firm in a hostile takeover.
In terms how to lessen the conflict, The situation gives managers a strong incentive to
take actions to maximize their stock's price.
"If you want to keep your job, never let your stock become a bargain."
How can a hostile takeover happen? - Answers -If intrinsic value is higher but actual
price is low, a raider may swoop in, buy the company at a bargain price, and fire the
managers.
A statement of a firm's financial position at a specific point in time.
DEFINITION - Answers -Balance Sheet
What is on the left side of a balance sheet? - Answers -Assets
What is on the right side of a balance sheet? - Answers -Liabilities
Stockholders' Equity
Long Term Debt
Assets are divided into two major categories on a balance sheet. What are they? -
Answers -Current assets = Assets that are to be paid off within one year
Fixed (long-term) assets = Assets that are to be paid off longer than one year (Plant and
Equipment)
What is included in long-term debt? - Answers -Bonds that mature in more than one
year.
