FINANCE MIDTERM - Chapter 1-6
Questions and Answers Distinction Level 2023
The Four Basic Areas of Finance are: - -1. Corporate Finance
2. Investments
3. Financial Markets and Institutions
4. International Finance
-What is the focus of corporate finance (3 basic issues)? - -1. What long-term investments should a firm take on?
2. Where will you get the long-term financing to pay for your investment?
3. How will you manage your everyday financial activities such as collecting from customers and paying suppliers?
-Capital Budgeting - -The process of planning and managing a firm's long-term investments
-Capital Structure - -The mixture of debt and equity maintained by a firm
-Working Capital Management - -The process of managing a firms short-term assets and liabilities
-Controller's Office - -1. Oversees cash management
2. Credit management
3. Capital expenditures
4. Financial Planning
-Treasurer's Office - -1. Oversees taxes
2. Cost accounting
3. Financial accounting
4. Data processing
-Sole Proprietorship - -business owned by a single individual
-Advantages of Sole Proprietorship - -1.Easily Established
2.Minimal Organizational Costs
3.Keep all Generated Profits
-Disadvantages of Sole Proprietorship - -1.Unlimited Liability
2.Losses absorbed by owner
3.Limited Capital
4.Limited Life
-Partnership - -An association of two or more individuals
-2 Types of Partnership - -1. General
2. Limited
-General Partnership - -each partner is fully responsible for liabilities
-Limited Partnership - -- one or more partners have limited liability
- limited partners do not participate in the management
- limited partners are merely investors
one general partner must exist
-Advantage of General Partnership - -1. Minimal Organizational Requirements
2. Negligible Government Regulations
, -Disadvantages of General Partnership - -1. All Partners have Unlimited Liability
2. Losses absorbed by owners
3. Difficulty of transferring ownership
4. Limited Life-Terminates at Death or Decision of One Partner
-Corporation - -Business form existing separate and apart for its owners
-Advantages of a Corporation - -1. Liability Limited to Investment
2. Ease in Raising Capital
3. Continues after death of owner(s)
-Disadvantages of a Corporation - -1. Tax Treatment of earnings (Double Taxation)
2. Time and Cost of Incorporation
3. Separation of ownership and management
-What is the classical goal of the firm? - -To Maximize Shareholder Wealth / Maximize the current value of the
company's stock
-What are 3 important trends? - -1. More accurate and dependable financial statements (Corporate Governance
Concept)
2. Globalization
3. Improving Information technology (IT)
-Business ethics - -a company's attitude and conduct toward its employees, customers, community, and stockholder
-Managerial compensation - -- They are given the opportunities to buy stocks for barging prices
- Better performers within the firm will tend to get promoted
- The threat of a takeover may result in better management
- Proxy rights: the authority to vote for some one else
-Agency Problem - -Conflict between Managers and Stockholders
-Indirect Agency Cost - -Forgo risky projects that could be justified
-Direct Agency Cost - -Purchase of management that can't be justified
-What is the difference between a primary market and a secondary market - -The secondary market involves buying
and selling securities between other investors, while the primary market involves investors buying the securities
from the issuing companies. Investors and traders engage in market activity through different exchanges, such as the
New York Stock Exchange and Nasdaq.
-CHAPTER 2 - -
-Balance sheet - -Financial statement showing a firm's accounting value on a particular date
-Net working capital - -Current assets less current liabilities
-Liquidity - -Refers to the speed and ease with which as asset can be converted to cash
-Financial leverage - -The use of debt in a firm's capital structure
-Market value - -The true value of any asset
Questions and Answers Distinction Level 2023
The Four Basic Areas of Finance are: - -1. Corporate Finance
2. Investments
3. Financial Markets and Institutions
4. International Finance
-What is the focus of corporate finance (3 basic issues)? - -1. What long-term investments should a firm take on?
2. Where will you get the long-term financing to pay for your investment?
3. How will you manage your everyday financial activities such as collecting from customers and paying suppliers?
-Capital Budgeting - -The process of planning and managing a firm's long-term investments
-Capital Structure - -The mixture of debt and equity maintained by a firm
-Working Capital Management - -The process of managing a firms short-term assets and liabilities
-Controller's Office - -1. Oversees cash management
2. Credit management
3. Capital expenditures
4. Financial Planning
-Treasurer's Office - -1. Oversees taxes
2. Cost accounting
3. Financial accounting
4. Data processing
-Sole Proprietorship - -business owned by a single individual
-Advantages of Sole Proprietorship - -1.Easily Established
2.Minimal Organizational Costs
3.Keep all Generated Profits
-Disadvantages of Sole Proprietorship - -1.Unlimited Liability
2.Losses absorbed by owner
3.Limited Capital
4.Limited Life
-Partnership - -An association of two or more individuals
-2 Types of Partnership - -1. General
2. Limited
-General Partnership - -each partner is fully responsible for liabilities
-Limited Partnership - -- one or more partners have limited liability
- limited partners do not participate in the management
- limited partners are merely investors
one general partner must exist
-Advantage of General Partnership - -1. Minimal Organizational Requirements
2. Negligible Government Regulations
, -Disadvantages of General Partnership - -1. All Partners have Unlimited Liability
2. Losses absorbed by owners
3. Difficulty of transferring ownership
4. Limited Life-Terminates at Death or Decision of One Partner
-Corporation - -Business form existing separate and apart for its owners
-Advantages of a Corporation - -1. Liability Limited to Investment
2. Ease in Raising Capital
3. Continues after death of owner(s)
-Disadvantages of a Corporation - -1. Tax Treatment of earnings (Double Taxation)
2. Time and Cost of Incorporation
3. Separation of ownership and management
-What is the classical goal of the firm? - -To Maximize Shareholder Wealth / Maximize the current value of the
company's stock
-What are 3 important trends? - -1. More accurate and dependable financial statements (Corporate Governance
Concept)
2. Globalization
3. Improving Information technology (IT)
-Business ethics - -a company's attitude and conduct toward its employees, customers, community, and stockholder
-Managerial compensation - -- They are given the opportunities to buy stocks for barging prices
- Better performers within the firm will tend to get promoted
- The threat of a takeover may result in better management
- Proxy rights: the authority to vote for some one else
-Agency Problem - -Conflict between Managers and Stockholders
-Indirect Agency Cost - -Forgo risky projects that could be justified
-Direct Agency Cost - -Purchase of management that can't be justified
-What is the difference between a primary market and a secondary market - -The secondary market involves buying
and selling securities between other investors, while the primary market involves investors buying the securities
from the issuing companies. Investors and traders engage in market activity through different exchanges, such as the
New York Stock Exchange and Nasdaq.
-CHAPTER 2 - -
-Balance sheet - -Financial statement showing a firm's accounting value on a particular date
-Net working capital - -Current assets less current liabilities
-Liquidity - -Refers to the speed and ease with which as asset can be converted to cash
-Financial leverage - -The use of debt in a firm's capital structure
-Market value - -The true value of any asset
