Financial Management | Chapters 1-5 | Complete Exam Prep | Practice Questions & Answers
Financial management The process of making financial decisions to maximize shareholder wealth.
Financial manager A manager who makes financial decisions for a firm with the goal of maximizing
shareholder wealth.
Goal of financial management To maximize shareholder wealth.
Shareholder wealth and shareholder wealth formula Shareholder wealth equals the number of shares times the stock price.
Stock price The net present value of owning a piece of the firm.
Shareholders People who own stock in a company and receive ownership rights.
Bondholders People who loan a company money in exchange for being paid back a higher
amount over time.
Management The people who control the corporation and make day-to-day decisions.
Stakeholders Non-bondholders and non-shareholders affected by the business, including
employees, customers, and society.
Net Present Value (NPV) The difference between the costs and benefits, in today's dollars, of present/future
cash flows. NPV considers how much money (more is better), when you get it
(sooner is better), and how risky it is (less risky is better). Positive NPV decisions
increase shareholder wealth, while negative NPV decisions decrease it.
Capital budgeting Planning and managing the firm's long-term investments.
Capital structure The mix of debt and equity used to finance the firm.
Working capital management Managing short-term assets and liabilities day to day.
Chief Financial Officer (CFO) The officer in charge of the firm's financial management decisions.
Capital expenditures Money spent on long-term assets, also called capital spending or CAPEX.
stuvia 2026-2027
,Financial Management | Chapters 1-5 | Complete Exam Prep | Practice Questions & Answers
Cash manager A financial-management role responsible for managing cash.
Credit manager A financial-management role responsible for managing credit.
Financial planning manager A financial-management role responsible for financial planning.
Financial accounting manager A financial-management role responsible for financial accounting.
Tax manager A financial-management role responsible for tax accounting and tax decisions.
Cost accounting manager A financial-management role responsible for cost accounting.
Data processing manager A financial-management role responsible for data processing.
Sole proprietorship A business owned by one person; it is cheap and easy to establish but has
unlimited liability and is hard to use to raise capital.
Partnership A business owned by more than one person; it requires an agreement between
partners and generally has unlimited liability.
Corporation A legal entity different from its owners; it is easy to raise capital and provides limited
liability, but it is difficult to form and double taxed.
Limited Liability Corporation (LLC) A business form similar to a corporation that is easier to form and generally pays
income as personal income.
S Corporation A business form similar to an LLC with more restrictions, including a limit of 100 or
fewer shareholders.
Limited Liability Partnership (LLP) A business form like an LLC with only a few partners, commonly used by doctors
and lawyers.
Benefit corporation A for-profit corporation that does not have to maximize shareholder wealth and must
consider public benefits and other stakeholders.
Double taxation Taxation in which the corporation pays taxes on income and owners also pay taxes
on dividends or capital gains.
stuvia 2026-2027
Financial management The process of making financial decisions to maximize shareholder wealth.
Financial manager A manager who makes financial decisions for a firm with the goal of maximizing
shareholder wealth.
Goal of financial management To maximize shareholder wealth.
Shareholder wealth and shareholder wealth formula Shareholder wealth equals the number of shares times the stock price.
Stock price The net present value of owning a piece of the firm.
Shareholders People who own stock in a company and receive ownership rights.
Bondholders People who loan a company money in exchange for being paid back a higher
amount over time.
Management The people who control the corporation and make day-to-day decisions.
Stakeholders Non-bondholders and non-shareholders affected by the business, including
employees, customers, and society.
Net Present Value (NPV) The difference between the costs and benefits, in today's dollars, of present/future
cash flows. NPV considers how much money (more is better), when you get it
(sooner is better), and how risky it is (less risky is better). Positive NPV decisions
increase shareholder wealth, while negative NPV decisions decrease it.
Capital budgeting Planning and managing the firm's long-term investments.
Capital structure The mix of debt and equity used to finance the firm.
Working capital management Managing short-term assets and liabilities day to day.
Chief Financial Officer (CFO) The officer in charge of the firm's financial management decisions.
Capital expenditures Money spent on long-term assets, also called capital spending or CAPEX.
stuvia 2026-2027
,Financial Management | Chapters 1-5 | Complete Exam Prep | Practice Questions & Answers
Cash manager A financial-management role responsible for managing cash.
Credit manager A financial-management role responsible for managing credit.
Financial planning manager A financial-management role responsible for financial planning.
Financial accounting manager A financial-management role responsible for financial accounting.
Tax manager A financial-management role responsible for tax accounting and tax decisions.
Cost accounting manager A financial-management role responsible for cost accounting.
Data processing manager A financial-management role responsible for data processing.
Sole proprietorship A business owned by one person; it is cheap and easy to establish but has
unlimited liability and is hard to use to raise capital.
Partnership A business owned by more than one person; it requires an agreement between
partners and generally has unlimited liability.
Corporation A legal entity different from its owners; it is easy to raise capital and provides limited
liability, but it is difficult to form and double taxed.
Limited Liability Corporation (LLC) A business form similar to a corporation that is easier to form and generally pays
income as personal income.
S Corporation A business form similar to an LLC with more restrictions, including a limit of 100 or
fewer shareholders.
Limited Liability Partnership (LLP) A business form like an LLC with only a few partners, commonly used by doctors
and lawyers.
Benefit corporation A for-profit corporation that does not have to maximize shareholder wealth and must
consider public benefits and other stakeholders.
Double taxation Taxation in which the corporation pays taxes on income and owners also pay taxes
on dividends or capital gains.
stuvia 2026-2027
