Finance 300 ( CSULB Yulong Ma) Exam 1 Chpt 1, 4, 5 Questions And Answers Verified 100% Correct

Finance 300 ( CSULB Yulong Ma) Exam 1 Chpt 1, 4, 5 Questions And Answers Verified 100% Correct Partnership* - ANSWER -A business in which two or more persons combine their assets and skills. Partners share in gains or losses, and all have unlimited liability for all partnership debts, not just some particular share. The way partnership gains (and losses) are divided is described in the partnership agreement. This agreement can be an informal oral agreement, such as "let's start a lawn mowing business," or a lengthy, formal written document. Disadvantages of sole proprietorships - ANSWER -(1) unlimited liability for business debts on the part of the owners (2) limited life of the business, and (3) difficulty of transferring ownership. Corporation* - ANSWER -A business created as a distinct legal entity owned by one or more individuals or entities. Most important form (in terms of size) of business organization in the United States. A corporation is a legal "person" separate and distinct from its owners, and it has many of the rights, duties, and privileges of an actual person. Corporations can borrow money and own property, can sue and be sued, and can enter into contracts. General Partneship - ANSWER -is similar to a proprietorship, except that there are two or more owners (partners). In a general partnership, all the partners share in gains or losses, and all have unlimited liability for all partnership debts, not just some particular share. The way partnership gains (and losses) are divided is described in the partnership agreement. This agreement can be an informal oral agreement, such as "let's start a lawn mowing business," or a lengthy, formal written document. Limited Partnership - ANSWER -one or more general partners will run the business and have unlimited liability, but there will be one or more limited partners who do not actively participate in the business. A limited partner's liability for business debts is limited to the amount that partner contributes to the partnership. This form of organization is common in real estate ventures Why is the corporate form superior when it comes to raising cash? - ANSWER Ownership (represented by shares of stock) can be readily transferred, and the life of the corporation is, therefore, not limited. The corporation borrows money in its own name. As a result, the stockholders in a corporation have limited liability for corporate debts. The most they can lose is what they have invested. Profit maximization - ANSWER -A method of setting prices that occurs when marginal revenue equals marginal cost. What is the goal of financial management?* - ANSWER -The goal of financial management is to maximize the current value per share of the existing stock. (same thing as maximizing the market price per share.) What are some shortcomings of the goal of profit maximization?* - ANSWER Large companies are sometimes guilty of unethical behavior. Often, this unethical behavior takes the form of false or misleading financial statements. Sarbanes-Oxley Act* - ANSWER -intended to strengthen protection against corporate accounting fraud and financial malpractice. Key elements of Sarbox took effect on November 15, 2004. What is an agency relationship? - ANSWER -Ex#1. A relationship between stockholders (person buying or selling) and management (person doing the trading or buying for you). Ex#2. Someone (the principal) hires another (the agent) to represent his or her interest. What are agency problems, and how do they arise? What are agency costs? - ANSWER -Suppose you hire someone to sell your car and you agree to pay her a flat fee when she sells the car. The agent's incentive, in this case, is to make the sale, not necessarily to get you the best price. However, If you paid a commission of say 10 percent of the sales price instead of a flat fee, then this problem might exist. the salesperson might want to sell the car as high as possible to get a higher %. This example illustrates that the way an agent is compensated is one factor that affects agency problems because the agent is to benefit the principle. Managerial Compensation - ANSWER -Incentives can be used to align management and stockholder interests The incentives need to be structured carefully to make sure that they achieve their goal. What incentives do managers in large corporations have to maximize share value (agency cost)?* - ANSWER -It is sometimes argued that, left to themselves, managers would tend to maximize the amount of resources over which they have control, or, more generally, business power or wealth. This goal could lead to an overemphasis on business size or growth. What is a dealer market? - ANSWER -markets in which traders specializing in particular assets buy and sell for their own accounts. One of the most prominent dealer markets is NASDAQ. NASDAQ (National Association of Securities Dealers Automated Quotations exchange), the first ELECTRONIC exchange that allowed investors to buy and sell stock on a computerized, speedy and transparent system, without the need for physical trading. How do dealer and auction markets differ? - ANSWER -Auction markets differ firm dealer markets in two ways. First, an auction market or exchange has a physical location (like wall street). Second, in a dealer market, most of the buying and selling is done by the dealer (first person). The primary purpose of an auction market, on the other hand, is to match those who wish to sell with those who wish to buy. Dealers play a limited role.