FINA 3332: PRINCIPLES OF
FINANCIAL MANAGEMENT: CH. 1 & 2
Test Questions All Answered Correctly
Primary Forms of Business Organization: - Answer 1. Proprietorship
2. Partnership
3. Corporation
Proprietorship: - Answer An unincorporated business owned by one individual.
Advantages:
1. Ease of formation.
2. Subject to few government regulations.
3. Taxed at an individual level.
Disadvantages:
1. Unlimited personal liability.
2. Limited life
3. Transferring ownership is difficult.
4. Difficult to raise large amounts of capital.
Partnership: - Answer An unincorporated business owned by two or more people.
Advantages:
1. Two or more owners, thus it can generally raise more capital than a proprietorship. They are
able to combine assets and available credit.
Otherwise, most advantages and limitations are similar to a proprietorship.
Corporation: - Answer A legal entity created by a state, separate and distinct from its owners
and managers, having unlimited life, easy transferability of ownership, and limited liability.
Advantages:
1. Unlimited Life.
2. Easy transfer of ownership.
,3. Limited liability.
4. Ease of raising capital - can issue stocks and bonds.
Disadvantages:
1. Cost of establishing and report-filing.
2. Double taxation.
Hybrid Forms of Business: - Answer 1. Limited Liability Partnership
2. Limited Liability Company
3. S Corporation
Limited Liability Partnership: - Answer A partnership wherein at least one partner is
designated as a general partner with unlimited personal financial liability, and the other
partners are limited partners whose liability is limited to amounts they invest into the firm.
Limited Liability Company (LLC): - Answer Offers the limited personal liability associated with
a corporation; however, the income of the company is taxed like that of a partnership.
S Corporation: - Answer A corporation with no more than 100 shareholders that elects to be
taxed in the same manner as proprietorships and partnerships, so that income is taxed only
once.
General Areas of Finance: - Answer 1. Financial Markets and Institutions: includes banks,
insurance companies, savings, loans, and credit unions.
2. Investments: focuses on the decisions made by businesses and individuals as they choose
securities for their investment portfolios. Focuses on two main components for investments - a.)
determining value, risks, and returns associated with financial assets such as stocks and bonds.
b.)
determining the optimal mix of securities that should be held in an investment portfolio (such
as a retirement account).
3. Financial Services: functions provided by organization that deal with the management of
money. They provide services that help individuals and companies decide how to invest their
money to achieve goals such as budgeting, financial stability, purchasing a home, etc...
4. Managerial Finance: deals with all decisions a firm makes concerning their cash inflows and
outflows.
, Corporate Charter: - Answer A document filed with the appropriate department of state in
which a business is incorporated, that provides important information on a corporation such as
its name, address, directors, and amount of capital stock.
Bylaws: - Answer A set of rules drawn up by the founders of the corporation that indicates
how a company is to be governed; includes procedures for electing directors, rights of
stockholders, and how to change bylaws when necessary.
Stockholder Wealth Maximization: - Answer The appropriate goal for management decisions;
considers the risk and timing associated with expected cash flows to maximize the price of the
firm's common stock.
Value: - Answer The present, or current value of the cash flows that an asset is expected to
generate in the future.
Earnings Per Share (EPS): - Answer Key financial metric used to evaluate a company's
profitability on a per-share basis. It measures the portion of a company's profit allocated to
each outstanding share of common stock. EPS is commonly used by investors to assess a
company's financial performance and to compare it with other companies in the same industry.
EPS = (NET INCOME - PREFERRED DIVIDENDS) / WEIGHTED AVG. SHARES OUTSTANDING
Multinational Corporation: - Answer A large business entity that operates in multiple
countries beyond its home country. These corporations manage production or deliver services
in at least one country other than their home country.
Despite their international presence, these companies often have centralized management.
They also generate diverse revenue streams which helps mitigate risk during local or regional
economic fluctuations.
Sarbanes-Oxley Act of 2002: - Answer Originally passed in 2002 in response to corporate
scandals such as Enron and WorldCom. It established strict reforms to improve corporate
governance, enhance financial disclosures, and combat accounting fraud.
Established the Public Company Accounting Oversight Board (PCAOB)
Mandates that public companies establish an independent audit committee composed of board
members.
Outlines penalties and establishes fraudulent activities that can result in criminal investigation
and charges.
FINANCIAL MANAGEMENT: CH. 1 & 2
Test Questions All Answered Correctly
Primary Forms of Business Organization: - Answer 1. Proprietorship
2. Partnership
3. Corporation
Proprietorship: - Answer An unincorporated business owned by one individual.
Advantages:
1. Ease of formation.
2. Subject to few government regulations.
3. Taxed at an individual level.
Disadvantages:
1. Unlimited personal liability.
2. Limited life
3. Transferring ownership is difficult.
4. Difficult to raise large amounts of capital.
Partnership: - Answer An unincorporated business owned by two or more people.
Advantages:
1. Two or more owners, thus it can generally raise more capital than a proprietorship. They are
able to combine assets and available credit.
Otherwise, most advantages and limitations are similar to a proprietorship.
Corporation: - Answer A legal entity created by a state, separate and distinct from its owners
and managers, having unlimited life, easy transferability of ownership, and limited liability.
Advantages:
1. Unlimited Life.
2. Easy transfer of ownership.
,3. Limited liability.
4. Ease of raising capital - can issue stocks and bonds.
Disadvantages:
1. Cost of establishing and report-filing.
2. Double taxation.
Hybrid Forms of Business: - Answer 1. Limited Liability Partnership
2. Limited Liability Company
3. S Corporation
Limited Liability Partnership: - Answer A partnership wherein at least one partner is
designated as a general partner with unlimited personal financial liability, and the other
partners are limited partners whose liability is limited to amounts they invest into the firm.
Limited Liability Company (LLC): - Answer Offers the limited personal liability associated with
a corporation; however, the income of the company is taxed like that of a partnership.
S Corporation: - Answer A corporation with no more than 100 shareholders that elects to be
taxed in the same manner as proprietorships and partnerships, so that income is taxed only
once.
General Areas of Finance: - Answer 1. Financial Markets and Institutions: includes banks,
insurance companies, savings, loans, and credit unions.
2. Investments: focuses on the decisions made by businesses and individuals as they choose
securities for their investment portfolios. Focuses on two main components for investments - a.)
determining value, risks, and returns associated with financial assets such as stocks and bonds.
b.)
determining the optimal mix of securities that should be held in an investment portfolio (such
as a retirement account).
3. Financial Services: functions provided by organization that deal with the management of
money. They provide services that help individuals and companies decide how to invest their
money to achieve goals such as budgeting, financial stability, purchasing a home, etc...
4. Managerial Finance: deals with all decisions a firm makes concerning their cash inflows and
outflows.
, Corporate Charter: - Answer A document filed with the appropriate department of state in
which a business is incorporated, that provides important information on a corporation such as
its name, address, directors, and amount of capital stock.
Bylaws: - Answer A set of rules drawn up by the founders of the corporation that indicates
how a company is to be governed; includes procedures for electing directors, rights of
stockholders, and how to change bylaws when necessary.
Stockholder Wealth Maximization: - Answer The appropriate goal for management decisions;
considers the risk and timing associated with expected cash flows to maximize the price of the
firm's common stock.
Value: - Answer The present, or current value of the cash flows that an asset is expected to
generate in the future.
Earnings Per Share (EPS): - Answer Key financial metric used to evaluate a company's
profitability on a per-share basis. It measures the portion of a company's profit allocated to
each outstanding share of common stock. EPS is commonly used by investors to assess a
company's financial performance and to compare it with other companies in the same industry.
EPS = (NET INCOME - PREFERRED DIVIDENDS) / WEIGHTED AVG. SHARES OUTSTANDING
Multinational Corporation: - Answer A large business entity that operates in multiple
countries beyond its home country. These corporations manage production or deliver services
in at least one country other than their home country.
Despite their international presence, these companies often have centralized management.
They also generate diverse revenue streams which helps mitigate risk during local or regional
economic fluctuations.
Sarbanes-Oxley Act of 2002: - Answer Originally passed in 2002 in response to corporate
scandals such as Enron and WorldCom. It established strict reforms to improve corporate
governance, enhance financial disclosures, and combat accounting fraud.
Established the Public Company Accounting Oversight Board (PCAOB)
Mandates that public companies establish an independent audit committee composed of board
members.
Outlines penalties and establishes fraudulent activities that can result in criminal investigation
and charges.
