ASU FIN 300 Exam 1 (Ch 1-4) Questions
with Complete Solutions
Three areas of finance: - Answers-1. *Financial Management*
-buying/selling of assets
-financing choices
-control costs
2. *Investments*
-purchasing and holding assets & securities
-stocks and bonds
3. *Financial Markets*
-capital markets
-money markets
-financial intermediaries (banks or credit unions)
Productive assets - Answers-the long-term tangible and intangible *assets* a firm uses
*to generate cash flows*
Tangible = equipment etc.
intangible = patents, trademarks, technical experience
when purchase productive assets = *capital budgeting*
Financial Managers should make decisions that maximize - Answers-the *value of the
owner's stock*
which helps maximize the *owner's wealth* (the economic value of the assets the
owners possesses)
Stakeholder - Answers-anyone other than the owner (stockholder) with a claim on the
cash flows of a firm (employees, customers, creditors, suppliers, the government)
3 fundamental decisions in financial management - Answers-a. *Capital budgeting*-
which productive assets to buy
b. *Financing decisions*- raising money to buy more p assets, mainly through selling
long term *debt and equity*
c. *Working capital* decisions- involve how firms *manage their current assets and
liabilities*. Enough money to *pay the bills* and any money left over is invested to earn
a return
Capital Budgeting - Answers-*which productive assets* the firm *should purchase* and
how much money the firm can afford to spend
,*long term assets* on balance sheets/investments/ productive assets both tangible and
intangible
Financing decisions - Answers-how firms raise cash to pay for their iterm-55nvestments
ex: productive assets financed by long term borrowing or equity investment
debt financing - advantage=tax deductable
but increase firms risk because contractual obligation to make interest payments
equity- has no maturity/guarantee of payments.
*long term liability (debt) and equity*
Working capital management decisions - Answers-how to manage the firm's *current
assets and current liabilities*
*day to day* management of short term asserts and liabilities
-mismanagement cause firm to go into debt/*bankruptcy*
-*profitability affected*
Capital structure - Answers-the mix of debt and equity that is used to finance a firm
Net working capital - Answers-the dollar difference between total current assets and
total current liabilities
Capital Markets - Answers-financial markets where equity and debt instruments with
maturities greater than one year are traded
Residual Cash Flow - Answers-cash remaining after a firm has paid operating expenses
and what it owes creditors and taxes, can be distributed to owners as cash dividend or
by repurchasing shares or reinvested into business
Cash flows between firms and stake/stockholders - Answers-A. Cash flows generated
by productive assets through sale of goods/services → management invests in current
and productive long term assets → cash paid as wages, to suppliers, as interest, as
taxes → to employees, suppliers, creditors and government (stockholders)
B. Residual Cash Flow
→ cash reinvested in business
→ cash used to pay dividends/repurchase shares
Forms of Business Organization - Answers-1. *Sole proprietorship*- one person
2. *General Partnership*
3. *Limited Partnership*
, 4. *Limited Liability* Partnership or Company (LLP / LCC)
5. *Corporation*
a) C corp
b) *S Corp*
c. Corporation- separate legal status and ability to recruit professional management,
corporate income taxed twice, conflicting goals between owners and management
d. LLC- owners not personally responsible, combine corporation with sole proprietorship
Sole proprietorship - Answers--owner = *1 person*
-*taxes*= as *personal* income, paid once
-*liability= all to owner*
-life = limited to owner, no stock to sell
-*capital = very limited / difficult* to raise
-owner/manager conflict = no
-least expensive
General Partnership - Answers--owner = *2+ people*
all *owners and managers*
-*taxes*= *to partners*, deductions available
-*liability= all to partners* (*responsible for others* partners actions)
-*life = flexible* limited to partners but can be transferred
-*capital = limited*
-owner/manager conflict = no
-harder to sell shares
Limited Partnership - Answers-Same as general except:
*liability = only up to amount* capital invested in
-*capital = less limited*
-owner/manager *conflict = some*
-harder to sell shares
*limited partners* are owners but *cannot be managing* -limited in decision making
Limited Liability Partnership / Company (LLP / LCC) - Answers--for
professional/licensed
hybrid business organizations that combine some of the advantages of corporations and
partnerships
-income to the partners *taxed only as personal income*
-*partners have limited liability*
capital = less limited
conflict = some
life = flexible can be transferred
with Complete Solutions
Three areas of finance: - Answers-1. *Financial Management*
-buying/selling of assets
-financing choices
-control costs
2. *Investments*
-purchasing and holding assets & securities
-stocks and bonds
3. *Financial Markets*
-capital markets
-money markets
-financial intermediaries (banks or credit unions)
Productive assets - Answers-the long-term tangible and intangible *assets* a firm uses
*to generate cash flows*
Tangible = equipment etc.
intangible = patents, trademarks, technical experience
when purchase productive assets = *capital budgeting*
Financial Managers should make decisions that maximize - Answers-the *value of the
owner's stock*
which helps maximize the *owner's wealth* (the economic value of the assets the
owners possesses)
Stakeholder - Answers-anyone other than the owner (stockholder) with a claim on the
cash flows of a firm (employees, customers, creditors, suppliers, the government)
3 fundamental decisions in financial management - Answers-a. *Capital budgeting*-
which productive assets to buy
b. *Financing decisions*- raising money to buy more p assets, mainly through selling
long term *debt and equity*
c. *Working capital* decisions- involve how firms *manage their current assets and
liabilities*. Enough money to *pay the bills* and any money left over is invested to earn
a return
Capital Budgeting - Answers-*which productive assets* the firm *should purchase* and
how much money the firm can afford to spend
,*long term assets* on balance sheets/investments/ productive assets both tangible and
intangible
Financing decisions - Answers-how firms raise cash to pay for their iterm-55nvestments
ex: productive assets financed by long term borrowing or equity investment
debt financing - advantage=tax deductable
but increase firms risk because contractual obligation to make interest payments
equity- has no maturity/guarantee of payments.
*long term liability (debt) and equity*
Working capital management decisions - Answers-how to manage the firm's *current
assets and current liabilities*
*day to day* management of short term asserts and liabilities
-mismanagement cause firm to go into debt/*bankruptcy*
-*profitability affected*
Capital structure - Answers-the mix of debt and equity that is used to finance a firm
Net working capital - Answers-the dollar difference between total current assets and
total current liabilities
Capital Markets - Answers-financial markets where equity and debt instruments with
maturities greater than one year are traded
Residual Cash Flow - Answers-cash remaining after a firm has paid operating expenses
and what it owes creditors and taxes, can be distributed to owners as cash dividend or
by repurchasing shares or reinvested into business
Cash flows between firms and stake/stockholders - Answers-A. Cash flows generated
by productive assets through sale of goods/services → management invests in current
and productive long term assets → cash paid as wages, to suppliers, as interest, as
taxes → to employees, suppliers, creditors and government (stockholders)
B. Residual Cash Flow
→ cash reinvested in business
→ cash used to pay dividends/repurchase shares
Forms of Business Organization - Answers-1. *Sole proprietorship*- one person
2. *General Partnership*
3. *Limited Partnership*
, 4. *Limited Liability* Partnership or Company (LLP / LCC)
5. *Corporation*
a) C corp
b) *S Corp*
c. Corporation- separate legal status and ability to recruit professional management,
corporate income taxed twice, conflicting goals between owners and management
d. LLC- owners not personally responsible, combine corporation with sole proprietorship
Sole proprietorship - Answers--owner = *1 person*
-*taxes*= as *personal* income, paid once
-*liability= all to owner*
-life = limited to owner, no stock to sell
-*capital = very limited / difficult* to raise
-owner/manager conflict = no
-least expensive
General Partnership - Answers--owner = *2+ people*
all *owners and managers*
-*taxes*= *to partners*, deductions available
-*liability= all to partners* (*responsible for others* partners actions)
-*life = flexible* limited to partners but can be transferred
-*capital = limited*
-owner/manager conflict = no
-harder to sell shares
Limited Partnership - Answers-Same as general except:
*liability = only up to amount* capital invested in
-*capital = less limited*
-owner/manager *conflict = some*
-harder to sell shares
*limited partners* are owners but *cannot be managing* -limited in decision making
Limited Liability Partnership / Company (LLP / LCC) - Answers--for
professional/licensed
hybrid business organizations that combine some of the advantages of corporations and
partnerships
-income to the partners *taxed only as personal income*
-*partners have limited liability*
capital = less limited
conflict = some
life = flexible can be transferred
