Chapter 1 Questions Foundations of Financial Management
advantages does a sole proprietorship offer?
organizational and operating costs
of sole proprietorship?
is on owner as income
What form of
partnership allows some partners to limit their liability?
limited partnership one or more partners is designated a general partner
with unlimited liability
partners have limited liability (for their initial contribution)
from active management role
estate agents, doctors, lawyers, accountants
corporation which group has ultimate responsibility for protecting and managing
What are the
disadvantages of a corporation
taxation of dividends
S corporation can circumvent this (only up to 35 stockholders)
reporting and structural requirements
What is the
issue for agency theory? Why is it important for public corporations but not
theory looks at relationship owners and managers.
private corporations managers and owners are usually the same people.
institutional investors so important now?
own a large percentage of stock
exercise voting rights and demand board seats
Why is profit
maximization by itself an inappropriate goal?
time value of money must be considered.
The timing of profits can have a big effect on the benefit to the
is subject to many different measurements which can be manipulated.
in profit may represent changes in risk which may cause future problems
for the business.
of inflation and currency movement also complicate things.
What is meant
by “Maximization of investor wealth”?
the highest value for the business
insider trading occur?
trade in shares using information that is not available to the public.
- Ala Drexel, Martha
Stewart, Rene Rivkin.
SEC protects the public from insider trading.
In terms of
the life of the security, what is the difference between money and capital
markets are short term
paper to finance daily operations of corporations
of deposit (less than 1 year)
markets have life of more than one year
and government bonds
What is the
difference between a primary and a secondary market?
new funds IPO etc is in the primary market new issue
the public start trading them this is the secondary market
market has constantly changing prices.
looking at many companies with equal risk, which ones will have the highest
one which has the highest expected profits.
can take place under restructuring? In recent times what group of investors has
forced restructuring to take place?
to liabilities and equity on the balance sheet.
and reinvesting from devisions
management team and workforce.
investors force restructuring.