Corporate Finance: Fundamentals Chapter 1

Chapter 1: Fundamentals of Corporate Finance

• The controller is responsible for depositing cash receipts, processing cost reports, analyzing equipment purchases, approving credit for a customer, and paying a vendor, rather than the treasurer.
• The treasurer of a corporation directly reports to the chief executive officer.
• The controller typically reports to the chief financial officer in a corporate organizational structure.
• A capital budgeting decision involves whether a firm should purchase a new machine for the production line.
• When evaluating the timing of a project's projected cash flows, a financial manager analyzes when each cash flow is expected to occur.
• A capital structure decision involves determining how much debt a firm should incur to fund a project.
• Determining the number of shares of stock to issue is an example of a capital structure decision.
• A working capital management decision relates to how much inventory a company should keep on hand.
• Deciding if a firm should require immediate payment from customers or offer credit demonstrates working capital management.
• Determining the maximum level of cash to be kept in a firm's bank account shows consideration of working capital management
• Deciding which long-term investment a firm should make is a capital budgeting decision.
• A firm's combination of debt and equity financing decisions results in its capital structure.
• A firm's mix of short-term assets and short-term liabilities is its net working capital.
• Deciding which region of the country a new product should be launched is least likely to be addressed by financial managers.
• A firm owned by a single person with unlimited liability for the firm's debt is called a sole proprietorship.
• A general partnership is a firm owned by two or more people who each have unlimited liability for all of the firm's debts.
• In a firm, if a partner knows that the maximum financial loss he or she will experience is the amount he or she invested in the firm, this describes a limited partner.
• A corporation is a business that is a legal entity separate from the owners, yet treated as a legal person
• A sole proprietorship requires the owner to be personally responsible for all of the company's debts.
• A sole proprietorship has a limited life.
• Both general partners and sole proprietors are personally responsible for 100 percent of the firm's debts.
• Limited partners do not have financial losses that exceed the amount of their capital investment
• A general partner is personally responsible for 100 percent of the debts of the partnership.
• A limited partnership must have at least one general partner.
• in a partnership with 4 general partners, the profits are distributed based on percentage of ownership
• Distributed profits experiencing double taxation is a disadvantage of the corporate form of business.
• The majority of firms in the U.S. are structured as corporations, which can have an unlimited life.
• The articles of incorporation describe the purpose of the firm and sets forth the number of shares of stock that can be issued.
• The corporate bylaws determine how a corporation regulates itself.
• A Limited liability company is taxed similarly to a partnership.
• If it is necessary to raise large amounts of capital, the best form of business would be a corporation.
• A corporation has all the respective rates and privileges of a legal person.
• A limited partnership is the most appropriate business entity for individuals wanting to launch a venture where one wishes limit liability to their initial investment
• If equal general partners in Business wish to replace their current arrangement because of discomfort surrounding unlimited liability, they should consider a limited liability company
• The growth of both sole proprietorships and partnerships is frequently limited by the inability to raise cash.
• Corporate dividends represent after tax income from the corporation which becomes taxable income for the recipient
• Financial managers should primarily focus on the interests of shareholders.
• The primary goal of financial management is to maximize the current value per share.
• An increase in the market value per share illustrates that the management of a firm adheres to the goal of financial management.
• Decisions made by financial managers should primarily focus on increasing the market value per share of outstanding stock.
• Management greed and abuses caused the Sarbanes-Oxley Act of 2002 to become a governmental response.
• Corporations delisting from major exchanges is an unintended result of the Sarbanes-Oxley Act.
• A firm that opts to goes dark in response to the Sarbanes-Oxley Act can provide less information to it's shareholders than it did prior to going dark
• The Sarbanes-Oxley Act of 2002 holds a public company's managers responsible for the accuracy of the company's financial statements.
• Increasing current profits when doing so lowers the value of the company's equity is most apt to create an agency problem.
• Increasing managers’ base salaries is the least apt to help convince managers to work in the best interest of the stockholders.
• Agency problems are most likely to be associated with corporations.
• Agency cost consist of hiring outside accountants to audit the company's financial statements
• Shareholders can replace company management by implementing a proxy fight.
• A proxy grants an individual the right to vote on behalf of a shareholder.
• Shareholders ultimately control the corporation.
• Competitors are not considered stakeholders of a firm.
• Paying dividends would cause a cash outflow from a corporation.
• The payment of loan interest represents a cash flow from a corporation into the financial markets.
• Primary market transactions consist of the sale of a new share of sock from a corporation to an individual investor
• The transaction of Eduardo selling 500 shares of Northcutt corporation stock on the New York stock exchange occurred on the secondary market
• Public offerings of debt and equity must be registered with the Securities and Exchange Commission
• Auction markets match buy and sell orders
• Some large companies are listed on Nasdaq
• The trade of Symone selling shares of Naraghi Corporation stock to Aleena, in which the stock is listed on the NYSE, occurred in the secondary, auction market concerning the NYSE
• Concerning the NYSE, the listing requirements for the NYSE are more stringent than those of Nasdaq
• The most likely action to decrease agency cost for a firm is to reward high performing employees with shares of stock
• An agency problem is illustrated when a manager in a corporation makes personal travel arrangements during work hours

Explore the fundamentals of corporate finance in Chapter 1. Learn about the roles of the controller and treasurer, capital budgeting, capital structure decisions, and working capital management. Understand financial manager's analysis of projected cashflow.