Corporation Investment and Financing Decisions

What is the main objective in conventional corporate financial theory?

Maximize the value of the business or firm.

What is the main disagreement between corporate finance theorists and practitioners?

The view they have about the real objective of the firm.

Why do some critics argue that firms should have multiple objectives?

To satisfy multiple interests (stockholders, labor, and customers).

What do some experts suggest companies focus on as simpler and more direct objectives?

Market share or profitability. Signup and view all the answers

What impact does a flawed main objective have on the theory of corporate finance?

It can be argued that the theory built on it is flawed as well. Signup and view all the answers

What is the unifying objective that all models of the theory of corporate finance are built around?

Maximizing the value of the business or firm. Signup and view all the answers

What are the two main types of decisions that corporations make according to the text?

Investment decision and financing decision Signup and view all the answers

What is the significance of managing assets already in place in the investment decision process?

It involves deciding when to shut down and dispose of assets if profits decline. Signup and view all the answers

What risks does the corporation have to manage in relation to its investments?

The corporation has to manage and control the risks of its investments. Signup and view all the answers

What does the financing decision involve besides raising cash today?

It includes meeting obligations to banks, bondholders, and stockholders from the past. Signup and view all the answers

Why is timing important in assessing project returns according to the text?

Today’s capital investments generate future returns, often in the distant future, so the financial manager must pay attention to the timing of project returns. Signup and view all the answers

What are some examples of intangible assets that corporations need to invest in?

Research and development (R&D), advertising, and marketing. Signup and view all the answers

Why do financial managers say that 'value comes mainly from the asset side of the balance sheet'?

Value comes mainly from the asset side of the balance sheet because good investment decisions are crucial for creating value for the corporation. Signup and view all the answers

How can financing decisions potentially destroy value for a corporation?

Financing decisions can destroy value if they are poorly made, leading to excessive debt levels or being unprepared for unexpected financial challenges. Signup and view all the answers

What risks should a financial manager be aware of and manage properly?

A financial manager should be aware of risks like excessive debt, economic downturns, commodity price fluctuations, interest rate changes, exchange rate movements, and adverse political events. Signup and view all the answers

How can a company be affected by recessions and changes in external factors?

Companies can be affected by recessions through decreased consumer spending and overall economic slowdown. Changes in external factors like commodity prices, interest rates, and exchange rates can impact costs, revenues, and profitability. Signup and view all the answers

What is the role of working capital in a firm?

Working capital management involves managing a firm's short-term assets (like inventory) and liabilities (like money owed to suppliers) to ensure smooth operations and financial health. Signup and view all the answers

Why is it important for companies to hedge or insure against certain risks?

Companies should hedge or insure against risks to protect themselves from potential financial losses due to adverse events like commodity price fluctuations, interest rate changes, or exchange rate movements. Signup and view all the answers

What is the responsibility of the treasurer?

Short-term cash management, currency trading, financing transactions, and bank relationships. Signup and view all the answers

What is the role of the controller?

Managing the company’s internal accounting systems, overseeing preparation of financial statements and tax returns. Signup and view all the answers

Apart from financial specialists, who else is involved in financial decisions according to the text?

Top management and engineers. Signup and view all the answers

How are rejected designs by engineers considered investment decisions?

They amount to decisions not to invest in other types of real assets. Signup and view all the answers

What does the term 'financial manager' encompass according to the text?

Anyone responsible for an investment or financing decision. Signup and view all the answers

What is the essential role of the financial manager based on Figur02?

Tracing how money flows from investors to the corporation and back to investors again. Signup and view all the answers

What are the three things each stockholder wants?

a. To be as rich as possible; b. To transform wealth into the most desirable time pattern of consumption; c. To manage the risk characteristics of the consumption plan. Signup and view all the answers

Why do stockholders not need the financial manager's help for the best time pattern of consumption?

Stockholders can achieve the best time pattern of consumption on their own with access to competitive financial markets. Signup and view all the answers

How can the financial manager help the firm's stockholders according to the text?

By increasing their wealth through increasing the market value of the firm and the price of its shares. Signup and view all the answers