30 Questions
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.
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.
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.
What are the two main types of decisions that corporations make according to the text?
Investment decision and financing decision
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.
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.
What does the financing decision involve besides raising cash today?
It includes meeting obligations to banks, bondholders, and stockholders from the past.
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.
What are some examples of intangible assets that corporations need to invest in?
Research and development (R&D), advertising, and marketing.
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.
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.
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.
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.
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.
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.
What is the responsibility of the treasurer?
Short-term cash management, currency trading, financing transactions, and bank relationships.
What is the role of the controller?
Managing the company’s internal accounting systems, overseeing preparation of financial statements and tax returns.
Apart from financial specialists, who else is involved in financial decisions according to the text?
Top management and engineers.
How are rejected designs by engineers considered investment decisions?
They amount to decisions not to invest in other types of real assets.
What does the term 'financial manager' encompass according to the text?
Anyone responsible for an investment or financing decision.
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.
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.
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.
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.
What principle have economists proved regarding value maximization?
Value-maximization principle.
What is the main goal of shareholders according to the text?
To be richer rather than poorer.
What is the widely accepted goal in both theory and practice?
Maximizing shareholder value.
This quiz explores the concepts of investment and financing decisions in a corporation. Learn about purchasing real assets, selling financial assets, managing existing assets, risk management, and decision-making processes in the realm of investments and financing.
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