Corporations, shareholders and partnerships

Choose a study mode

Play Quiz
Study Flashcards
Spaced Repetition
Chat to Lesson

Podcast

Play an AI-generated podcast conversation about this lesson

Questions and Answers

What is the primary role of a corporate treasurer?

  • Overseeing product development and marketing strategies.
  • Preparing financial statements and managing internal budgets.
  • Managing the firm's cash, raising capital, and maintaining bank relationships. (correct)
  • Looking after the firm's tax affairs.

What is a key difference between a corporation and a sole proprietorship?

  • Corporations are typically smaller businesses, while sole proprietorships are larger.
  • Corporations are easier to form and manage than sole proprietorships.
  • Corporations do not require any legal filings, unlike sole proprietorships.
  • Corporations have limited liability for shareholders, while sole proprietorships have unlimited liability for the owner. (correct)

A company is considering a project with a projected return of 8%. If similar risk investments in the market offer a 12% return, what should the financial manager do, according to value maximization?

  • Accept the project, as it will increase the company's profit margin.
  • Reject the project, as the return is less than the opportunity cost of capital. (correct)
  • Accept the project, as any positive return is beneficial.
  • Defer the decision until market conditions improve.

What is the primary purpose of corporate governance mechanisms?

<p>To protect the rights of investors and restrict the decision-making power of managers. (D)</p> Signup and view all the answers

Which of the following best describes an agency problem in a corporation?

<p>The conflict of interest between managers and shareholders due to separation of ownership and control. (A)</p> Signup and view all the answers

What are the main components to measure the dimension of a business?

<p>Market capitalization, number of employees, and earnings. (B)</p> Signup and view all the answers

What is the main objective of socially responsible investing (SRI)?

<p>To make investment decisions that benefit both shareholders and stakeholders, including society. (C)</p> Signup and view all the answers

What distinguishes a limited partnership from other forms of partnerships?

<p>Some partners have unlimited liability and manage the business, while others have limited liability and contribute capital. (A)</p> Signup and view all the answers

In the context of corporate finance, what is the 'opportunity cost of capital' primarily determined by?

<p>The alternative investment opportunities available to shareholders in financial markets. (D)</p> Signup and view all the answers

Which of the following is NOT a typical responsibility of the controller in a large corporation?

<p>Raising new capital through debt or equity offerings. (D)</p> Signup and view all the answers

Which of the following best describes the concept of 'limited liability' for shareholders of a corporation?

<p>Shareholders are not liable for the corporation’s debts beyond the value of their shares. (A)</p> Signup and view all the answers

For a large corporation, what is the most appropriate financial goal?

<p>Maximize the market value of shareholders’ investment in the firm. (B)</p> Signup and view all the answers

Which of the following is a key characteristic of a corporation?

<p>Separation of ownership and control. (C)</p> Signup and view all the answers

A corporation is considering investing in new machinery. The expected rate of return from the machinery is 15%, but the opportunity cost of capital is 12%. According to value maximization principles, what should the corporation do?

<p>Accept the investment, as it exceeds the opportunity cost of capital. (D)</p> Signup and view all the answers

What is the role of the Chief Financial Officer (CFO) in a large corporation?

<p>Overseeing the work of all financial staff and managing the company's finances. (D)</p> Signup and view all the answers

What is the defining characteristic of sustainable bonds?

<p>Their payoffs depend on the issuer meeting sustainability criteria, and the proceeds are used for sustainable investments. (A)</p> Signup and view all the answers

What distinguishes 'Green bonds' from other types of sustainable bonds?

<p>Green bonds are directed to finance climate or environmental projects. (A)</p> Signup and view all the answers

Which factor might lead investors to increase the cost of capital for a firm?

<p>The firm conducting activities that harm society (C)</p> Signup and view all the answers

When would profit maximization NOT be considered a good corporate objective?

<p>When it focuses on short-term gains at the expense of long-term value. (C)</p> Signup and view all the answers

How can shareholders effectively delegate decision making in a large corporation?

<p>Only if shareholders have a common goal, such as maximizing the market value of their investment. (D)</p> Signup and view all the answers

What is the role of the board of directors in mitigating agency problems?

<p>Discouraging opportunism and wasteful decisions. (B)</p> Signup and view all the answers

Which action would be most aligned with the goals of Socially Responsible Investing (SRI)?

<p>Investing in a company that has been recognized for its commitment to human rights and environmental protection, even if its returns are moderate. (C)</p> Signup and view all the answers

What is the purpose of assessing the ESG compliance of firms as part of socially responsible investing?

<p>To evaluate companies based on environmental, social, and governance factors to align investments with ethical and sustainability goals. (C)</p> Signup and view all the answers

Which of the following is an example of an internal control measure used by corporations to mitigate agency problems?

<p>Implementing strict financial auditing and reporting procedures. (B)</p> Signup and view all the answers

Why would a company choose to organize as a corporation rather than as a partnership or sole proprietorship?

<p>To gain access to greater capital and offer limited liability to its owners. (B)</p> Signup and view all the answers

How do financial markets help corporations in their investment decisions?

<p>They provide information to managers to know the investors’ opportunity cost of capital. (C)</p> Signup and view all the answers

Which of the following is typically the role of the Chief Operating Officer (COO) in a corporation?

<p>Overseeing the company's day-to-day administrative and operational functions. (C)</p> Signup and view all the answers

What is one way that corporations can incentivize managers to act in the best interests of shareholders?

<p>Tying a portion of managers' compensation to the company's stock price or other performance metrics. (A)</p> Signup and view all the answers

What is the implication of prioritizing value maximization for a corporation in relation to its stakeholders?

<p>The value maximization may lead to conflict with the interests of other stakeholders. (D)</p> Signup and view all the answers

Flashcards

Corporation

A legal entity formed under law, distinct from its owners, with shareholders having limited liability.

Limited Liability

Shareholders are not personally responsible for repaying the corporation’s debt.

Separation of Ownership and Control

Shareholders elect a board of directors that appoints and advises top managers (CEOs) and monitors their performance

Sole Proprietorship

A business owned and run by one person, who is liable for business debts.

Signup and view all the flashcards

Partnerships

Proprietors voluntarily decide to hold unlimited liability

Signup and view all the flashcards

Limited Partnerships

Some partners manage the business and have unlimited liability, others contribute funding and have limited liability

Signup and view all the flashcards

Market Capitalization

Total market value of a company's outstanding shares.

Signup and view all the flashcards

Assets

The economic resources that a business owns or controls.

Signup and view all the flashcards

Sales or Revenue

Revenue generated from business activities.

Signup and view all the flashcards

Earnings, Profit, or Net Income

A company's residual profit after deducting all expenses from its revenues

Signup and view all the flashcards

Number of Employees

Total number of people employed by the organization

Signup and view all the flashcards

Chief Financial Officer (CFO)

Oversees the financial activities of a company.

Signup and view all the flashcards

Treasurer

Looks after the firm’s cash, raises new capital, and maintains relationships with banks and other investors

Signup and view all the flashcards

Controller

Prepares the financial statements, manages internal budgets and accounting, and looks after its tax affairs

Signup and view all the flashcards

Goal of the Financial Manager

Maximize the market value of shareholders’ investment in the firm

Signup and view all the flashcards

Opportunity Cost of Capital

The minimum acceptable rate of return on an investment project.

Signup and view all the flashcards

Agency Problems

Conflicts of interest between managers and shareholders, resulting in losses in value.

Signup and view all the flashcards

Corporate Governance

Laws, regulations, institutions, and corporate practices that protect the rights of investors.

Signup and view all the flashcards

Socially Responsible Investment (SRI)

Investment approach considering both financial return and positive social and environmental impact.

Signup and view all the flashcards

Environmental, Social, and Governance (ESG)

Criteria used in socially responsible investing to evaluate a company's ethical impact.

Signup and view all the flashcards

Green Bonds

Directed to finance climate or environmental projects

Signup and view all the flashcards

Blue Bonds

Directed to finance marine and ocean projects with positive environmental outcome

Signup and view all the flashcards

Social Bonds

Directed to finance projects with positive social outcome

Signup and view all the flashcards

Study Notes

  • Corporations are legal entities formed under law through incorporation articles, outlining the business's purpose, governance, and operation.
  • Shareholders own corporations, but the corporation is legally distinct from them, offering shareholders limited liability, which protects them from being personally responsible for the corporation's debt.
  • Corporations feature a separation of ownership and control, where shareholders elect a board of directors who appoint top managers (CEOs) and monitor their performance.
  • Sole proprietorships are typically used for smaller businesses.
  • Partnerships involve proprietors who voluntarily hold unlimited liability.
  • Limited partnerships feature some partners with unlimited liability involved in management and others with limited liability who only contribute funding.

Measuring Corporate Activity

  • Market capitalization measures a company's size.
  • Assets measures a company's size.
  • Sales or revenue measures a company's size.
  • Earnings, profit, or net income measures a company's size.
  • Number of employees measures a company's size.
  • A company's size based on one metric is not directly linked to its size based on another metric.

Key Roles

  • CEO means Chief Executive Officer
  • CFO means Chief Financial Officer or financial manager
  • COO means Chief Operating Officer
  • CFO manages financial staff
  • Treasurer is responsible for cash, raises capital, and investor relations
  • Controller prepares financial statements, manages budgets and accounting, and handles tax matters

Goal of the Financial Manager

  • The financial manager acts as a link between the firm, outside investors, and financial markets.
  • The primary financial objective is to maximize the market value of shareholders’ investment.

Profit Maximization vs. Value Maximization

  • Profit maximization is not a well-defined corporate objective because it can lead to decisions that harm long-term value.
  • Value maximization ensures the long-run survival of the corporation.
  • Corporations increase value by accepting investment projects that earn more than the opportunity cost of capital.
  • The minimum acceptable rate of return is called the hurdle rate or opportunity cost of capital, dependent on alternative investment opportunities.
  • The opportunity cost of capital depends on the risk of the proposed investment project.

Agency Problems

  • Conflicts of interest arise from the separation of ownership and control
  • Agency costs are losses in value from agency problems or costs to mitigate them.
  • Internal controls, executive compensation, and corporate governance mitigate agency issues.

Ethics of Maximizing Value

  • Actions to maximize market value can conflict with the interests of stakeholders.
  • Valuable firms prioritize satisfied customers and loyal employees, understanding the importance of reputation.

Socially Responsible Investment (SRI)

  • SRI decision-making benefits shareholders and stakeholders, including society.
  • SRI focuses on Environmental, Social, and Governance (ESG) criteria and allows evaluations to invest in companies that promote environmental care, consumer protection, or human rights.
  • Financial returns are a secondary consideration after the investors' moral values
  • SRI investment criteria includes excluding unacceptable activities and selecting firms that meet an ESG benchmark.
  • Assessment of compliance of ESG norms
  • Incorporating ESG information to assess expected returns
  • Investment in funds that target firms with sustainable behavior
  • Ambition to generate specific social or environmental effects
  • Active engagement for foster best ESG practices

Sustainable Bonds

  • Sustainable bonds are those whose payoffs depend on the issuer meeting sustainability criteria.
  • Proceeds from sustainable bonds are used in sustainable, "Green", or "Social", investments
  • Green bonds finance climate or environmental projects
  • Blue bonds finance marine and ocean projects with positive environmental outcomes
  • Social bonds finance projects with positive social outcomes

Studying That Suits You

Use AI to generate personalized quizzes and flashcards to suit your learning preferences.

Quiz Team

More Like This

Use Quizgecko on...
Browser
Open
Browser
Browser