Questions and Answers
What is the definition of assets?
What does equity represent?
The amount of money the owner of an asset would be paid after selling it and any debts associated with the asset were paid off.
What is debt?
What I owe.
What are dividends?
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What is the primary goal of managers in terms of shareholder wealth?
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Do profits necessarily result in cash flows available to shareholders?
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What is a basic premise in managerial finance regarding return and risk?
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Who are stakeholders?
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What do business ethics aim to motivate?
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What is the impact of ethical behavior on a firm's share price?
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Study Notes
Key Financial Terms
- Assets: Property owned, which can be classified into debt and equity.
- Debt: Money owed by an individual or organization.
- Equity: Amount received from selling an asset after settling associated debts.
- Preferred Stock: A form of equity that grants ownership rights and claims on company operations.
- Liability: Financial obligations or money owed to others.
- Dividends: Distribution of earnings to shareholders.
Role of Managerial Finance
- Defined as the science and art of managing money.
- Important for understanding financial implications of business organization structures.
Goal of Managerial Finance
- Aim to maximize shareholder wealth, which often correlates with maximizing stock price.
- Managers must balance demands of various stakeholders (employees, customers, suppliers) while focusing on shareholder interests.
- Actions should be taken only if expected to enhance shareholder wealth.
Profit Maximization
- Common companies measure performance via Earnings Per Share (EPS), indicating earnings for each share of common stock.
- Profit maximization does not always equate to the highest share price due to various reasons:
- Timing: Early receipt of funds is prioritized for greater potential returns.
- Cash Flows: Profits don't always lead to available cash; increased profits may not result in guaranteed higher dividends.
- Risk: Investors prefer higher returns for accepting additional risk; increased cash flows enhance share prices.
Stakeholders
- Companies increasingly consider the interests of stakeholders, including employees, customers, suppliers, and creditors.
- Emphasis is on maintaining stakeholder well-being rather than maximizing it.
Importance of Business Ethics
- Business ethics dictate moral standards for conduct in commerce.
- Ethical behavior is essential for achieving wealth maximization for shareholders.
- Maintaining ethical standards can positively impact cash flow and reduce perceived risk, benefiting share price.
Managerial Finance Function
- Encompasses the relationship with economics and accounting.
- Primary activities revolve around making financial decisions that align with overall business strategy.
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Description
Test your knowledge on key finance concepts such as assets, debt, equity, and preferred stock. This quiz is designed to help you comprehend essential terms from your Finance 1 class materials. Use it to reinforce your understanding and prepare effectively for your studies.
