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Questions and Answers
Which of the following roles is NOT typically associated with a finance career?
Which of the following roles is NOT typically associated with a finance career?
Financial management can be used interchangeably with corporate finance.
Financial management can be used interchangeably with corporate finance.
True
Name one daily activity performed by financial managers.
Name one daily activity performed by financial managers.
Monitor cash balances
Investors use investment principles to value stocks and bonds of __________.
Investors use investment principles to value stocks and bonds of __________.
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Match the following finance roles with their primary responsibilities:
Match the following finance roles with their primary responsibilities:
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What is a key advantage of a sole proprietorship?
What is a key advantage of a sole proprietorship?
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In a sole proprietorship, profits and losses are taxed at the corporate level.
In a sole proprietorship, profits and losses are taxed at the corporate level.
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Name one drawback of a sole proprietorship.
Name one drawback of a sole proprietorship.
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A corporation typically has __________ liability for its owners.
A corporation typically has __________ liability for its owners.
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Match the following forms of organization with their characteristics:
Match the following forms of organization with their characteristics:
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What does the Time Value of Money (TVM) concept primarily state?
What does the Time Value of Money (TVM) concept primarily state?
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The future value is always less than the present value.
The future value is always less than the present value.
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What is the formula used to calculate the Future Value (FV) in relation to Present Value (PV)?
What is the formula used to calculate the Future Value (FV) in relation to Present Value (PV)?
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The primary goal of financial management is the maximization of ______.
The primary goal of financial management is the maximization of ______.
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Match the terms with their respective definitions:
Match the terms with their respective definitions:
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Which of the following is a drawback of focusing solely on profit maximization?
Which of the following is a drawback of focusing solely on profit maximization?
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Inflation effects complicate the process of measuring profit accurately.
Inflation effects complicate the process of measuring profit accurately.
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What is one disadvantage of a corporation?
What is one disadvantage of a corporation?
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The 2017 Tax Cuts and Jobs Act increased the U.S. corporate tax rate from 21% to 35%.
The 2017 Tax Cuts and Jobs Act increased the U.S. corporate tax rate from 21% to 35%.
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What tax advantage does an S corporation provide its stockholders?
What tax advantage does an S corporation provide its stockholders?
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The _____ Act of 2002 was a response to financial scandals and audit failures.
The _____ Act of 2002 was a response to financial scandals and audit failures.
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Which act aimed to reduce systemic risks in the U.S. financial system?
Which act aimed to reduce systemic risks in the U.S. financial system?
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Match the following terms to their correct descriptions:
Match the following terms to their correct descriptions:
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Institutional investors have little influence over publicly owned companies.
Institutional investors have little influence over publicly owned companies.
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What flexibility does a Limited Liability Company (LLC) provide regarding taxation?
What flexibility does a Limited Liability Company (LLC) provide regarding taxation?
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Study Notes
Introduction
- Financial management is a field connecting economics and accounting.
- Firms have various organizational structures.
- Risk and return are core concepts in finance.
- Financial managers aim to maximize wealth.
- Daily and long-term decisions impact wealth maximization.
- Future and present value concepts relate to time value of money.
The Field of Finance
- Finance bridges economics and accounting.
- Economics describes the business environment.
- Financial managers need financial statement understanding.
- Accounting provides financial data (income statements, balance sheets, cash flow statements).
- Finance focuses on forward-thinking business activity results.
- Finance and accounting are closely linked.
Investments vs. Corporate Finance
- Investments use principles for stock and bond valuation.
- Investors choose securities and build portfolios.
- Corporate finance determines firm asset development.
Investments vs. Corporate Finance (Continued)
- Financial management overlaps with corporate finance.
- Financial management encompasses various investment topics.
- Outside investors evaluate companies.
The Value of Studying Finance
- Finance offers diverse career paths (financial officer, banker, stockbroker, financial analyst, portfolio manager, investment banker, financial consultant, personal financial planner).
- CEOs report to boards of directors.
- Marketing managers are interested in investment returns.
Activities of Financial Management
- Financial managers perform numerous activities (monitoring cash balances, managing credit, monitoring inventory, collecting and distributing cash).
- Less routine activities include loan negotiations, stock/bond sales, and capital budgeting/dividend plan establishment.
Figure 1-1 Functions of the Financial Manager
- Daily activities (credit management, inventory control, receipt and disbursement of funds) influence profitability.
- Occasional activities (stock issue, bond issue, capital budgeting, dividend decisions) consider risk.
Activities of Financial Management (Continued)
- Risk and return trade-offs maximize market value.
- Managers influence operational and financial mixes.
Forms of Organization
- Forms include sole proprietorships, partnerships, and corporations.
- Factors include the number of people, owner liability, regulatory complexity.
Sole Proprietorship
- Sole proprietorship represents single-owner businesses.
- Advantages: Simple decision-making, low costs.
- Drawbacks: Unlimited owner liability, profits/losses taxed as direct personal income.
Partnership
- Partnerships (like sole proprietorships) are businesses with multiple owners.
- Partnership agreements detail ownership, profit distribution, and withdrawal procedures.
- Partnerships have unlimited liability for owners.
Partnership (Continued)
- Limited liability partnerships split general and limited partners' responsibilities, and liabilities.
Corporation
- Corporations are legally distinct entities.
- Corporations can sue/be sued, engage in contracts, and acquire property.
- Articles of incorporation define the entity's rights and limitations.
- Shareholders have limited liability.
Corporation (Continued)
- Corporations have continuous life.
- Stock ownership easily transfers, shares can divide.
- Potential drawback: Double taxation of earnings.
Corporation (Concluded)
- 2017 tax cuts reduced corporate tax rates.
- S corporations are taxed once as direct income to stockholders.
- Limited liability companies (LLCs) offer limited liability for owners and flexibility in taxation.
Corporate Governance
- Sarbanes-Oxley Act of 2002 responded to financial scandals, creating legal guidelines for public companies.
- Dodd-Frank Act (2010) sought to reduce systemic risks and financial system instability following the Great Recession.
Corporate Governance (Concluded)
- Agency theory explores conflicts between corporate owners and managers.
- Institutional investors impact company management through voting power.
The Time Value of Money
- A dollar today is worth more than a future dollar due to potential investment returns.
- Future value (FV) of a dollar > today's dollar.
- Present value (PV) is today's dollar value.
Present Value
- Present value (PV) equations calculate today's value of future sums.
Goals of Financial Management
- The primary goal is profit maximization.
- Problems with profit include risk, timing of benefits, and accurate profit measurement.
- Inflation and diverse currency transactions further complicate the valuation of profit.
A Valuation Approach
- Investor valuation of earnings is the key measure of firm performance.
- Present valuation of the company, is critical.
- Future cash flows are not always immediate.
- Future earnings are critical for shareholder interest.
Maximizing Shareholder Wealth
- The overall aim is maximizing shareholder wealth.
- High firm value supports shareholder claims.
- Value is not fixed.
- Financial managers influence shareholder wealth through strategic choices.
Management and Stockholder Wealth
- Long-run management success relies on prioritizing stakeholder concerns.
- Board of directors aligns company management incentives.
- Institutional investors exert influence over management decisions.
Social Responsibility and Ethical Behavior
- Social responsibility and ethical business practices align with long-term company sustainability.
- Fair pricing and other socially desirable behaviors can positively impact valuation in the market.
- Ethical behavior can enhance company reputation.
Social Responsibility and Ethical Behavior (Continued)
- Insider trading is unethical and illegal, negatively impacting share value.
- The Securities Exchange Commission (SEC) protects against unethical trading practice.
Role of the Financial Markets
- Financial markets are platforms for corporations, individuals, and institutions to engage in borrowing, lending, or investing.
- Governments may be participants in these markets.
- Public markets facilitate corporate fundraising.
Structure and Functions of the Financial Markets
- Financial markets have different sectors (domestic, international, corporate, government, money, capital).
Money Markets
- Money markets deal with securities maturing in one year or less.
- Example securities: commercial paper, certificates of deposit.
Capital Markets
- Capital markets handle securities with longer terms.
- Long term markets can focus on securities with one to ten years.
- Intermediate markets with 10+ year-maturity terms.
- Securities include stocks, preferred stock, corporate bonds.
Allocation of Capital
- Primary markets facilitate initial public offerings (IPOs).
- Secondary markets allow investors to trade securities continuously, providing feedback to managers.
Allocation of Capital (Continued)
- Return maximization and risk minimization guide investor decisions.
- Highly-evaluated firms often raise funds at lower costs than competitors.
Internationalization of Financial Markets
- Internationalization of financial markets enables capital allocation from various sources.
- Globalization and international affairs influence managers and operations.
- These international impacts may include international capital flows, computerized transactions, and foreign currency management.
Format of the Text
- The text is organized into sections: introduction, financial analysis and planning, working capital, capital budgeting, long-term financing, and corporate finance perspectives.
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Description
This quiz covers fundamental concepts in financial management, including the relationship between finance, economics, and accounting. It explores the roles of financial managers in wealth maximization, as well as the distinctions between investments and corporate finance. Test your knowledge on these key financial principles.
