Chap 1

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Questions and Answers

What is the primary objective of financial managers in a firm?

Minimize costs and reduce expenses

Maximize sales and market share

Increase the firm's asset base

Maximize shareholder wealth (correct)

What is the primary focus of capital budgeting decisions?

Evaluating short-term investments

Determining the firm's capital structure

Selecting long-term projects that create value (correct)

Managing day-to-day financial matters

Which of the following is a key financial decision?

Dividend payout ratio

Financial ratio analysis

Capital budgeting and financing decisions (correct)

Current asset management

What is the primary consideration in working capital management decisions?

Ensuring sufficient funds for short-term needs Signup and view all the answers

What is the primary goal of financial managers in relation to profit maximization?

Maximize profit in the long-term Signup and view all the answers

Which of the following is a key aspect of time value of money?

The present value of future cash flows Signup and view all the answers

What is the primary focus of financing decisions?

Determining the optimal capital structure Signup and view all the answers

What is the primary consideration in dividend decisions?

Balancing dividend payout and retained earnings Signup and view all the answers

What is the primary goal of capital budgeting in a company?

To maximize the company's value by allocating capital efficiently Signup and view all the answers

What is the primary metric used to analyze the profitability of a projected investment?

Net present value (NPV) Signup and view all the answers

What is the primary goal of maximizing shareholder wealth?

To allow shareholders to adjust risk in their investment portfolio Signup and view all the answers

What is the implication of maximizing market value for shareholders?

Shareholders will have more flexibility to manage their investments Signup and view all the answers

What is the primary consideration for a company's managers when evaluating risky projects?

The potential profits should offset the risk Signup and view all the answers

What is the primary objective of a company's financial management?

To maximize shareholder wealth and market value Signup and view all the answers

What is the implication of a project yielding a positive NPV?

The project should be accepted as it is profitable Signup and view all the answers

What is the primary benefit of maximizing market value for a company?

It increases the company's market capitalization Signup and view all the answers

What is the primary goal of a firm's financial decisions?

Maximizing shareholder wealth Signup and view all the answers

What is the main difference between profit maximization and shareholder wealth maximization?

Profit maximization ignores the timing of future cash flows, while shareholder wealth maximization considers it. Signup and view all the answers

What is the primary concern of a firm's capital budgeting decisions?

Maximizing shareholder wealth Signup and view all the answers

What is the main advantage of using Net Present Value (NPV) over Present Value (PV) in capital budgeting decisions?

NPV considers the time value of money, while PV does not. Signup and view all the answers

Why is profit maximization a short-term oriented strategy?

It ignores the timing of future cash flows. Signup and view all the answers

What is the primary difference between internal financing and external financing?

Internal financing involves using retained earnings, while external financing involves issuing new shares or debt. Signup and view all the answers

What is the main advantage of using shareholder wealth maximization as a firm's financial objective?

It considers the time value of money. Signup and view all the answers

Why do firms use capital budgeting techniques to evaluate investment opportunities?

To maximize shareholder wealth. Signup and view all the answers

Study Notes

Financial Management Decisions

Financial managers make four key decisions: investment, financing, cash management, and dividend decisions
Investment decisions involve selecting value-creating long-term projects
Financing decisions involve deciding how to pay for investments, including capital structure and short-term and long-term financing options

Types of Decisions

Cash management decisions: ensuring sufficient working capital to meet short-term obligations and goals
Dividend decisions: balancing dividend payout and retained earnings

Impact on Balance Sheet

Working capital management decisions affect current assets, current liabilities, and net working capital
Capital budgeting decisions determine long-term productive assets purchased
Financing decisions determine the firm's capital structure, including long-term debt and equity

Risk Management

Emphasizes taking calculated risks to protect and grow shareholders' capital
Uses capital budgeting to evaluate and select investments in long-term assets

Firm Goals

Maximizing market value: focuses on increasing the company's stock price and market capitalization
Maximizing shareholder wealth: focuses on increasing the company's long-term value and profitability

Key Metrics

Price-to-earning ratio, dividend yield, earning yield, and other metrics to measure market value and shareholder wealth

Examples of Investment and Financing Decisions

McDonald's: expanding restaurants in China and issuing Canadian dollar bonds
Tesla Motors: starting battery cell production and raising capital by selling new shares
Lenovo: building a new manufacturing facility in India and issuing 5-year dollar bonds
GlaxoSmithKline: spending on research and development and issuing short-term euro debt

Profit Maximization vs. Shareholder Wealth Maximization

Profit maximization focuses on short-term profit, while shareholder wealth maximization focuses on long-term value creation
Profit maximization ignores the timing of future cash flows, while shareholder wealth maximization considers it

Present Value (PV) and Net Present Value (NPV)

PV: the current value of future cash flows discounted by the cost of capital
NPV: the difference between the PV of cash inflows and outflows of a project, used to determine its profitability

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Description

Learn how companies like Apple effectively use financial resources to manage operational needs and invest in future growth opportunities. This quiz covers key financial decisions, corporate investment, and financing strategies.