Podcast
Questions and Answers
What is a significant disadvantage of a sole proprietorship?
What is a significant disadvantage of a sole proprietorship?
- Complex ownership transfer
- Unlimited liability (correct)
- High regulatory requirements
- Difficult to acquire capital
Which of the following is NOT a form of business organization mentioned?
Which of the following is NOT a form of business organization mentioned?
- Limited company (correct)
- Sole proprietorship
- S-Corp
- General partnership
What is a primary advantage of a sole proprietorship?
What is a primary advantage of a sole proprietorship?
- Access to extensive resources
- Ability to share profits
- Ease of establishment (correct)
- Limited liability
In what way does a sole proprietorship limit the owner's business capabilities?
In what way does a sole proprietorship limit the owner's business capabilities?
What does it mean that a sole proprietorship is 'limited to the life of the owner'?
What does it mean that a sole proprietorship is 'limited to the life of the owner'?
What are the four main areas of finance traditionally grouped into?
What are the four main areas of finance traditionally grouped into?
Which job roles are associated with the field of Investments?
Which job roles are associated with the field of Investments?
What do financial institutions primarily specialize in?
What do financial institutions primarily specialize in?
What is one requirement for working in International Finance?
What is one requirement for working in International Finance?
Which of the following best describes the goal of financial management?
Which of the following best describes the goal of financial management?
What is one of the primary responsibilities of a financial manager?
What is one of the primary responsibilities of a financial manager?
Which of the following types of companies is NOT considered a financial institution?
Which of the following types of companies is NOT considered a financial institution?
Which role specifically oversees cash management and capital expenditures?
Which role specifically oversees cash management and capital expenditures?
What are the main responsibilities in Corporate Finance?
What are the main responsibilities in Corporate Finance?
What is capital budgeting concerned with?
What is capital budgeting concerned with?
Which aspect is crucial in Investments when dealing with financial assets?
Which aspect is crucial in Investments when dealing with financial assets?
Which aspect of financial management involves deciding between using debt or equity to pay for assets?
Which aspect of financial management involves deciding between using debt or equity to pay for assets?
Which task is NOT typically associated with a Controller in a financial management context?
Which task is NOT typically associated with a Controller in a financial management context?
What is the focus of personal finance?
What is the focus of personal finance?
Which financial decision is primarily concerned with managing a firm's everyday finances?
Which financial decision is primarily concerned with managing a firm's everyday finances?
Who is generally the highest-ranking financial manager in a firm?
Who is generally the highest-ranking financial manager in a firm?
What is a primary goal of financial management?
What is a primary goal of financial management?
The Sarbanes-Oxley Act was enacted in response to which of the following?
The Sarbanes-Oxley Act was enacted in response to which of the following?
What does the agency problem refer to?
What does the agency problem refer to?
How can managerial compensation be structured to align with shareholder interests?
How can managerial compensation be structured to align with shareholder interests?
What is one potential consequence of the Sarbanes-Oxley Act for firms?
What is one potential consequence of the Sarbanes-Oxley Act for firms?
Which of the following is NOT a goal of financial management?
Which of the following is NOT a goal of financial management?
What can potentially enhance management performance according to corporate control principles?
What can potentially enhance management performance according to corporate control principles?
Which of the following describes the principal-agent relationship?
Which of the following describes the principal-agent relationship?
What is a key advantage of a partnership?
What is a key advantage of a partnership?
What is a significant disadvantage of a corporation?
What is a significant disadvantage of a corporation?
Which of the following describes a general partnership?
Which of the following describes a general partnership?
What happens to a partnership when one partner dies or wishes to leave?
What happens to a partnership when one partner dies or wishes to leave?
What is known as the agency problem in a corporation?
What is known as the agency problem in a corporation?
What ensures ease of capital raising in corporations?
What ensures ease of capital raising in corporations?
Which of the following is NOT an advantage of forming a corporation?
Which of the following is NOT an advantage of forming a corporation?
What should be considered the primary goal of financial management in a corporation?
What should be considered the primary goal of financial management in a corporation?
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Study Notes
Goal of Financial Management
- The goal of financial management should be to maximize the market value of the existing owners' equity.
- This means making decisions that will increase the value of the company to its owners, such as maximizing shareholder wealth and maximizing the current value per share of the company’s existing stock.
Sarbanes-Oxley Act
- The Sarbanes-Oxley Act was passed in response to corporate accounting scandals including Enron, Tyco, WorldCom, and Adelphia.
- The act aims to protect against accounting fraud and financial malpractice.
- Large public companies found compliance costly, and this led to some choices to go public outside the U.S. or go private.
Agency Problem
- An agency relationship is created when one party (the principal) hires another party (the agent) to act on their behalf.
- In the business world, shareholders are the principals while managers are the agents and have been hired to run the company.
- An Agency Problem arises when a conflict of interest exists between principals and agents.
- Shareholders want to maximize their returns, while management aims to maximize their compensation and benefits.
Addressing the Agency Problem
- Managers can be incentivized to act in the shareholders' interests through compensation packages that are tied to company performance.
- The threat of a takeover can also act as a disciplinary measure, as a new management team may take over a company if its performance does not meet the expectations of stakeholders.
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