Financial Management Concepts

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Questions and Answers

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?

Limited company (correct)

Sole proprietorship

S-Corp

General partnership

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?

Due to difficulty in attracting investors Signup and view all the answers

What does it mean that a sole proprietorship is 'limited to the life of the owner'?

The business ceases to exist upon the owner's passing Signup and view all the answers

What are the four main areas of finance traditionally grouped into?

Corporate finance, Investments, Financial institutions, International finance Signup and view all the answers

Which job roles are associated with the field of Investments?

Stockbroker, Portfolio manager, Security analyst Signup and view all the answers

What do financial institutions primarily specialize in?

Financial matters and services Signup and view all the answers

What is one requirement for working in International Finance?

Understanding of exchange rates and political risks Signup and view all the answers

Which of the following best describes the goal of financial management?

Maximizing the value of the firm for shareholders Signup and view all the answers

What is one of the primary responsibilities of a financial manager?

Managing day-to-day finances Signup and view all the answers

Which of the following types of companies is NOT considered a financial institution?

Retail wholesalers Signup and view all the answers

Which role specifically oversees cash management and capital expenditures?

Treasurer Signup and view all the answers

What are the main responsibilities in Corporate Finance?

Overseeing capital structure and funding decisions Signup and view all the answers

What is capital budgeting concerned with?

Deciding on long-term investments Signup and view all the answers

Which aspect is crucial in Investments when dealing with financial assets?

Risk versus return and asset allocation Signup and view all the answers

Which aspect of financial management involves deciding between using debt or equity to pay for assets?

Capital structure Signup and view all the answers

Which task is NOT typically associated with a Controller in a financial management context?

Managing credit Signup and view all the answers

What is the focus of personal finance?

Individual budgeting and retirement planning Signup and view all the answers

Which financial decision is primarily concerned with managing a firm's everyday finances?

Working capital management Signup and view all the answers

Who is generally the highest-ranking financial manager in a firm?

Chief Financial Officer (CFO) Signup and view all the answers

What is a primary goal of financial management?

Maximize the current value per share of existing stock Signup and view all the answers

The Sarbanes-Oxley Act was enacted in response to which of the following?

Corporate scandals like Enron and WorldCom Signup and view all the answers

What does the agency problem refer to?

The relationship between stockholders and managers Signup and view all the answers

How can managerial compensation be structured to align with shareholder interests?

By providing stock options as incentives Signup and view all the answers

What is one potential consequence of the Sarbanes-Oxley Act for firms?

Higher compliance costs Signup and view all the answers

Which of the following is NOT a goal of financial management?

Minimizing risk at all costs Signup and view all the answers

What can potentially enhance management performance according to corporate control principles?

Threat of a takeover Signup and view all the answers

Which of the following describes the principal-agent relationship?

Stockholders as principals hiring managers as agents Signup and view all the answers

What is a key advantage of a partnership?

More capital available Signup and view all the answers

What is a significant disadvantage of a corporation?

Double taxation Signup and view all the answers

Which of the following describes a general partnership?

Partnership structure owned by two or more persons Signup and view all the answers

What happens to a partnership when one partner dies or wishes to leave?

The partnership dissolves Signup and view all the answers

What is known as the agency problem in a corporation?

The conflict between owners and managers Signup and view all the answers

What ensures ease of capital raising in corporations?

Separation of ownership and management Signup and view all the answers

Which of the following is NOT an advantage of forming a corporation?

High level of taxation on dividends Signup and view all the answers

What should be considered the primary goal of financial management in a corporation?

Maximize shareholder wealth Signup and view all the answers

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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Description

Explore key concepts in financial management including the goal of maximizing market value, the Sarbanes-Oxley Act's implications, and the agency problem in corporate governance. This quiz covers essential principles that impact shareholder wealth and corporate accountability.