Financial Management Midterm Reviewer
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Questions and Answers

What is the primary ultimate goal of a corporation?

  • Maximizing shareholder's wealth (correct)
  • Increasing physical assets
  • Enhancing employee satisfaction
  • Maximizing profits in the short term

    • Which market involves the trading of long-term debt and equity securities?

  • Future Market
  • Capital Market (correct)
  • Spot Market
  • Physical Market

    • Why is maximizing market value more important than maximizing profits?

  • It ensures a stable workforce
  • It prioritizes short-term financial goals
  • It guarantees immediate cash flows
  • It considers capital gains and time value of money (correct)

    • What could happen if a company decides to reinvest cash instead of declaring dividends?

    <p>It might lead to detrimental effects if reinvestment is risky</p> Signup and view all the answers

    What is an example of a derivative mentioned in the content?

    <p>Option contract</p> Signup and view all the answers

    In which market are goods sold and delivered on the same date?

    <p>Spot Market</p> Signup and view all the answers

    Which type of market involves obligations to buy or trade an asset at a future date?

    <p>Future Market</p> Signup and view all the answers

    What is the significance of the discount rate in financial contexts?

    <p>It reflects risks of capitalization and time value of money</p> Signup and view all the answers

    What role does the Banko Sentral ng Pilipinas play in unit investment trust funds?

    <p>It supervises these funds.</p> Signup and view all the answers

    What happens to the cash proceeds from transactions in the primary market?

    <p>They go to the corporation.</p> Signup and view all the answers

    Which market is involved with the sale of outstanding shares of stocks?

    <p>Secondary Market</p> Signup and view all the answers

    What characterizes the weak form of stock market efficiency?

    <p>It relies on past stock prices for predictions.</p> Signup and view all the answers

    In an indirect transfer of securities, what is primarily involved?

    <p>Investment banks facilitating transactions.</p> Signup and view all the answers

    Which type of efficiency suggests that even insider information cannot lead to consistently beating the market?

    <p>Strong form efficiency</p> Signup and view all the answers

    What is a primary characteristic of a pension fund?

    <p>It involves pooled contributions from employees and employers.</p> Signup and view all the answers

    What distinguishes the secondary market from the primary market?

    <p>The primary market involves new issuances.</p> Signup and view all the answers

    What does the Debt to Equity ratio indicate about a company?

    <p>The proportion of company funds financed by debt compared to equity</p> Signup and view all the answers

    Which ratio measures how many times interest payments can be made by EBIT?

    <p>Times Interest Earned Ratio</p> Signup and view all the answers

    What does the Cash Coverage Ratio assess?

    <p>The coverage of interest payments through cash flows generated from operations</p> Signup and view all the answers

    What is the main goal of a corporation according to the provided information?

    <p>To maximize shareholder wealth</p> Signup and view all the answers

    What does the Inventory Turnover Ratio indicate?

    <p>How efficiently a company replaces its average inventories due to sales</p> Signup and view all the answers

    Which type of corporation is organized by private individuals for profit generation?

    <p>Private Corporation</p> Signup and view all the answers

    What practice should a corporation avoid to maintain ethical standards?

    <p>Increasing the selling prices of products dramatically</p> Signup and view all the answers

    Which of the following does not describe Activity Ratios?

    <p>They indicate the financial health of the company.</p> Signup and view all the answers

    What does the Accounts Receivable Turnover Ratio indicate?

    <p>The number of times a company collects on its receivables during a period</p> Signup and view all the answers

    How should financial managers allocate funds within a corporation?

    <p>By deciding how much is needed for each operating unit</p> Signup and view all the answers

    What is a significant aspect of stocks concerning capital?

    <p>Capital stock is divided into shares for distribution</p> Signup and view all the answers

    What is the significance of the Asset Turnover Ratio?

    <p>It measures how well a company utilizes its assets to generate sales.</p> Signup and view all the answers

    What does the stock price reflect regarding a corporation's performance?

    <p>Both current and future cash flows</p> Signup and view all the answers

    Which of the following ratios would be most useful for assessing how often a company pays its outstanding debts?

    <p>Accounts Payable Turnover Ratio</p> Signup and view all the answers

    What should corporations prioritize in addition to maximizing profits?

    <p>Maintaining Corporate Social Responsibility</p> Signup and view all the answers

    What is an unethical way a corporation might attempt to increase profits?

    <p>Raising product prices excessively</p> Signup and view all the answers

    What is the formula for calculating the Working Capital to Total Asset Ratio?

    <p>(Current Assets - Current Liabilities) / Total Assets</p> Signup and view all the answers

    Which ratio indicates the proportion of total debt that is funded by total assets?

    <p>Debt Ratio</p> Signup and view all the answers

    What do leverage ratios primarily indicate about a company?

    <p>Its capacity to meet long-term debt obligations</p> Signup and view all the answers

    What does the Equity Ratio represent?

    <p>The proportion of total equity compared to total assets</p> Signup and view all the answers

    How is Net Working Capital defined?

    <p>Total Current Assets - Total Current Liabilities</p> Signup and view all the answers

    Which of the following ratios is a liquidity ratio?

    <p>Working Capital to Total Asset Ratio</p> Signup and view all the answers

    What is the significance of keeping track of a company's solvency?

    <p>To indicate long-term financial stability</p> Signup and view all the answers

    Which ratio shows the funding of total assets by shareholder's equity?

    <p>Equity Ratio</p> Signup and view all the answers

    What is the purpose of an indirect transfer of securities?

    <p>To facilitate easier issuance of securities to investors.</p> Signup and view all the answers

    Which classification of stock price is also known as perceived value?

    <p>Market value</p> Signup and view all the answers

    How can the intrinsic value of a stock be estimated?

    <p>Using either the Dividend Discount Model or the Corporate Valuation Model.</p> Signup and view all the answers

    What does the current ratio measure?

    <p>The liquidity of a company to pay short-term debt obligations.</p> Signup and view all the answers

    What is the acceptable range for a current ratio?

    <p>1.5:1 to 2:1</p> Signup and view all the answers

    If a company's current ratio is higher than 2:1, what might this indicate?

    <p>The company may be not utilizing its current assets efficiently.</p> Signup and view all the answers

    Which of the following stock markets in the Philippines was established first?

    <p>Manila Stock Exchange (MSE)</p> Signup and view all the answers

    What is the significance of financial statement analysis in business?

    <p>It compares financial data over two or more periods.</p> Signup and view all the answers

    Study Notes

    Financial Management Midterm Reviewer

    • Business Organizations:
    • Sole Proprietorship: Simplest, owned by one person, full control. Few regulations, unlimited liability. Limited life (ends with owner's death).
    • Partnership: Two or more owners. Can be oral or written, except for real property. Classified as general or limited. Dissolution can occur due to retirement, addition, incorporation, death.
    • Corporation: Most complex, five or more incorporators. Limited liability for owners (shareholders). Stricter regulations.
    • Types of Corporations:
    • De Jure: Meets legal requirements.
    • De Facto: Exists in fact but not in law (flaws in incorporation).
    • Public: Organized by the state for public welfare.
    • Private: Organized by individuals for profit.
    • Stock: Issues shares, divides profits among holders.
    • Non-stock: No stocks, no dividend distribution.
    • Publicly listed: Traded on stock exchange.
    • Privately owned: Shares not traded.

    Financial Managers

    • Financial Managers: Employees responsible for managing a corporation's money to maximize value.
    • Board of Directors (BOD): Directly responsible to shareholders, manages the corporation.
    • Chief Financial Officer (CFO): Similar to the VP of Finance, plans and formulates financial strategies.
    • Treasurer: Raises and manages company funds.
    • Controller: Manages accounting, budgeting, and financial record-keeping, prepares financial statements.

    Financial Manager Roles

    • Investing Decisions: Investments must benefit the company.
    • Financing Decisions: Limited capital is a constraint for investment opportunities.
    • Generating Capital: Financial managers use various means to accumulate funds (e.g., bank loans, issuing stocks or bonds).
    • Operating Decisions: Managers decide how much money is allocated to the company's different parts to support day-to-day operations.

    Ethical Considerations

    • Ethical Conduct: Corporations should maximize shareholder wealth ethically, not through fraud. Corporate Social Responsibility (CSR) ensures positive impact.
    • Profit vs. ethics: If there is a conflict, ethics prevail over profit due to the long-term benefits of goodwill.

    Goals of the Corporation

    • Profit Maximization: Most business organizations want to maximize earnings.
    • Shareholder Wealth Maximization: This is the ultimate goal of corporations, focusing on increasing stock price (not just current profit).

    Financial Environment

    • Factors affecting finances: Sources of financing (financial markets, financial intermediaries)
    • Market Types:
    • Financial Markets: Where financial assets (stocks, bonds) are issued and traded.
    • Stock Market: Stocks are traded/issued.
    • Bond Market: Debt securities (bonds) are issued and traded.
    • Money Market: Short-term debt instruments (e.g., Treasury bills) are traded.
    • Capital Market: Long-term debt and equity securities used for financing.
    • Other Markets: Physical markets (real estate), spot markets (immediate transactions) and future markets (future contracts).

    Financial Ratios

    • Liquidity Ratios: Ability to pay short-term debts (current ratio, quick ratio, cash ratio).
    • Leverage Ratios: Ability to pay long-term debts (debt ratio, equity ratio, debt to equity ratio).
    • Activity Ratios: Efficiency in managing assets (asset turnover ratio, inventory turnover ratio, accounts receivable turnover ratio, accounts payable turnover ratio).
    • Profitability Ratios: Measuring overall company performance and return on investment (times interest earned, cash coverage, etc.).

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    Financial Management Midterm Reviewer PDF

    Description

    Prepare for your financial management midterm with this comprehensive reviewer. It covers various business organizations, including sole proprietorships, partnerships, and corporations, along with their classifications. Understand the differences in liability and regulations to excel in your exam.

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