Podcast
Questions and Answers
Which of the following best describes the primary cause of the agency problem in corporate finance?
Which of the following best describes the primary cause of the agency problem in corporate finance?
- The differing risk tolerances between shareholders.
- The lack of sufficient government regulation.
- The separation of management and ownership. (correct)
- The presence of strong labor unions.
In an efficient capital market, what is the most likely impact of new, relevant information becoming available to the public?
In an efficient capital market, what is the most likely impact of new, relevant information becoming available to the public?
- No change in price due to market stability.
- An immediate and accurate price adjustment. (correct)
- A delayed price adjustment as investors analyze the information.
- A gradual price adjustment over several days.
Why is a peso received today generally considered more valuable than a peso received in the future?
Why is a peso received today generally considered more valuable than a peso received in the future?
- There is a lower risk associated with receiving pesos today instead of the future.
- Inflation only affects future pesos.
- Future pesos are subject to higher taxes.
- Today's peso can be invested to earn additional value. (correct)
How do differing personal values primarily contribute to ethical dilemmas in business?
How do differing personal values primarily contribute to ethical dilemmas in business?
What investment strategy does the saying 'don't put all your eggs in one basket' best represent?
What investment strategy does the saying 'don't put all your eggs in one basket' best represent?
In a competitive market, what are two primary strategies that firms can employ to achieve a competitive advantage?
In a competitive market, what are two primary strategies that firms can employ to achieve a competitive advantage?
What fundamental principle underlies the risk-return tradeoff in finance?
What fundamental principle underlies the risk-return tradeoff in finance?
How can taxes influence business decisions, and what is often required to navigate these influences effectively?
How can taxes influence business decisions, and what is often required to navigate these influences effectively?
Why is 'cash not profit being king' a critical concept in financial management?
Why is 'cash not profit being king' a critical concept in financial management?
What is the primary focus when evaluating incremental cash flows in capital budgeting decisions?
What is the primary focus when evaluating incremental cash flows in capital budgeting decisions?
Flashcards
The Agency Problem
The Agency Problem
Separation of management and ownership in a firm, potentially leading to conflicts of interest.
Efficient Capital Markets
Efficient Capital Markets
Markets where prices quickly reflect all available information.
Time Value of Money
Time Value of Money
The concept that money available today is worth more than the same amount in the future due to its potential earning capacity.
Ethical Dilemmas
Ethical Dilemmas
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All Risk Is Not Equal
All Risk Is Not Equal
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Curse of Competitive Market
Curse of Competitive Market
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Risk-Return Tradeoff
Risk-Return Tradeoff
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Taxes Biased Business Decisions
Taxes Biased Business Decisions
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Cash vs. Profit
Cash vs. Profit
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Incremental Cash Flows
Incremental Cash Flows
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Study Notes
- Agency problem arises from the separation of management and ownership within a firm.
- Efficient capital markets are characterized by quick reactions and accurate pricing.
- The time value of money dictates that a peso today is worth more than a peso in the future.
- Ethical dilemmas persist due to differing values that form the basis for personal judgments.
- Risk varies, cautioning against putting all resources into a single investment ("don't put all your eggs in one basket").
- Competitive markets require firms to differentiate their products or achieve a cost advantage.
- Risk-return trade-off suggests that higher risk correlates with higher potential return.
- Taxes influence business decisions, necessitating cooperation between private entities and the government.
- Cash flow is crucial, as cash and accounting profit may not align.
- Incremental cash flows: only changes are relevant.
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