Podcast
Questions and Answers
Which type of business organization has unlimited liability for its owners?
Which type of business organization has unlimited liability for its owners?
Which business organization allows for the separation of management and investment?
Which business organization allows for the separation of management and investment?
What is the tax treatment of income for an S-Corporation?
What is the tax treatment of income for an S-Corporation?
Which type of business organization has the highest cost to transfer ownership?
Which type of business organization has the highest cost to transfer ownership?
Signup and view all the answers
Which business form permits owners to have limited liability?
Which business form permits owners to have limited liability?
Signup and view all the answers
In terms of providing incentives to retain high-quality employees, which business organization type is most favorable?
In terms of providing incentives to retain high-quality employees, which business organization type is most favorable?
Signup and view all the answers
Which of the following organizations have limited deductibility of owner benefits?
Which of the following organizations have limited deductibility of owner benefits?
Signup and view all the answers
Which business organization type is known for flow-through tax treatment?
Which business organization type is known for flow-through tax treatment?
Signup and view all the answers
What is the primary focus of capital budgeting in financial management?
What is the primary focus of capital budgeting in financial management?
Signup and view all the answers
Which of the following is NOT a disadvantage of sole proprietorships?
Which of the following is NOT a disadvantage of sole proprietorships?
Signup and view all the answers
What is meant by working capital management?
What is meant by working capital management?
Signup and view all the answers
What advantage does a partnership have over a sole proprietorship?
What advantage does a partnership have over a sole proprietorship?
Signup and view all the answers
Which decision type in financial management involves choosing the optimal financing method?
Which decision type in financial management involves choosing the optimal financing method?
Signup and view all the answers
Which of the following accurately describes a disadvantage of partnerships?
Which of the following accurately describes a disadvantage of partnerships?
Signup and view all the answers
Which form of business organization places the owner's personal assets at risk?
Which form of business organization places the owner's personal assets at risk?
Signup and view all the answers
What is a consequence of poor decisions in capital budgeting, financing, or working capital management?
What is a consequence of poor decisions in capital budgeting, financing, or working capital management?
Signup and view all the answers
What triggers the creation of an agency relationship in a business?
What triggers the creation of an agency relationship in a business?
Signup and view all the answers
Which statement accurately describes agency conflicts?
Which statement accurately describes agency conflicts?
Signup and view all the answers
What are agency costs primarily associated with?
What are agency costs primarily associated with?
Signup and view all the answers
How can agency costs be effectively reduced?
How can agency costs be effectively reduced?
Signup and view all the answers
What role does the Board of Directors play in agency relationships?
What role does the Board of Directors play in agency relationships?
Signup and view all the answers
Which of the following actions can help align the interests of managers with those of stockholders?
Which of the following actions can help align the interests of managers with those of stockholders?
Signup and view all the answers
What is the significance of Sarbanes-Oxley in corporate governance?
What is the significance of Sarbanes-Oxley in corporate governance?
Signup and view all the answers
Which of the following is NOT a strategy used to limit agency conflicts?
Which of the following is NOT a strategy used to limit agency conflicts?
Signup and view all the answers
What is one of the primary goals of the Sarbanes-Oxley Act?
What is one of the primary goals of the Sarbanes-Oxley Act?
Signup and view all the answers
Which of the following is NOT a requirement for public corporations under the new regulations?
Which of the following is NOT a requirement for public corporations under the new regulations?
Signup and view all the answers
Which component must a firm have as part of its ethics program?
Which component must a firm have as part of its ethics program?
Signup and view all the answers
What is the recommended practice regarding the roles of chairperson and CEO?
What is the recommended practice regarding the roles of chairperson and CEO?
Signup and view all the answers
Who must certify the financial statements according to the Sarbanes-Oxley Act?
Who must certify the financial statements according to the Sarbanes-Oxley Act?
Signup and view all the answers
What is a requirement for audit committee members under the Sarbanes-Oxley Act?
What is a requirement for audit committee members under the Sarbanes-Oxley Act?
Signup and view all the answers
How often must the lead partner of an external auditor change?
How often must the lead partner of an external auditor change?
Signup and view all the answers
What consequence may board members face for failing their fiduciary responsibilities?
What consequence may board members face for failing their fiduciary responsibilities?
Signup and view all the answers
What is the primary obligation regarding the interests of the firm?
What is the primary obligation regarding the interests of the firm?
Signup and view all the answers
When faced with a conflict of interest, what is the first step to address it?
When faced with a conflict of interest, what is the first step to address it?
Signup and view all the answers
In assessing the fairness of using information asymmetry, what is an appropriate guideline?
In assessing the fairness of using information asymmetry, what is an appropriate guideline?
Signup and view all the answers
What might indicate that one is abusing information asymmetry?
What might indicate that one is abusing information asymmetry?
Signup and view all the answers
What would be an indicator of a questionable action in a corporate context?
What would be an indicator of a questionable action in a corporate context?
Signup and view all the answers
What is the primary focus of business ethics?
What is the primary focus of business ethics?
Signup and view all the answers
What ethical conflict arises from a mortgage broker benefiting financially despite the home-buyer being unlikely to fulfill the mortgage contract?
What ethical conflict arises from a mortgage broker benefiting financially despite the home-buyer being unlikely to fulfill the mortgage contract?
Signup and view all the answers
Which of the following is NOT a consequence of unethical behavior in business?
Which of the following is NOT a consequence of unethical behavior in business?
Signup and view all the answers
Which question should you consider when facing a moral issue related to ethics?
Which question should you consider when facing a moral issue related to ethics?
Signup and view all the answers
Which term describes the situation where a seller has more information about a product than the potential buyer?
Which term describes the situation where a seller has more information about a product than the potential buyer?
Signup and view all the answers
How can business norms be effectively maintained?
How can business norms be effectively maintained?
Signup and view all the answers
In terms of ethical behavior, a manager faces a moral issue if their actions:
In terms of ethical behavior, a manager faces a moral issue if their actions:
Signup and view all the answers
What should a person consider when determining their role-related obligations in an ethical dilemma?
What should a person consider when determining their role-related obligations in an ethical dilemma?
Signup and view all the answers
Study Notes
Fundamentals of Corporate Finance - Chapter 1
- This is a fourth edition textbook on corporate finance.
- Key figures are Robert Parrino, David S. Kidwell, Thomas W. Bates, and Stuart Gillan.
- The chapter focuses on the financial manager and the firm.
Learning Objectives (1 of 2)
- Identify key financial decisions facing financial managers.
- Identify common business organizations in the United States and their strengths/weaknesses.
- Describe the typical financial function in a large corporation.
- Explain the appropriate goal for management: maximizing firm stock value.
Learning Objectives (2 of 2)
- Discuss how agency conflicts affect the goal of maximizing stockholder value.
- Explain why ethics is important in corporate finance.
The Role of the Financial Manager (1 of 5)
- Maximize shareholder wealth by maximizing the firm's stock price.
- Stakeholders encompass managers, employees, suppliers, creditors, and the government.
The Role of the Financial Manager (2 of 5)
- Firm value is tied to positive cash flow.
- Positive residual cash flow can be paid as dividends or reinvested to boost value.
- Sustained negative cash flow leads to business failure or bankruptcy.
The Role of the Financial Manager (3 of 5)
- Cash flows are generated by selling goods and services.
- Management invests in current and long-term assets—cash, inventory, accounts receivable, plant, equipment, buildings, technology.
- Residual cash flow after asset investments, salaries, and expenses are directed to stakeholders (including stockholders, suppliers, creditors, and the government).
- Reinvested cash flows can grow the business.
The Role of the Financial Manager (4 of 5)
- Three fundamental decisions of financial management are:
- Capital budgeting (acquiring long-term assets).
- Financing (determining how to pay for assets).
- Working capital (managing short-term resources).
- Poor decisions in these areas can lead to bankruptcy.
The Role of the Financial Manager (5 of 5)
- The three key financial management decisions (capital budgeting, financing, working capital) affect the balance sheet.
- Working capital decisions affect current assets, liabilities, and net working capital.
- Capital budgeting decisions determine the firm's long-term assets.
- Financing decisions decide the proportions of long-term debt and equity.
Forms of Business Organization
- Key types: sole proprietorships, partnerships, and corporations.
- Hybrid forms: limited liability partnerships (LLPs) and limited liability companies (LLCs).
Sole Proprietorship
- Owned by one person.
- Advantages: easy to create and control, easy to dissolve, right to all profits.
- Disadvantages: owner's personal assets are at risk, equity is limited to owner's funds, difficult to transfer ownership, limited access to capital.
Partnership
- Owned by two or more people.
- Advantages: limited protection of owner's personal assets; owner's limited liability for firm's obligations; more sources of equity; more expertise.
- Disadvantages: shared control, shared profit, harder to dissolve, and limited access to capital.
Corporation
- Owned by more than one person.
- Advantages: protects personal assets, easier to change ownership, and greatest access to sources of funds.
- Disadvantages: most difficult and expensive to establish, ownership is diluted, and overall higher taxes for shareholders.
Hybrid Forms of Business Organization
- Combinations of characteristics from various forms to achieve specific benefits.
- Key characteristics are considered, such as cost to establish; life of entity; control exercised by founders; and access to capital.
Agency Relationship
- Created when a principal hires an agent to manage the business.
- Ownership is separated from control, creating conflicts of interest.
Agency Conflicts
- Conflicts of interest between stockholders (principals) and management (agents).
- Shared ownership in corporations often means management has less direct control by shareholders.
- Thus, managers have the ability to invest firm assets for their own benefit.
Agency Costs
- Stem from conflicts between owners and managers.
- Increase oversight and align incentives to reduce these costs.
Aligning Interests of Managers and Stockholders
- Board of directors oversees CEOs and major decisions.
- Labor markets offer incentives for managers to perform well.
- Competition among managers is an internal check.
- Large shareholders can monitor management decisions, and corporations can be targeted by raiders.
- Laws and regulations constrain managerial behavior.
Sarbanes-Oxley and Regulatory Reform (1 of 5)
- Better corporate governance reduces agency costs through requirements.
- Key requirements include more effective monitoring of managerial activity, promotion of appropriate behaviors, and penalties for insufficient fiduciary responsibilities.
Sarbanes-Oxley and Regulatory Reform (2 of 5)
- New regulations require public corporations to ensure greater board independence, create internal accounting controls, implement compliance programs, establishes ethics programs, and expands audit committee powers.
Sarbanes-Oxley and Regulatory Reform (3 of 5)
- Regulations aim to reduce agency costs by improving corporate governance, especially board of directors' oversight and processes.
- Board has fiduciary responsibility for shareholders.
- Majority of the board should be independent.
- Firms require codes of ethics.
Sarbanes-Oxley and Regulatory Reform (4 of 5)
- Regulations require an ethics program with a hotline/whistleblower protection.
- The separation of roles of chairperson and CEO is advised.
- Board members can face fines/jail if they fail fiduciary responsibilities
Sarbanes-Oxley and Regulatory Reform (5 of 5)
- Lead external auditors need to change every five years to avoid biases.
- There are limits on non-audit consulting services offered by external auditors.
The Importance of Ethics in Business
- Ethics are societal standards for judging actions as right or wrong.
- Business ethics are specific societal standards for behavior in business/financial markets.
Ethics in Corporate Finance (1 of 4)
- Examples show ethical conflicts in business, including agency costs (employee misuse of company resources).
- Conflicts of interest can occur, such as a mortgage contract benefiting the broker more than the buyer.
- Information asymmetry exists when one party has more relevant information than another party, such as in vehicle sales.
Ethics in Corporate Finance (2 of 4)
- Regulation and marketplace forces alone cannot maintain integrity—ethical beliefs, customs, and practices are crucial.
- Ethical behavior is complex; judgments about behavior can be difficult.
- Questions include whether a manager took too little or too much risk.
Ethics in Corporate Finance (3 of 4)
- Framework for ethical conflict analysis includes several inquiries: legal requirements; profession codes/obligations; party interests/desires; in addition to the financial impacts of actions.
Ethics in Corporate Finance (4 of 4)
- Further questions include: stockholder interests; conflict of interest; information asymmetry; and whether actions would stand up to public scrutiny.
Studying That Suits You
Use AI to generate personalized quizzes and flashcards to suit your learning preferences.
Related Documents
Description
This quiz covers the key concepts from Chapter 1 of the fourth edition of 'Fundamentals of Corporate Finance'. It focuses on the role of financial managers in maximizing shareholder value, the impact of agency conflicts, and the importance of ethics in corporate finance. Test your understanding of business organizations and financial decision-making in the U.S.
