Exam 1 Review
Three key areas of decisions a financial manager evaluates
Capital budgeting decisions, regarding investments in long-term productive assets-
identify the productive assets the company should buy.
Financing decisions, regarding how the firm raises capital to finance its investments
working capital decisions, regarding the day-to-day cash management operations of the
Three basic forms of business organization and understand the key advantages and
Sole Proprietorship-(good)simple to start, least regulated, keep profit, lower income
taxes (Bad)Pay all bills, unlimited liability, Investments are limited to personal wealth
restricting growth, difficult to transfer ownership.
Partnership-same as sole proprietorship
Corporation-(good) Limited liability (bad) double taxation
Shareholders are the owners of corporations, and that they elect a board of directors to
represent them. The board, in turn, hires (and fires, if necessary) a CEO, to whom the
CFO typically reports, along with other Sr. executives of the firm.
Maximizing owners’ wealth is the appropriate primary objective of financial managers,
and that this trumps maximizing revenues, profits, return on equity, and minimizing
risk, among other possible objectives.
The agency conflict derives from the fact that control of the firm may be separated from
ownership of the firm. In addition, there are numerous things can be done to minimize
the conflict including compensation packages that link executive compensation to stock
performance, and having independent board members. Other market factors also serve
to govern poor management including the managerial labor market and the threat of a
Business ethics is an important concept for study in financial management, because
corruption in business inhibits economic growth, creates inefficiencies in an economy,
and slows the economic growth rate of an economy by diverting funds away from the
best investment alternatives.
Financial System: The major role of the financial system, which is made up of numerous
financial markets and financial institutions, is to facilitate the efficient transfer of
capital from those who have excess capital – lenders/savers (or surplus spending units)
to those who need it – borrowers/spenders (or deficit spending units)
–Funds flow directly through financial market
-Funds flow indirectly through financial market
- new security issues are sold by companies directly to investors
- owners of outstanding securities can sell them to other investors