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Principles of Finance Exam 1 - UARK (Kefu Wu) Questions and Answers
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Principles of Finance Exam 1 - UARK (Kefu Wu)
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Principles of Finance Exam 1 - UARK(Kefu Wu)
Should the firm or financial managers set the goal to maximize profit? - answerNo.
It ignores 3 important factors:
1) Timing
2) Cash flows
3) Risk
What is the goal of a firm? - answerMaximize shareholder wealth
Should the firm maximize Stakeholders' Welfare? - answerNo.
Stakeholders are difficult to be ranked, therefore, their welfare can't be maximized.
What are financial managers' key decisions? (4) - answer1) Financing
2) Investment
3) Capital Budgeting
4) Working Capital
What are Principles of managerial decisions? (5) - answer1) Time Value of Money
2) Risk-Return Tradeoff
3) "Cash is King"
4) Competitive Financial Market
5) Incentive
What is the primary principle that Finance adopted from Economics? - answerMarginal
Cost - Marginal Benefit Analysis.
Wise financial systems must achieve MB > MC!!
What is the difference between Finance and Accounting in terms of business
transactions? - answerFinancial Managers focus on actual Cash Flows, whereas
Accountants focus on Accrual Basis.
Principal-Agent Problem - answerWhen the agent (worker or manager) doesn't act in
the best interest of the principal (owner).
, How do you solve the Principal-Agent Problem? - answerBy corporate governance...
such as laws, rules & processes.
Internally, some firms may offer stock options and/or restricted stocks as a sort of
compensation to managers which link managers' performance/benefits directly to the
firm's stock prices & therefore align managers' interests with the interests of the owners.
What are the Board of Directors responsible for? - answerMaking strategic decisions
What is the President/CEO responsible for? - answerFully in charge of overall business
What is the CFO responsible for? - answerUnder CEO, in charge of overall financial
management
What is the Treasurer responsible for? - answerUnder CFO, manages cash, pension
plans, as well as key risks.
What is the Controller responsible for? - answerUnder CFO, Cheif accountant,
responsible for accounting activities, tax management, and cost control
What are 3 organizational forms? What are their major differences? - answer1) Sole
Proprietorship - unlimited liability, taxed on proprietor's personal tax return.
2) Partnership - unlimited liability for owners and may have to cover debts of other
partners. Taxed on partners' personal tax return.
3) Corporation - limited liability, double taxation on firm and on individual
How do you calculate marginal tax & total tax payment due with a progressive taxation
framework? - answerYou calculate tax payments for each applicable taxable income
bracket w/ the marginal tax rate of that bracket, then add them up together.
Do ethics of the firm affect its share prices? - answerYes
What are financial institutions? - answerThere are fund demanders and fund suppliers
in the economy. Generally, individuals are fund suppliers & firms are fund demanders.
Financial institutions are intermediaries that channel the savings of individuals,
businesses, & governments into loans or investments to fund demanders.
What are the 3 financial institutions? - answer1) Commercial Banks
2) Investment Banks
3) Shadow Banking System
What do commercial banks do? - answerThey receive deopsits and make commercial
laws
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