Finance 3101, Howard Keen, Exam 1 Review (Chapters 1-5) Solutions
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Finance 3101, Howard Keen, Exam 1 Review (Chapters 1-5) Solutions
Describe the cycle of money, the participants in the cycle, and the common objective of borrowing and lending. - AnswersThe cycle of money is the movement of money from lender to borrower and back again. It is often accomplished t...
Finance 3101, Howard Keen, Exam 1 Review
(Chapters 1-5) Solutions
Describe the cycle of money, the participants in the cycle, and the common objective of
borrowing and lending. - Answers✓✓The cycle of money is the movement of money from
lender to borrower and back again. It is often accomplished through a financial intermediary
like a bank. The common objective is to make both the lender and the borrower better off.
Distinguish the four main areas of finance and briefly explain the financial activities that each
encompasses. - Answers✓✓The four main areas of finance are corporate finance, investments,
financial institutions and markets, and international finance.
Corporate Finance - Answers✓✓Supports the operations of a company.
Investments - Answers✓✓Are the activities centered on buying and selling stocks and bonds.
Financial Institutions and Markets - Answers✓✓Are the organizations that promote the cycle of
money and the buying and selling of financial assets.
International Finance - Answers✓✓Is concerned with the multinational element of finance
activities.
Explain the different ways of classifying financial markets. - Answers✓✓There are a number of
ways to classify financial markets: by type of asset traded, by maturity of assets, by owner of
the assets, or by method of sale.
Discuss the three main categories of financial management. - Answers✓✓Financial
management can be subdivided into three categories: capital budgeting, capital structure, and
working capital management.
Capital Budgeting - Answers✓✓Is the process of choosing the products and services the
company will produce.
Capital Structure - Answers✓✓Is concerned with choosing the lenders the company will use to
finance its operations.
Working Capital Management - Answers✓✓Involves choosing the policies that manage day-to-
day operating needs of the company.
Identify the main objective of the finance manager and how he or she might meet that objective.
- Answers✓✓The primary goal of the finance manager is to maximize the current stock price
(equity value) of the firm. The finance manager works with multiple players inside and outside
the firm to create and preserve the economic value of the firm's asset.
Explain how the finance manager interacts with both internal and external players. -
Answers✓✓Business activities are accomplished by a diverse set of players inside and outside
the organization. The finance manager provides critical knowledge and guidance to marketing,
manufacturing, human resources, supporting suppliers and customers and interfaces with
agencies like banks to meet the needs of the company.
Delineate the three main legal categories of business organizations and their respective
advantages and disadvantages. - Answers✓✓There are three main legal categories of business
organizations: sole proprietorship, partnership, and corporation. The key advantage of the
corporate form of business is the limited liability of the shareholders (owners). The key
disadvantage is double taxation, in which profits are taxed both before and after distribution to
owners. The key advantages for the sole proprietorship form of business are that the owner can
make all the decisions and can keep all the profits. The disadvantage is the limited access to
funding. Partnerships have more funding potential, but must share the profit and losses.
Illustrate agency theory and the principal-agent problem. - Answers✓✓Companies run by
managers who may have different goals than the owners. The resolution of these potential
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