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Financial Management Chapter 1-5 Rutgers exam questions and answers.
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Financial Management Chapter 1-5 Rutgers exam questions and answers.
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Financial ManagementChapter 1-5 Rutgers
exam questions and
answers
Financial institutions
are businesses that deal primarily in financial
matters (e.g., banks and insurance companies)
Capital budgeting
is the process of planning and managing a firm’s
long-term investments
Ex: •Evaluating the size, timing, and risk of future
cash flows
Capital structure
is the mixture of debt and equity maintained by a
firm
Ex:•How much should the firm borrow (i.e., what
mixture of debt and equity is best)?
•What are the least expensive sources of funds for
the firm?
Working capital management
short-term assets and liabilities
,Three different legal forms of business
organization
1.Sole proprietorship
2.Partnership
3.Corporation
Sole proprietorship
is a business owned by a single individual
Advantages include the following:
•Simple
•Least regulated
•Owner keeps all the profits!
Disadvantages include the following:
•Owner has unlimited liability for business debts
•All business income is taxed as personal income
•Amount of equity that can be raised is limited to
the amount of the proprietor’s personal wealth
•Ownership may be difficult to transfer
Partnership
is a business formed by two or more individuals or
entities
•In a general partnership, all the partners share in
gains or losses, and all have unlimited liability
for all partnership debts, not just some particular
share.
, •In a limited partnership, one or more general
partners will run the business and have unlimited
liability, but there will be one or more limited
partners who will not actively participate in the
business. A limited partner’s liability for business
debts is limited to the amount that partner
contributes to the partnership.
Corporation
a business created as a distinct legal entity
composed of one or more individuals or entities
Advantages include the following:
•Ownership can be readily transferred
•Life of corporation is unlimited
•Limited liability for stockholders
Significant disadvantage includes the following:
•Double taxation, meaning corporate profits are
taxed twice, first at the corporate level when they
are earned and again at the personal level when
they are paid out
Goal of Financial Management
maximize the current value per share of the
existing stock
Add value for Shareholders
Sarbanes-Oxley Act (i.e., "SOX")
Key requirements of SOX include the following:
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