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Question & Answer:

  • What are the three types of financial management decisions? For each type of decision, give an example of a business transaction that would be relevant.
  • What are the four primary disadvantages of the sole proprietorship and partnership forms of business organization? What benefits are there to these types of business organization as opposed to the corporate form?
  • What are the primary disadvantages of the corporate form of organization? Name at least two advantages of corporate organization?
  • In response to the Sarbanes-Oxley Act, many small firms in the United States have opted to go dark delist their stock. Why might a company choose this route? What are the costs of going dark?
  • In a large corporation what are the two distinct groups that report to the chief financial officer? Which group is the focus of corporate finance?
  • What goal should always motivate the actions of a firm’s financial manager?
  • Who owns a corporation? Describe the process whereby the owners control the form’s management. What is the main reason that an agency relationship exist in the corporate forms of organization? In this context, what kinds of problems can arise?
  • You’ve probably noticed coverage in the financial press of an initial public offering (IPO) of a company’s securities. Is an IPO a primary market transaction or a secondary market transaction?
  • What does it mean when we say the New York Stock Exchange is an auction market? How are auction markets different from dealer markets? What kind of market is NASDAQ?
  • Suppose you were the financial manager of a not-for-profit business (a not-for-profit hospital, perhaps). What kind of goals do you think would be appropriate?
  • Evaluate the following statement: Managers should not focus on the current stock value because doing so will lead to an overemphasis on short-term profits at the expense of long-term profits.
  • Can our goal of maximizing the value of the stock conflict with other goals, such as avoiding unethical or illegal behavior? In particular, do you think subjects like customer and employee safety, the environment, and the general good of society fit in this framework, or are they essentially ignored? Think of some specific scenarios to illustrate your answer?
  • Would our goal of maximizing the value of the stock be different if we were thinking about financial management in a foreign country? Why or why not?
  • Suppose you own stock in a company. The current price per share is $25. Another company has just announced that it wants to buy your company and will pay $35 per share to acquire all the outstanding stock. Your company’s management immediately begins fighting off this hostile bid. Is management acting in the shareholders best interests? Why or why not?
  • Corporate ownership varies around the world. Historically individuals have owned the majority of shares in public corporations in the United States. In Germany and Japan, however, banks, other large financial institutions, and other companies own most of the stock in public corporations. Do you think agency problems are likely to be more or less severe in Germany and Japan than in the United States? Why? In recent years, large financial institutions such as mutual funds and pension funds have been becoming the dominant owners of stock in the United States, and these institutions are becoming more active in corporate affairs. What are the implications of this trend for agency problems and corporate control?
  • Critics have charged that compensation to top managers in the Units States is simply too high and should be cut back. For example, focusing on large corporations, Larry Ellison of Oracle has been one of the best-compensated CEOs in the United States, earning about $46 million in 2005 alone and $868 million over the 2001-2005 period. Are such amounts excessive? In answering, it might be helpful to recognize that superstar athletes such as Tiger Woods, top entertainers such as Tom Hanks and Oprah Winfrey, and others are the top of their respective fields earn at least as much, if not a great deal more.
  • What does liquidity measure? Explain the trade-off a firm faces between high liquidity and low liquidity levels.
  • Why might the revenue and cost figures shown on a standard income statement not be representative of the actual cash inflows and outflows that occurred during a period?
  • In preparing a balance sheet, why do you think standard accounting practice focuses on historical cost rather than market value?
  • In comparing accounting net income and operating cash flow, name two items you typically find in net income that are not in operating cash flow. Explain what each is and why it is excluded in operating cash flow.