Introduction to Finance

10 important questions on Introduction to Finance

What is the difference between a private company and a corporation?

A corporation is a separate legal entity, where the company itself thus acts as a person. This means that owners are not responsible for debts.

What are the characteristics of a corporation?

1. Start-up is complicated. Founders need to file the articles of incorporation with the government
2. Shares are easily transferable (guarantees continuity of organisation)
3. Organisation has unlimited life

What are articles of incorporation?

Lays out the general nature of the corporation, the amount of stock it is authorised to issue, the rights of the shareholders and the names and rights of the directors
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What 2 boards are there in case of a two-tier system?

1. Executive board - for day-to-day business appointed by supervisory board
2. Supervisory board - supervises executive board, elected by shareholders and employees

What is a type I agency relationship?

Relationship between the shareholder and the managers of a company. Shareholders are the principal, and commissioned by them the management (agent) must lead the company.

What are the 2 types of agency costs?

1. Bonding costs - type of cost related to acquisition of goods with money from business in favour of managers, but at expense of shareholders' capital. E.g. private jet for transportation of directors
2. Monitoring costs - to control the activities of management. E.g. payment for audit

What are the 2 economic incentives to ensure that managers maximise shareholders' wealth?

1. Variable remuneration - compensation of management partly based on share value.
2. Promotion - local managers perform well within company, they can move up and make more salary

What does the salary of board members consist of?

1. Base salary
2. Stock option grant (option to buy shares at a certain price)
3. Restricted stock grant (shares are issued to executives that may not be sold before a certain date)
4. Other benefits, e.g. tax benefits, insurances, etc.

What is a type II agency relationship?

The relation between powerful shareholders and minority shareholders

What are minority shareholders?

Shareholders that only own a small part of the shares of a company

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