Summary: Financial Management & Tax

Read the summary and the most important questions on Financial Management & Tax

• 1 Financial Management

• 1.1 Goals and governance

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• What is a financing decision?

  A decision on the sources and amount of financing.
  
  Capital strucure is the mix of long-term debt and equity financing.

• What are real and financial assets?

  Real assets are assets used to produce goods and services.
  
  Financial assets are financial claims to the income generated by the firm's real assets.

• What is a corporation?

  A corporation is a business organized as a separate legal entity owned by stockholders. 
  
  Types of corporations: 
  - Public companies
  - Private Corporations
  - Limited liability corporations.

• What are the different types of business organizations?

  - Sole proprietorship
  - Partnerships
  - Corporations
  - Limited liability options such as: Limited Liability Partnerships, Limited Liability Corporations &Professional Corporations. 
  
  Slide 11

• What is an agency problem?

  Managers are agents for stockholders and are tempted to act in their own interests rather than maximizing value. Agency costs is the value lost from agency problems or from the cost of resolving agency problems.

• How can agency problems be resolved?

  - Internal controls in decision making processes.
  - Compensation schemes that align manager's and stockholder's interests.
  - Corporate governanance: The laws, regulations, institutions, and corporate practices that protect shareholders and other investors. (slide 22)

• 1.2 NPV and other investment criteria

• What are the pitfalls of internal rate of return?

  - Mutually exclusive projects: IRR sometimes ignores the size of a project.
  - Multiple rates of return: Certain cash flows can generate NPV= 0 at two different discount rates.

• Explain capital, soft and hard rationing:

  - Capital rationing: Limit set on the amount of funds available for investment.
  
  - Soft rationing: Limits on available funds imposed by management.
  
  - Hard rationing: Limits on available funds imposed by the unavailability of funds in the capital market.

• What are the pitfalls of the payback rule?

  - Does not concider any CF that arrives after the PB period.
  - Does not discount the CF.

• 1.3 Working capital management

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• What are the 5 credit management steps?

  1. Establish terms of sale.
  2. What form of IOU will you require (evidence)?
  3. Perform a credit analysis (credit worthiness)
  4. Create a credit policy ( how much credit do you give?)
  5. Develop a collection policy: Procedures to collect and monitor receivables