The Role of Managerial Finance
55 important questions on The Role of Managerial Finance
Which legal form of business organization is the most dominant in terms of generating almost 90% of total business revenues?
Corporations are the most dominant legal form of business organization in terms of revenue generation.
Who are the major parties in a company and what are their main roles?
Major parties in a company are:
- Stockholders (owners)
- Board of Directors
- Managers
- Stockholders (owners)
- Board of Directors
- Managers
What is the role of stockholders in a company?
- Owners of the company
- Liable for debts up to their investment
- Elect members of the board of directors
- Make decisions on company's charter changes
- Liable for debts up to their investment
- Elect members of the board of directors
- Make decisions on company's charter changes
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What are the main roles of the Board of Directors in a company?
- Approve strategic plans and goals
- Set general company policy
- Approve significant expenditures
- Hire functional managers
- Set compensation for senior executives
- Manage and guide corporate affairs
- Set general company policy
- Approve significant expenditures
- Hire functional managers
- Set compensation for senior executives
- Manage and guide corporate affairs
What are the roles of the President or Chief Executive Officer (CEO) in a company?
- Manage day-to-day operations
- Execute policies set by the board of directors
- Execute policies set by the board of directors
What are some responsibilities of functional managers in an organization?
- Responsible for the efficient and effective functioning of their departments, such as marketing, production, etc.
- Report to the CEO for guidance and decision-making.
- Oversee the day-to-day operations within their departments.
- Report to the CEO for guidance and decision-making.
- Oversee the day-to-day operations within their departments.
How are stockholders rewarded for the risk they take as owners of a company?
- Through dividends periodically distributed by the company.
- By capital gains resulting from increases in share prices.
- These rewards incentivize investment and ownership in the company.
- By capital gains resulting from increases in share prices.
- These rewards incentivize investment and ownership in the company.
What is a common characteristic of organizational forms that provide owners with limited liability?
- They typically have less than 100 owners.
- Provide limited liability protection to the owners.
- Shield owners from personal liability for business debts and obligations.
- Provide limited liability protection to the owners.
- Shield owners from personal liability for business debts and obligations.
Can you name some organizational forms that provide owners with limited liability?
- Limited Partnership (LP)
- S Corporation (S Corp)
- Limited Liability Company (LLC)
- Limited Liability Partnership (LLP)
- S Corporation (S Corp)
- Limited Liability Company (LLC)
- Limited Liability Partnership (LLP)
Why is knowledge from managerial finance important for both professional and personal life?
- Personal Life: Helps in managing personal finances effectively.
- Professional Life:
- Understanding financial implications of decisions.
- Learning how financial managers think.
- Gaining resources for job activities through financial justification.
- Professional Life:
- Understanding financial implications of decisions.
- Learning how financial managers think.
- Gaining resources for job activities through financial justification.
What is the main feature of an S Corporation (S Corp) as an organizational form?
- Subject to Subchapter S of the Internal Revenue Code.
- Taxes are imposed on owners' personal income, not the company.
- Allows all profits to be taxed only at the individual level.
- Taxes are imposed on owners' personal income, not the company.
- Allows all profits to be taxed only at the individual level.
How does Limited Liability Partnership (LLP) differ from a Limited Liability Company (LLC)?
- Both provide limited liability to partners or owners.
- LLP allows partners to manage the company.
- LLC offers limited liability without the management ability for owners.
- LLP allows partners to manage the company.
- LLC offers limited liability without the management ability for owners.
In what ways does the study of managerial finance in various areas of a company benefit employees?
- Helps quantify results and impacts of decisions.
- Understanding financial manager decision-making aids in success.
- Knowing financial aspects assists in acquiring necessary resources for job activities.
- Understanding financial manager decision-making aids in success.
- Knowing financial aspects assists in acquiring necessary resources for job activities.
What is the main goal of a company?
The primary goal of the company is to maximize the wealth of the company's owners, which are its shareholders.
How do companies determine if the goal of maximizing shareholder wealth is achieved?
- The best measure of shareholder wealth is the share price of the company.
- Managers focus on activities that increase share price and the company's market capitalization.
- Managers focus on activities that increase share price and the company's market capitalization.
Why is profit maximization inconsistent with the maximization of wealth?
Three reasons are:
- Timing: Lower initial profits that can be reinvested for future growth.
- Difference between profits and cash flows: High profits don't guarantee cash flows.
- Risk: Companies with reliable profits may have higher value.
- Timing: Lower initial profits that can be reinvested for future growth.
- Difference between profits and cash flows: High profits don't guarantee cash flows.
- Risk: Companies with reliable profits may have higher value.
What key variables do managers consider when making decisions to increase share price and market capitalization?
Managers base decisions on:
- The return (cash flows) an activity will produce.
- The risk associated with the return.
- The return (cash flows) an activity will produce.
- The risk associated with the return.
How do differences between profits and cash flows impact the maximization of wealth?
- Profits can be influenced by accounting choices, while cash flows reflect actual financial position.
- High profits may not lead to increased cash flow or stock price.
- High profits may not lead to increased cash flow or stock price.
Why is a company with stable profits considered more valuable than one with fluctuating profits?
- Companies with stable profits can be more valuable due to consistent returns.
- Highly fluctuating profits can decrease a company's overall worth.
- Highly fluctuating profits can decrease a company's overall worth.
What is the definition of RISK and why should the financial manager consider RISK and RETURN in the process of action evaluation?
- RISK is the chance of deviation of the actual output from the expected one.
- RETURN (CASH FLOW) and RISK are MAJOR DETERMINANTS OF:
- COMPANY'S SHARE PRICE
- Market capitalization
- Cash flow and risk influence share price differently:
- Increase in cash flow generally increases share price with fixed risk level
- Increase in risk generally decreases share price with fixed cash flow level because shareholders dislike risk.
- RETURN (CASH FLOW) and RISK are MAJOR DETERMINANTS OF:
- COMPANY'S SHARE PRICE
- Market capitalization
- Cash flow and risk influence share price differently:
- Increase in cash flow generally increases share price with fixed risk level
- Increase in risk generally decreases share price with fixed cash flow level because shareholders dislike risk.
Describe the role of policies and guidelines of CORPORATE ETHICS and discuss the relationship between ETHICS and SHARE PRICE.
- BUSINESS ETHICS are policies and guidelines directing behavior/moral judgment in commerce.
- MAIN ROLE is to:
- Motivate appropriate behavior
- Adhere to laws guiding business practices
- Ethics program contributes through:
- Cost reduction from potential lawsuits
- Positive image and reputation
- Stakeholder loyalty and respect
- Shareholder confidence, resulting in share price increase.
- MAIN ROLE is to:
- Motivate appropriate behavior
- Adhere to laws guiding business practices
- Ethics program contributes through:
- Cost reduction from potential lawsuits
- Positive image and reputation
- Stakeholder loyalty and respect
- Shareholder confidence, resulting in share price increase.
What can effective ETHICS PROGRAMS contribute to a corporation?
- Reduction of costs linked to potential lawsuits.
- Building a positive image.
- Enhancing loyalty and respect from stakeholders.
- Increases confidence of shareholders, potentially leading to an increase in the share price.
- Building a positive image.
- Enhancing loyalty and respect from stakeholders.
- Increases confidence of shareholders, potentially leading to an increase in the share price.
How does an increase in RISK with fixed cash flow level generally impact the SHARE PRICE according to shareholder preference?
- An increase in risk with fixed cash flow usually results in a decrease in share price since shareholders tend to dislike risk.
What are some of the actions prevented by appropriate ETHICS POLICIES and guidelines in the business environment?
- Preventing actions such as creative accounting.
- Avoiding fraud.
- Discouraging bribery.
- Preventing insider trading.
- Avoiding fraud.
- Discouraging bribery.
- Preventing insider trading.
Why should RETURN and RISK be considered by a financial manager evaluating a certain action?
- Return (cash flow) and risk are two major determinants of a company's share price and market capitalization.
- Increase in cash flow generally raises share price.
- Rise in risk typically reduces share price as shareholders have a tendency to dislike risk.
- Increase in cash flow generally raises share price.
- Rise in risk typically reduces share price as shareholders have a tendency to dislike risk.
Who does the Corporate Treasurer report to, and what are some of the activities involved in this role?
The Corporate Treasurer reports to the chief financial officer (CFO) and engages in the following activities:
- Managing the cash of the company, including providing external financing and investing excess funds.
- Supervising pension plans.
- Managing risks related to interest rates, currency values, and commodity prices.
- Managing the cash of the company, including providing external financing and investing excess funds.
- Supervising pension plans.
- Managing risks related to interest rates, currency values, and commodity prices.
What is the most important economic principle that managerial finance utilizes, and how is it applied in decision making?
The basic economic principle used by financial managers is Marginal Cost-Benefit Analysis. This principle states that decisions should be based on comparing added benefits to added costs.
What are the main differences between accounting and finance concerning cash flows and decision-making?
When focusing on cash flows, the main differences between accounting and finance include:
- Main goals and activities: Accounting focuses on developing financial data for performance measurement, while finance concentrates on ensuring solvency through cash flow planning.
- Accrual vs. cash basis: Accounting uses accrual accounting, recognizing revenue and expenses based on transactions, while finance uses cash basis, recognizing cash inflows and outflows.
- Main goals and activities: Accounting focuses on developing financial data for performance measurement, while finance concentrates on ensuring solvency through cash flow planning.
- Accrual vs. cash basis: Accounting uses accrual accounting, recognizing revenue and expenses based on transactions, while finance uses cash basis, recognizing cash inflows and outflows.
What are some of the activities involved in the role of a Corporate Treasurer?
The Corporate Treasurer engages in activities such as:
- Managing company cash, including external financing and investments.
- Supervising pension plans.
- Managing risks related to interest rates, currency values, and commodity prices.
- Managing company cash, including external financing and investments.
- Supervising pension plans.
- Managing risks related to interest rates, currency values, and commodity prices.
How do financial managers utilize economic principles in decision-making?
Financial managers use Marginal Cost-Benefit Analysis, where decisions are made based on comparing added benefits to added costs.
What distinguishes accounting from finance concerning cash flows and decision-making?
Regarding cash flows, accounting focuses on data development for performance measurement, while finance aims to ensure solvency through cash flow planning, using different accounting methods.
Who does the Corporate Treasurer report to, and what is a critical responsibility in this role?
The Corporate Treasurer reports to the CFO and is responsible for activities such as managing company cash, supervising pension plans, and mitigating risks related to interest rates and currency values.
What is the main difference between accounting and finance in terms of decision-making?
- Accounting emphasizes financial data collection and presentation, focusing on gathering information.
- Finance focuses on evaluating accounting statements and developing additional data for making decisions regarding risks and returns.
- Finance focuses on evaluating accounting statements and developing additional data for making decisions regarding risks and returns.
What are the two primary activities of financial managers?
1. Making investment decisions related to determining company assets.
2. Making financing decisions related to raising funds for investing in assets.
2. Making financing decisions related to raising funds for investing in assets.
Define corporate governance and explain the influence of the Sarbanes-Oxley Act (SOX) on it.
- Corporate governance is a set of rules and laws managing companies and determining rights and responsibilities of parties.
- The SOX of 2002 aimed to ensure effective corporate governance by establishing audit control, stricter regulations, and penalties for fraud, among other provisions.
- The SOX of 2002 aimed to ensure effective corporate governance by establishing audit control, stricter regulations, and penalties for fraud, among other provisions.
What is the main goal of the Sarbanes-Oxley Act (SOX) passed in 2002?
- The main goal of the SOX was to eliminate problems related to disclosure and conflict of interest by holding managers personally accountable for the firm's disclosures and financial decisions.
What are some provisions of the Sarbanes-Oxley Act (SOX) related to corporate governance?
- The SOX includes provisions for establishing a board to monitor the accounting industry and ensuring stricter audit control and regulation, among other guidelines and requirements.
How does accounting differ from finance in terms of decision-making focus?
- Accounting focuses on financial data collection and presentation primarily, while finance emphasizes evaluating accounting statements and developing additional data for making decisions based on risks and returns.
Explain the roles of financial managers in investment and financing decisions.
- Financial managers are responsible for making investment decisions related to determining company assets and financing decisions to raise funds for asset investments. Investment decisions involve items on the left side of the balance sheet, while financing decisions relate to the right side.
What do AGENCY PROBLEMS represent and give an example scenario of such a problem?
- Conflict of interest between an agent and a principal
- Arises when one party prioritizes personal interests over tasks
- In corporations, seen between managers as agents and shareholders as principals
- Example scenario: managers choosing expensive hotels or buying jets instead of maximizing shareholder wealth
- Arises when one party prioritizes personal interests over tasks
- In corporations, seen between managers as agents and shareholders as principals
- Example scenario: managers choosing expensive hotels or buying jets instead of maximizing shareholder wealth
What are AGENCY COSTS and give two situations where they are incurred?
- Internal costs linked to agent-principal relationship in a company
- Incurred when management uses company resources for personal gain or when shareholders want to oversee managers
- Situations: Management making poor investment decisions, shareholders needing to monitor managers to protect their interests
- Incurred when management uses company resources for personal gain or when shareholders want to oversee managers
- Situations: Management making poor investment decisions, shareholders needing to monitor managers to protect their interests
How does internal control through CORPORATE GOVERNANCE help in avoiding agency problems and protecting shareholder interests?
- Aids in ensuring accountability of managers
- Develops mechanisms like rules, principles, and laws to regulate behavior
- Focuses on encouragement of appropriate manager behavior
- Eliminates mechanisms that enable improper manager conduct
- Develops mechanisms like rules, principles, and laws to regulate behavior
- Focuses on encouragement of appropriate manager behavior
- Eliminates mechanisms that enable improper manager conduct
Explain how MANAGEMENT COMPENSATION SYSTEMS can help reduce agency problems and align managerial and shareholder interests.
- Aligns interests through performance-based management compensation structuring
- Types of plans: incentive plans and performance plans
- Incentive plans link management compensations to share prices
- For instance, granting stock options motivates managers to boost stock value
- Types of plans: incentive plans and performance plans
- Incentive plans link management compensations to share prices
- For instance, granting stock options motivates managers to boost stock value
What are INCENTIVE PLANS in the context of management compensation and how do they work?
- Tie management compensations to company's share price
- Typically involve granting management stock options
- Allows managers to purchase stocks at effective price and sell at a higher market price
- Encourages aligning managerial actions with boosting stock value
- Typically involve granting management stock options
- Allows managers to purchase stocks at effective price and sell at a higher market price
- Encourages aligning managerial actions with boosting stock value
How can managers reduce AGENCY COSTS and prioritize shareholder interests?
- Make optimal investment decisions to reduce costs
- Ensure that shareholders' interests are a top priority
- Avoid using company resources for personal benefit
- Enhance transparency and accountability in decision-making processes
- Ensure that shareholders' interests are a top priority
- Avoid using company resources for personal benefit
- Enhance transparency and accountability in decision-making processes
Share a recent OPINION on COMPENSATION PLANS in relation to reducing agency problems.
- Recent emphasis on performance-based compensation plans
- Focus on aligning managerial incentives with long-term company performance
- Supports the idea of linking compensation to sustainable growth and shareholder value
- Focus on aligning managerial incentives with long-term company performance
- Supports the idea of linking compensation to sustainable growth and shareholder value
How do performance plans connect management compensations to company performance?
- Performance plans link management compensations to measures such as earnings per share and growth in earnings per share.
- Compensations are given in the form of performance shares or cash bonuses.
- Compensations are given in the form of performance shares or cash bonuses.
Why is the current view of the execution of many compensation plans negative?
- Many studies find a weak link between management compensation levels and company performances.
- Past corporate scandals have led to questioning the eligibility of large compensation plans.
- Past corporate scandals have led to questioning the eligibility of large compensation plans.
How can forces of the market impede or reduce agency problems in a company?
- Shareholders, both individual and institutional investors, play crucial roles in corporate governance.
- Institutional investors monitor and influence governance, while individual investors often group-vote for changes.
- The threat of a takeover can also mitigate agency problems by motivating managers to act in shareholders' best interest.
- Institutional investors monitor and influence governance, while individual investors often group-vote for changes.
- The threat of a takeover can also mitigate agency problems by motivating managers to act in shareholders' best interest.
What do individual investors and institutional investors do to influence corporate governance?
- Individual investors with limited power often vote collectively on issues like electing the board of directors.
- Institutional investors
- Institutional investors
How does the threat of takeover help in minimizing agency problems in a company?
- The threat of a takeover encourages managers to act in the best interest of shareholders to avoid losing control.
- Takeovers become attractive when agency problems reduce stock prices, incentivizing managers to prioritize shareholder wealth.
- Takeovers become attractive when agency problems reduce stock prices, incentivizing managers to prioritize shareholder wealth.
What types of compensations are typically given in performance plans?
- Performance plans generally provide compensations in the form of performance shares or cash bonuses.
- Performance shares are granted upon achieving set performance goals, while cash bonuses are awarded for meeting performance targets.
- Performance shares are granted upon achieving set performance goals, while cash bonuses are awarded for meeting performance targets.
What are some key factors contributing to the negative perception of current compensation plan executions?
- Many studies show a lack of strong correlation between management compensation and company performance.
- Past corporate scandals have raised concerns about the justification of large compensation packages.
- Past corporate scandals have raised concerns about the justification of large compensation packages.
How do institutional investors influence corporate governance and address agency problems?
- Institutional investors like banks and pension funds play essential roles in monitoring governance and resolving agency issues.
- They can exert pressure on management, escalate concerns to the board of directors, and take actions like voting or selling shares.
- They can exert pressure on management, escalate concerns to the board of directors, and take actions like voting or selling shares.
What role do individual investors typically play in influencing corporate governance and decision-making processes?
- Individual investors, often lacking significant power individually, tend to vote collectively on matters such as the election of the board of directors.
- Their main influence lies in exerting group pressure on governance decisions and seeking changes in the corporate structure.
- Their main influence lies in exerting group pressure on governance decisions and seeking changes in the corporate structure.
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