Puray, Ma. Lorraine M.

June 09, 2020

BSA-1 1 st Activity/Ass.
Financial Management

Self-Test Questions:
1. What is the relationship between economics, finance and accounting?
- The economics finance and accounting are all related fields and all often
focused on the flow of money. However, Economics is a bit distinct, it is a
social science that looks at understanding how money and resources
flow within a society. Accounting and Finance functions are closely
related and almost invariably fall within the domain of the chief financial
officer. Accounting deals with the recording of Financial Transactions
while Finance deals more on looking to the future of an organization and
planning investments and spending.

2. Who is the CFO, where does this individual fit into the corporate hierarchy, and
what are some of his/hey responsibilities?
- The Chief Financial Officer is generally a senior vice president and the
third ranking officer. Some of the responsibilities of the CFO are
Accounting, Financing, Credit Policy, decisions regarding asset
acquisitions, and investor relations, which involves communications with
stockholders and the press. In other words the primary responsibility of the
CFO is to make financial decisions.

3. Does it make sense for not-for-profit organizations such as hospital and

universities to have CFO's?
- Yes because they are publicly owned and they need to certify to the SEC
reports released to stockholders, and especially the annual report. If they
don't they're fined.

4. What three areas of finance does this book cover? Are these independent of one
another, or are they interrelated in the sense that someone working in one area
should know something about each of the other areas?
- This book covers the three areas of finance which is the financial
management, capital markets, and investments. These three areas are
interrelated in the sense that someone who is working in one area should
know something about each of the other areas, for instance Banking is
studied under capital markets, but a bank lending officer evaluating a
 business’ loan request must understand corporate finance to make a
sound decision.

5. What are the key differences between proprietorships, partnerships, and

corporation?
- A sole proprietorship is where the single owner operates the business. A
partnership is similar, however, it is owned by two or more individuals. A
corporation is a legal entity separate from the owners of the business.
There are a number of factors to consider before deciding which route to
take. Sole Proprietorship and Partnerships requires no filing of documents.
Unlike corporation that is a entity. Forming a corporation requires filing
articles of incorporation with the state where the corporation will conduct
business.

6. How are LLCs and LLPs related to other forms of organization?

- Similar to corps. by providing limited liability protection, but they are
taxed as partnerships.

7. What is an S corporation, and what is its advantage over a C corporation? Why

don’t firms such as IBM, GE, and Microsoft chose S corporation?
- Similar to corps. by providing limited liability protection, but they are taxed
as partnerships.
- An S corporation is a special designation that allows small businesses that
meet qualifications to be taxed as if they were a proprietorship or a
partnership rather than a corporation. The main advantage of the S
corp over the C corp is that an S corp does not pay a corporate level
income tax. So any distribution of income to the shareholders is only taxed
at the individual level.
- IBM, GE and Microsoft didn’t choose S Corporation maybe because they
wanted to have more than 75 stockholders so that it its limits in using
privately owned firms will be stretched.

8. What are some of the reasons the value of a business other than a small one is
generally maximized when it is organized as a corporation?

 Limited liability reduces the risks borne by investors; and other things held
constant, the lower the firm’s risk, the higher its value.
 A firm’s value is dependent on its growth opportunities, which are dependent on
its ability to attract capital.
 The value of an asset also depends on its liquidity, which means the time and
effort it takes to sell the asset for cash at a fair market value. Because the stock
 of a corporation is easier to transfer to a potential buyer than is an interest in a
proprietorship or partnership and because more investors are willing to invest in
stocks than in partnerships (with their potential unlimited liability), a corporate
investment is relatively liquid. This too enhances the value of a corporation.

9. Suppose you are relatively wealthy and are looking for a potential investment.
You do not plan to be active in the business. Would you be more interested in
investing in a partnership or in a corporation? Why or Why not?
- Maybe I would be more interested in investing in a corporation because
unlike partnership, Corporations provide liability protection for their
shareholders. The personal assets of shareholders are not subject to the
liabilities of the corporation.

10. What is managements primary goal?

- The managements primary goal is share-holder wealth maximization
which means for managers of publicly owned companies implies that
decisions should be made to maximize the long-run value of the firm's
common stock.

11. What do investors expect to receive when they buy a share of stock? Do
investors know for sure how much they will receive? Explain.
- The investors expect that they may have a claim to the company’s assets
and earnings. In other words, a shareholder is now an owner of the
issuing company. Ownership is determined by the number of shares a
person owns relative to the number of outstanding shares. 

12. Based just on the name, which company would you expect to be riskier—General
Foods or South Seas Oil Exploration? Explain.
- As for me, I expected the South Seas Oil Exploration to be riskier than the
General Foods because as we all know one of the riskiest businesses is
oil exploration. The risk climbs exponentially if it is taking place in a virgin
basin, not yet proven its commercial potential. Oil projects are by nature
risky ventures due to their complex nature, potential environmental impact
and high operational costs. These risks balloons for oil exploration
ventures in new frontiers. 

13. When Boeing decides to invest $5 billion in a new jet airliner, are its managers
certain of the projects effects on Boeings future profits and stock price? Explain.
- Not exactly certain, but the finance department's principle task is to
evaluate the proposed decisions and judge how they will affect the stock
price and thus shareholder wealth. Astute managers recognize that they
also need to take into account how these decisions affect society at large.
14. Who would be better able to judge the effect of a new airliner on Boeings profits
—its managers or its stockholders? Explain.
- Stockholders because they are the ones who will be affected.

15. Would all Boeing stockholders expect the same outcome from a given new
project, and how would those expectations affect the stock’s price? Explain.
- Yes, those expectations might met exactly. However, management might
make a prudent decision that causes profits to rise causing the stock price
to jump higher than what it already was. Of course, management might
make a big mistake, profits might suffer, and the stock price might decline.

16. What's the difference between a stock's current market price and its intrinsic
value?
-Stock price: current market price. Intrinsic value: represents the "true" value of
the company's stock, can't be directly observed and must instead be estimated

17. Do stocks have known and “provable” intrinsic values, or might different people
reach different conclusions about intrinsic values? Explain.
-No, Intrinsic values are estimates and different analysts with different data have
different views.

18. Should managers estimate intrinsic values or leave that to outside security
analysts? Explain.
-Managers have the best information about a firm's future prospects, so their
estimates are better than outside investors. However their estimates can be
wrong.

19. If a firm could maximize either its current market price or its intrinsic value, what
would stockholders (as a group) want managers to do? Explain.
-Stockholders would want firms to maximize the intrinsic value not the current
market value.

20. Should a firms managers help investors improve their estimates of the firms
intrinsic value? Explain.
-Managers should provide info that helps investors make better estimates of the
firm's intrinsic value, which will keep the stock price closer to its equilibrium level.
However, there are times when the management cannot divulge the true
situation because doing so would provide info that helps its competitors.

21. What four trends affect business management in general and financial
management in particular?
 - First, the points discussed in the preceding section have led to profound
changes in business practices.
- Second, Increased Globalization of business
- Third, Improving Information Technology
- Lastly, is the way the top managers operate and interface with
stockholders which relates to corporate governance.

22. How would you define “business ethics”?

- can be thought of as a company's attitude and conduct toward its employees,
customers, community and stockholders.

23. Can a firm’s executive compensation plan lead to unethical behavior? Explain.
- Yes! because of misleading accounting practices that led to overstated profits

24. Unethical acts are generally committed by unethical people. What are some
things companies can do to help ensure that their employees act ethically?
-By having a moral code of conduct for its employees and the resources or who
to report such unethical behavior to with any form reprisal from the perpetrator(s).

25. What are three techniques stockholders can use to motivate managers to
maximize their stock’s long-run price?
-reasonable compensation packages,
-firing of managers who don't perform well,
-and the threat of hostile takeovers

26. Should managers focus directly on the stock’s actual market price or its intrinsic
value, or are both important? Explain.
- Managers must communicate effectively with stockholders (without divulging
info that would aid their competitors) to keep the actual price close to the intrinsic
value. It's bad for stockholders and managers when the intrinsic value is high but
the actual price is low. In that situation, a raider may swoop in, buy the company
at a bargain price, and fire the managers. Therefore, both are important.

27. Why might conflicts arise between stockholders and bondholders?

- Bondholders receive fixed payments regardless of how well the company does.
Stockholders- do better when the company does better; typically more willing to
take on risky projects.