FINC 3301 Test 1 Study Guide || with 100% Errorless
Answers.
mortgage backed security correct answers a collection of mortgages that have been packaged
into a security that investors can buy
credit default swap correct answers a type of contract that offers a guarantee against the non-
payment of a loan or mortgage such as a mortgage back security.
Three primary functions of the treasurer of a firm. correct answers Cash management, credit
management, financial planning.
Three primary functions of the controller of a firm. correct answers Cost accounting, financial
accounting, and information system activities.
Functions of the chief financial officer of a firm. correct answers directs and coordinates the
financial activities of the firm and supervises the treasurer and controller.
How risk can influence decisions made by the firm. correct answers affects value because the
less certain owners and investors are about a firm's expected future cash flows, the lower they
will value the firm. Companies whose expected future cash flows are doubtful will have lower
values than companies whose expected future cash flows are virtually certain.
Why striving to achieve accounting profits and maximizing stock value are not the same. correct
answers Stock value depends on future cash flows, their timing, and their riskiness. Profit
calculations do not consider these three factors. Profit, as defined in accounting, is simply the
difference between sales revenue and expenses. It is true that more profits are generally better
than less profits, but when the pursuit of short-term profits adversely affects the size of future
cash flows, their timing, or their riskiness, then these profit maximization efforts are detrimental
to the firm.
The "principal" in an agent-principal relationship. correct answers The principal is the person
who hires the agent to act on his behalf.
Factors that may influence a firm's financial decisions. correct answers Agency Issues,
Stakeholder's Interest, Interest of Society
Some of the ethical issues facing a corporation. correct answers Ethical concerns may include
fair treatment of employees, customers, the community, and society as a whole.
Sole proprietorship correct answers The sole proprietor has unlimited liability for matters
relating to the business. This means that the sole proprietor is responsible for all the obligations
of the business, even if those obligations exceed the amount the proprietor has invested in the
business.
, partnership correct answers Each partner in a partnership is usually liable for the activities of the
partnership as a whole. Even if there are a hundred partners, each one is technically responsible
for all the debts of the partnership. If ninety-nine partners declare personal bankruptcy, the
hundredth partner still is responsible for all the partnership's debts.
corporation correct answers A corporation is a legal entity that is liable for its own activities.
Stockholders, the corporation's owners, have limited liability for the corporation's activities.
They cannot lose more than the amount they paid to buy the corporation's stock.
stockholder correct answers owns a share of the company
stakeholder correct answers has a stake in the business (creditors, suppliers, etc.) and the
interests of these stakeholders can influence business decisions.
The field of finance. correct answers Financial principles guide businesses in how they raise,
spend and allocate money. Decisions made in these areas can and will affect every aspect of a
business. Careers in the field of finance include: Financial management, financial markets and
institutions, and investments.
Duties of the financial manager in a business firm. correct answers measure the firm's
performance, determine what the financial consequences will be if the firm maintains its present
course or changes it, and recommend how the firm should us its assets. Also locate external
financing sources and recommend the most beneficial mix of financing sources, and they
determine the financial expectations of the firm's owners.
All financial managers must be able to correct answers communicate, analyze, and make
decisions based on information from many sources. To do this, they need to be able to analyze
financial statements, forecast and plan, and determine the effect of size, risk, and timing of cash
flows.
The basic goal of a business firm. correct answers to maximize the wealth of the firm's owner by
adding value rather than profits. The value of a firm is measured by the price investors are
willing to pay to own the firm. For corporations, this would be the stock price.
The three financial factors that influence the value of a business. correct answers Cash flow,
Timing of Cash Flows, and Risk
The Importance of Cash Flow correct answers In business, cash is what pays the bills. It is also
what the firm receives in exchange for its products and services. Cash is therefore of ultimate
importance, and the expectation that the firm will generate cash in the future is one of the factors
that gives the firm its value.
The Effect of Timing on Cash Flows correct answers Owners and potential investors look at
when firms can expect to receive cash and when they can expect to pay out cash. All other
factors being equal, the sooner companies expect to receive cash and the later they expect to pay
out cash, the more valuable the firm and the higher its stock price will be.
