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MOS 1023: Final exam Study Guide Solutions Finance - ANSWER-The science or study of the management of funds. Number one job is to maximize the return of the investments The goal of the firm - ANSWER-To create value for the firm's shareholders by maximizing the price of the existing common stoc...

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  • November 4, 2024
  • 26
  • 2024/2025
  • Exam (elaborations)
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  • mos 1023 final exam study guide solutions

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Copyright © KAYLIN 2024/2025 ACADEMIC YEAR. ALL RIGHTS RESERVED FIRST PUBLISH NOVEMBER, 2024




MOS 1023: Final exam Study Guide

Solutions


Finance - ANSWER✔✔-The science or study of the management of funds. Number one job is to

maximize the return of the investments


The goal of the firm - ANSWER✔✔-To create value for the firm's shareholders by maximizing the price of

the existing common stock.


Influence of financial decisions - ANSWER✔✔-Good financial decisions will help increase stock price and

poor financial decisions will lead to a decline in stock price


The role of management - ANSWER✔✔-Management serves as an arbitrator and moderator between

conflicting interest groups or stakeholders and objectives


Contractual claims - ANSWER✔✔-What creditors, managers, employees and customers hold against the

company (have rights to certain amounts of assets)


Residual claims - ANSWER✔✔-What shareholders have against the company that entitles them to what's

left over after the contractual claims have been paid


Three basic issues of finance - ANSWER✔✔-1. What long-term investments should the firm undertake?

(Capital budgeting decision)


2. How should the firm raise money to fund these investments? (Capital structure decision)


3. How to manage cash flows arising from day-to-day operations (Operating decision)


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,Copyright © KAYLIN 2024/2025 ACADEMIC YEAR. ALL RIGHTS RESERVED FIRST PUBLISH NOVEMBER, 2024


Functions of a financial manager - ANSWER✔✔-1a. Raising funds (financial markets --> financial

managers --> operations)


1b. Obligations: stocks, debts, securities (financial manager --> financial markets)


2. Investments (financial markets --> financial manager --> operations)


3. Cash from operational activities (operations --> financial manager)


4. Reinvesting (financial manager --> financial markets)


5. Dividends or interest payments (financial manager --> financial markets)


Principles of finance - ANSWER✔✔-1. Cash flow is what matters


2. Money has a time value


3. Risk requires a reward


4. Market prices are generally right


5. Conflicts of interest cause agency problems


6. Ethics and trust in business


Cash flow is what matters - ANSWER✔✔-Accounting profits are not equal to cash flows. It is possible for

a firm to generate it but not report accounting profits in the books because it drives the value of a

business, not the profits. Must determine additional when making financial decisions.


Money has a time value - ANSWER✔✔-A dollar received today is worth more than a dollar received in

the future since we can earn interest on money received today (better to receive money sooner rather

than later)




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, Copyright © KAYLIN 2024/2025 ACADEMIC YEAR. ALL RIGHTS RESERVED FIRST PUBLISH NOVEMBER, 2024


Risk requires a reward - ANSWER✔✔-Rational investors would choose a riskier investment if it has the

potential for a higher reward


Market prices are generally right - ANSWER✔✔-Information efficient markets provide liquidity and fair

prices. When new information becomes available, prices quickly change to reflect that information


Conflicts of interest cause agency problems - ANSWER✔✔-The separation of management and the

ownership of the firm creates an agency problem. Managers may seek to emphasize the size of the firm

sales, while owners seek to make the most money they can (dispersed ownership)


Ethics and trust in business - ANSWER✔✔-Sound, ethical standards are important for business and

personal success. Unethical decisions can destroy shareholder wealth


Dispersed ownership - ANSWER✔✔-For public companies, the ownership is widely spread out


Proxy - ANSWER✔✔-The only right you have as a shareholder is to vote for the board of directors and

the number of votes you get depends on the number of shares you owe. One way to mitigate the agency

problem


Corporate governance functions - ANSWER✔✔-1. Oversight: board of directors to oversee management


2. Managerial: run company


3. Compliance: laws, regulations and standards


4. Internal audit: assurance and consulting activity


5. Advisory: advice


6. External audit: lend credibility


7. Monitoring: elect or remove directors and management

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