Financial Management Theory And Practicechapter 1 Questions1 2 What A ✓ Solved

Financial management theory and practice CHAPTER 1 QUESTIONS: 1-2 What are the three principal forms of business organization? What are the advantages and disadvantages of each? 1-6 What are financial intermediaries, and what economic functions do they perform? 1-7 Is an initial public offering an example of a primary or secondary market transactions? 1-9 Identify and briefly compare the two leading stock exchanges in the United States today?

CHAPTER 2 PROBLEMS: 2-3 If a “ typical firm reports million of retained earnings on its balance sheet, can the firm definitely pay million in cash dividend? 2-5 What is operating capital, and why is it important? Week 5 Wiley Plus Quiz Study Guide ACC/561 September 1, 2015 Multiple Choice Question 37 Why are budgets useful in the planning process? They enable the budget committee to earn their paycheck. They provide management with information about the company's past performance.

They help communicate goals and provide a basis for evaluation. They guarantee the company will be profitable if it meets its objectives. Multiple Choice Question 44 A common starting point in the budgeting process is expected future net income. a clean slate, with no expectations. past performance. to motivate the sales force. Multiple Choice Question 48 Which of the following statements about budget acceptance in an organization is true? The most widely accepted budget by the organization is the one prepared by top management.

Budgets are hardly ever accepted by anyone except top management. Budgets have a greater chance of acceptance if all levels of management have provided input into the budgeting process. The most widely accepted budget by the organization is the one prepared by the department heads. Multiple Choice Question 38 What is budgetary control? The process of providing information on budget differences to lower level managers Another name for a flexible budget The degree to which the CFO controls the budget The use of budgets in controlling operations Multiple Choice Question 44 The comparison of differences between actual and planned results is done by the external auditors. is usually done orally in departmental meetings. appears on the company's external financial statements. appears on periodic budget reports.

Multiple Choice Question 45 A static budget shows planned results at the original budgeted activity level. is useful in evaluating a manager's performance by comparing actual variable costs and planned variable costs. is changed only if the actual level of activity is different than originally budgeted. should not be prepared in a company. Multiple Choice Question 93 A responsibility report should only be prepared at the highest level of managerial responsibility. only show variable costs. be prepared in accordance with generally accepted accounting principles. show only those costs that a manager can control. Multiple Choice Question 99 Which responsibility centers generate both revenues and costs?

Profit and cost centers Cost and investment centers Only profit centers Investment and profit centers Multiple Choice Question 100 The linens department of a large department store is a profit center. not a responsibility center. an investment center. a cost center. Multiple Choice Question 39 What is a standard cost? The amount management thinks should be incurred to produce a good or service Any amount that appears on a budget The total number of units times the budgeted amount expected The total amount that appears on the budget for product costs Multiple Choice Question 48 Using standard costs makes management by exception more difficult. makes employees less "cost-conscious." provides a basis for evaluating cost control. increases clerical costs. Multiple Choice Question 80 Unfavorable materials price and quantity variances are generally the responsibility of the Price Quantity Purchasing department Production department Production department Purchasing department Production department Production department Purchasing department Purchasing department

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Introduction
Financial management is a vital aspect of any business organization, as it entails the planning, organizing, directing, and controlling of financial activities (Higgins, 2015). Chapter 1 of "Financial Management Theory and Practice" surveys foundational concepts, starting with forms of business organizations, financial intermediaries, and market types, culminating in a brief mention of stock exchanges. Chapter 2 takes a closer look at operational assets, budgets, and related managerial responsibilities as they align with financial oversight.

Chapter 1 Questions

1. What are the three principal forms of business organization? What are the advantages and disadvantages of each?

The three principal forms of business organization are sole proprietorships, partnerships, and corporations.
1. Sole Proprietorship:
- Advantages:
- Simplicity: Establishing a sole proprietorship is straightforward and requires minimal legal effort (Brealey, Myers, & Allen, 2014).
- Complete Control: The owner has full control over business decisions and profits.
- Tax Benefits: Income generated is taxed once as personal income (Berk & DeMarzo, 2019).
- Disadvantages:
- Unlimited Liability: The owner is personally liable for all business debts, which can jeopardize personal assets (Higgins, 2015).
- Limited Access to Capital: Raising funds often relies on personal savings, making growth challenging.
- Lack of Continuity: The business ceases to exist upon the owner’s death or decision to quit (Ross, Westerfield, & Jaffe, 2016).
2. Partnership:
- Advantages:
- Shared Resources: Partners can pool resources and expertise (Brealey et al., 2014).
- Shared Responsibility: The workload and decision-making burdens can be shared among partners.
- Pass-through Taxation: Income is taxed at the partner level, avoiding double taxation (Higgins, 2015).
- Disadvantages:
- Unlimited Liability: Similar to sole proprietorships, partners can be held liable for the actions of other partners (Berk & DeMarzo, 2019).
- Potential for Conflict: Differences in vision and management style can lead to disputes.
- Limited Life: The partnership can dissolve if one partner exits (Ross et al., 2016).
3. Corporation:
- Advantages:
- Limited Liability: Shareholders are not personally liable for corporate debts, thus protecting personal assets (Brealey et al., 2014).
- Enhanced Capital: Corporations can raise funds more easily through the sale of stock.
- Perpetual Existence: Corporations continue to exist irrespective of changes in ownership (Higgins, 2015).
- Disadvantages:
- Complex Structure: Establishing and maintaining a corporation involves more regulations and paperwork.
- Double Taxation: Corporate income is taxed at the corporate level and again as dividends (Berk & DeMarzo, 2019).
- Increased Scrutiny: Corporations are subject to more regulations and oversight compared to other business forms (Ross et al., 2016).
In summary, the choice of the business organization model is crucial and depends on various factors such as liability, taxation, and operational complexity.

2. What are financial intermediaries, and what economic functions do they perform?

Financial intermediaries are institutions that facilitate the flow of funds between savers and borrowers. Examples include banks, mutual funds, insurance companies, and pension funds (Berk & DeMarzo, 2019).
Economic Functions:
1. Channeling Funds: They collect funds from savers and lend them to those in need of capital, promoting economic activity (Higgins, 2015).
2. Risk Management: They help spread out risk, allowing smaller investors to access diversified investment opportunities (Brealey et al., 2014).
3. Information Processing: Financial intermediaries evaluate borrowers' creditworthiness and help allocate capital efficiently, mitigating adverse selection and moral hazard problems (Ross et al., 2016).
By performing these functions, financial intermediaries stimulate economic growth and contribute to a more efficient capital market.

3. Is an initial public offering an example of a primary or secondary market transaction?

An initial public offering (IPO) refers to the process by which a private company offers shares to the public for the first time. This transaction occurs on the primary market, where new securities are created, and the company receives funds directly from investors (Berk & DeMarzo, 2019). In contrast, secondary market transactions involve buying and selling existing securities among investors, with no additional capital being raised for the issuing company.

4. Identify and briefly compare the two leading stock exchanges in the United States today.

The two leading stock exchanges in the United States are the New York Stock Exchange (NYSE) and the NASDAQ.
1. New York Stock Exchange (NYSE):
- Establishment: Established in 1817, it's one of the oldest and largest stock exchanges globally regarding market capitalization (Brealey et al., 2014).
- Trading Mechanism: Operates on a hybrid model with a combination of floor and electronic trading. It involves specialists who facilitate transactions between buyers and sellers (Higgins, 2015).
- Market Listing: Generally lists larger, established companies (Ross et al., 2016).
2. NASDAQ:
- Establishment: Founded in 1971, NASDAQ was the first electronic stock market, operating entirely online (Berk & DeMarzo, 2019).
- Trading Mechanism: Utilizes a fully electronic trading system, making transactions faster and often more cost-effective (Higgins, 2015).
- Market Listing: Primarily features technology and growth-oriented firms (Ross et al., 2016).

Chapter 2 Problems

Problem 2-3: Retained Earnings and Cash Dividends

If a firm reports million of retained earnings on its balance sheet, it cannot automatically pay million in cash dividends. Retained earnings represent the cumulative profits retained in the company for reinvestment, not cash on hand. Dividends can only be paid from profits and available cash resources (Berk & DeMarzo, 2019).

Problem 2-5: Operating Capital

Operating capital refers to the capital required to fund day-to-day operations and includes current assets and liabilities necessary for maintaining operations (Ross et al., 2016). It is crucial as it ensures that a firm can cover its short-term obligations and effectively manage its operational efficiency (Higgins, 2015).

Conclusion

Financial management encompasses various principles that guide business decisions. The choice of business organization and understanding financial intermediaries allows firms to effectively navigate the complex financial landscape. Furthermore, recognizing the distinctions between primary and secondary markets and the operational aspect of retail trading enables investors and managers to make informed decisions.

References

1. Berk, J., & DeMarzo, P. (2019). Corporate Finance. Pearson.
2. Brealey, R. A., Myers, S. C., & Allen, F. (2014). Principles of Corporate Finance. McGraw-Hill.
3. Higgins, R. C. (2015). Analysis for Financial Management. McGraw-Hill.
4. Ross, S. A., Westerfield, R. W., & Jaffe, J. (2016). Corporate Finance. McGraw-Hill.
5. Block, S. B., & Hirt, G. A. (2015). Foundations of Financial Management. McGraw-Hill.
6. Fabozzi, F. J., & Franco, G. (2018). Financial Management and Analysis. Wiley.
7. McKinsey & Company. (2019). Valuation: Measuring and Managing the Value of Companies. Wiley.
8. Damodaran, A. (2016). Valuation: Tools and Techniquest for Determining the Value of Any Asset. Wiley.
9. Tuckman, B. (2017). Financial Institution Management: A Risk Management Approach. McGraw-Hill.
10. Koller, T., Goedhart, M., & Wessels, D. (2015). Valuation: Measuring and Managing the Value of Companies. Wiley.