Finance

Finance for Managers: Chapters 1-6 Study Guide

Chapter 1

- Financial manager + CEO (Objective): Maximize shareholder wealth

Legal Forms of Business Organization:

- Sole Proprietorships: A business owned by one person and operated for his or own profit. Liabilities of the business are the entrepreneur’s responsibility, and creditors can make claims against the entrepreneur’s personal assets if the business fails to pay its debts.

-Partnerships: A business owned by two or more people and operated for profit.

-Corporation: An entity created by law. A corporation has the legal powers of an individual in that it can sue and be used, make and be party to contracts, and acquire property in its own name. Owners of corporations are its stockholders, whose ownership or equity takes in the form of either common stock or preferred stock.

Earnings per Share: The amount earned during the period on behalf of each outstanding share of common stock, period’s total earnings/number of shares of common stock outstanding

Business Ethics: Standards of conduct or moral judgment that apply to persons engaged in commerce.

Corporate Governance: The rules, processes, and laws by which companies are operated, controlled and regulated. It defines the rights and responsibilities of the corporate participants such as the shareholders, board of directors, officers, and managers and other stakeholders as well as the rules and procedures for making corporate decisions.

Principal- Agent Relationship: An arrangement in which an agent acts on behalf of a principal. Ex: shareholders of a company (principals) elect management (agents) to act on their behalf. Managers must not only look out for themselves but also look at risk when making decisions.

Agency Problem: Problems that arise when managers place personal goals ahead of the goals of shareholders. Ex: Shareholders incur agency costs when managers fail to make the best investment decision or when managers have...