BFM 1014 FUNDAMENTALS OF FINANCE

Trimester 2, 2016-2017

CHAPTER 1: INTRODUCTION OF FINANCIAL MANAGEMENT

Critical Thinking and Concepts Review Questions

1. What are the three types of financial management decisions? For each type of decision, give
an example of a business transactions that would be relevant.
a. budgeting (deciding on whether to expand a manufacturing plant),
b. capital structure (deciding whether to issue new equity and use the proceeds to retire
outstanding debt), and
c. working capital management (modifying the firm’s credit collection policy with its
customers).

3. What are the primary disadvantage of the corporate form of organization? Name at least two
disadvantages of corporate organization.
The primary disadvantage of the corporate form is the double taxation to shareholders of
distributed earnings and dividends.
Some advantages include: limited liability, ease of transferability, ability to raise capital,
and unlimited life.

5. What goal should always motivate the actions of the firm’s financial managers?
To maximize the current market value (share price) of the equity of the firm (whether it’s
publicly traded or not).

6. Who owns a corporation? Describe the process whereby the owner control the firm’s
management. What is the main reason that an agency relationship exists in the corporate form
of organization? In this context, what kind of problem may arise?
In the corporate form of ownership, the shareholders are the owners of the firm. The
shareholders elect the directors of the corporation, who in turn appoint the firm’s
management. This separation of ownership from control in the corporate form of organization
is what causes agency problems to exist. Management may act in its own or someone else’s
best interests, rather than those of the shareholders. If such events occur, they may contradict
the goal of maximizing the share price of the equity of the firm.

7. You’ve probably noticed coverage in the financial press of an initial public offering (IPO) of a
company securities. Social networking company Facebook is relatively recent example. Is an
IPO a primary market or secondary market transactions?

A primary market transaction.