Question

1. The Financial Management Decision Process. What are the three types of financial management decisions? For each type of decision, give an example of a business transaction that would be relevant.

2. Sole Proprietorships and Partnerships. What are the four primary disadvantages to the sole proprietorship and partnership forms of business Page 19organization? What benefits are there to these types of business organization as opposed to the corporate form?

3. Corporations. What is the primary disadvantage of the corporate form of organization? Name at least two of the advantages of corporate organization.

4. Corporate Finance Organization. In a large corporation, what are the two distinct groups that report to the chief financial officer? Which group is the focus of corporate finance?

5.  Goal of Financial Management. What goal should always motivate the actions of the firm’s financial manager?

6. Agency Problems. Who owns a corporation? Describe the process whereby the owners 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 kinds of problems can arise?

Answer 1

answering only the first one as these are separate independent questions.

1) Three types of financial management decisions

a) Investment decisions - which project to invest in. For example a company is evaluating whether to take a mcdonalds franchise or a burger king franchise

b) Financing decision - how much should be the debt/equity ratio of total investment outaly. What should be the sources of debt and equity. Example, a textile company deciding the capital mix of $50m expansion.

c) Dividend decision - how much earnings to retain and how much to distribute among equity holders. Example, Apple co deciding whether to distribute dividends/buy back stock or to invest in R&D