Intro and Chapter 1 Questions Q1. How can “Finance” be defined” generally? Q2. How can “Business Finance” be defined generally? Q3. How is “Finance” different from “Accounting” ? Q4. How can “Finance” be defined by the kinds of professions its equips?

Intro and Chapter 1 Questions Q1. How can “Finance” be defined” generally? A1. Finance is the management of money invested in assets that are expected to produce at least a fair return for the Owner by the appreciation of the asset’s market value and/or future cash flows to be received. Q2. How can “Business Finance” be defined generally? Q3. How is “Finance” different from “Accounting” ? Q4. How can “Finance” be defined by the kinds of professions its equips?

Intro and Chapter 1 Questions Q1. How can “Finance” be defined” generally? A1. Finance is the management of money invested in assets that are expected to produce at least a fair return for the Owner by the appreciation of the asset’s market value and/or future cash flows to be received. Q2. How can “Business Finance” be defined generally? A2. Business Finance is the management of money invested in business assets/projects that are expected to produce at least a fair return for the Owner by the appreciation of the asset’s market value and/or future cash flows to be received. Q3. How is “Finance” different from “Accounting” ? Q4. How can “Finance” be defined by the kinds of professions its equips?

Intro and Chapter 1 Questions Q1. How can “Finance” be defined” generally? A1. Finance is the management of money invested in assets that are expected to produce at least a fair return for the Owner by the appreciation of the asset’s market value and/or future cash flows to be received. Q2. How can “Business Finance” be defined generally? A2. Business Finance is the management of money invested in business assets/projects that are expected to produce at least a fair return for the Owner by the appreciation of the asset’s market value and/or future cash flows to be received. Q3. How is “Finance” different from “Accounting” ? A3. Accounting is about recording and reporting accurately according to Generally Accepted Accounting Principles the financial impact of an entity’s historical business transactions. Finance is about investing in an asset(s) with a reasonable expectation of receiving at least a fair return (in cash value terms) in the future (plus the original cash value of the amount invested). Q4. How can “Finance” be defined by the kinds of professions its equips?

Intro and Chapter 1 Questions Q1. How can “Finance” be defined” generally? A1. Finance is the management of money invested in assets that are expected to produce at least a fair return for the Owner by the appreciation of the asset’s market value and/or future cash flows to be received. Q2. How can “Business Finance” be defined generally? A2. Business Finance is the management of money invested in business assets/projects that are expected to produce at least a fair return for the Owner by the appreciation of the asset’s market value and/or future cash flows to be received. Q3. How is “Finance” different from “Accounting” ? A3. Accounting is about recording and reporting accurately according to Generally Accepted Accounting Principles the financial impact of an entity’s historical business transactions. Finance is about investing in an asset(s) with a reasonable expectation of receiving at least a fair return (in cash value terms) in the future (plus the original cash value of the amount invested). Q4. How can “Finance” be defined by the kinds of professions its equips? A4. - Corporate Finance (Treasury: Cash Management, Treasury: Finance, Financial Planning) - Commercial Banking - Money Management (i.e., Professional Investing) - Investment Banking - Consulting

Intro and Chapter 1 Questions Q5. What is the primary goal of Business Finance? Q6. What “formula” summarizes what management needs to do in order to achieve the primary goal? Q7. Why is “profit maximization” not strong enough to be the primary goal of business financial management?

Intro and Chapter 1 Questions Q5. What is the primary goal of Business Finance? A5. To maximize the market value of the shareholders equity investment (by working to produce enough Free Cash Flow profitability to at least cover the company’s Weighted Average Cost of Capital). The focus is on making the market value of the business’ assets increase in value, and this will lead to an increase in the value of the Business Owner’s equity investment. Q6. What “formula” summarizes what management needs to do in order to achieve the primary goal? Q7. Why is “profit maximization” not strong enough to be the primary goal of business financial management?

Intro and Chapter 1 Questions Q5. What is the primary goal of Business Finance? A5. To maximize the market value of the shareholders equity investment (by working to produce enough Free Cash Flow profitability to at least cover the company’s Weighted Average Cost of Capital). The focus is on making the market value of the business’ assets increase in value, and this will lead to an increase in the value of the Business Owner’s equity investment. Q6. What “formula” summarizes what management needs to do in order to achieve the primary goal? A6. Free Cash Flow > Weighted Average Cost of Capital Q7. Why is “profit maximization” not strong enough to be the primary goal of business financial management?

Intro and Chapter 1 Questions Q5. What is the primary goal of Business Finance? A5. To maximize the market value of the shareholders equity investment (by working to produce enough Free Cash Flow profitability to at least cover the company’s Weighted Average Cost of Capital). The focus is on making the market value of the business’ assets increase in value, and this will lead to an increase in the value of the Business Owner’s equity investment. Q6. What “formula” summarizes what management needs to do in order to achieve the primary goal? A6. Free Cash Flow > Weighted Average Cost of Capital Q7. Why is “profit maximization” not strong enough to be the primary goal of business financial management? A7. -Because it only addresses Accounting Net Income (and not Free Cash Flow). -Because Accounting Net Income ignores managing a company’s level of riskiness. -Because Accounting Net Income ignores the company’s Weighted Average Cost of Capital (“WACC”). -Because focusing only on Free Cash Flow would also ignore risk and WACC.

Intro and Chapter 1 Questions Q8. What is the difference between “intrinsic value” and “market price” with respect to the valuation of common stocks? Q9. With regard to current trends in business, what is “corporate governance” and what are some examples of changes taking place? Q10. What can be the relationship between ethical problems in business and shareholder value?

Intro and Chapter 1 Questions Q8. What is the difference between “intrinsic value” and “market price” with respect to the valuation of common stocks? Q8. “Intrinsic value” is an estimate of a stock’s theoretical “true” value based on accurate risk and return data. “Market price” is the current price being paid in the market for a stock based on perceived but possible incorrect information Q9. With regard to current trends in business, what is “corporate governance” and what are some examples of changes taking place? Q10. What can be the relationship between ethical problems in business and shareholder value?

Intro and Chapter 1 Questions Q8. What is the difference between “intrinsic value” and “market price” with respect to the valuation of common stocks? Q8. “Intrinsic value” is an estimate of a stock’s theoretical “true” value based on accurate risk and return data. “Market price” is the current price being paid in the market for a stock based on perceived but possible incorrect information Q9. With regard to current trends in business, what is “corporate governance” and what are some examples of changes taking place? Q9. Corporate governance refers to the ways the management of a publicly-held corporation is organized and incentivized to ensure the common stockholders’ interests (i.e., receiving at least a fair return on their equity investment, corporate reputation, etc.). Q10. What can be the relationship between ethical problems in business and shareholder value?

Intro and Chapter 1 Questions Q8. What is the difference between “intrinsic value” and “market price” with respect to the valuation of common stocks? Q8. “Intrinsic value” is an estimate of a stock’s theoretical “true” value based on accurate risk and return data. “Market price” is the current price being paid in the market for a stock based on perceived but possible incorrect information Q9. With regard to current trends in business, what is “corporate governance” and what are some examples of changes taking place? Q9. Corporate governance refers to the ways the management of a publicly-held corporation is organized and incentivized to ensure the common stockholders’ interests (i.e., receiving at least a fair return on their equity investment, corporate reputation, etc.). Q10. What can be the relationship between ethical problems in business and shareholder value? Q10. If a publicly-held corporation has management and employees who violate generally accepted standards of ethical behavior, then this could lead to common stockholders losing confidence in management’s ability to serve their interests, and this could lead to a lower demand for the stock, and thereby, a lower value/price for the stock.

Intro and Chapter 1 Questions Q11. What is the Agency Problem in Business Finance, and What are Agency Costs? Q12. How can Stockholders manage/minimize the Agency problem? Q13. What are the two basic legal categories of Business Organization Q14. What are the advantages and disadvantages to a business of being unincorporated? What two forms of unincorporated businesses were described in the text?

Intro and Chapter 1 Questions Q11. What is the Agency Problem in Business Finance, and What are Agency Costs? A11. Agency Problem: When Management fails to achieve the Primary Goal; Conflicts between the Business Owner’s goals and Management’s Goals. Agency Costs: The various costs of the Agency Problem. Q12. How can Stockholders manage/minimize the Agency problem? Q13. What are the two basic legal categories of Business Organization Q14. What are the advantages and disadvantages to a business of being unincorporated? What two forms of unincorporated businesses were described in the text?

Intro and Chapter 1 Questions Q11. What is the Agency Problem in Business Finance, and What are Agency Costs? A11. Agency Problem: When Management fails to achieve the Primary Goal; Conflicts between the Business Owner’s goals and Management’s Goals. Agency Costs: The various costs of the Agency Problem. Q12. How can Stockholders manage/minimize the Agency problem? A12. - Aligning Management compensation to the Primary Goal - Sell the company to another company (so Management may lose their jobs) - Incurring monitoring and bonding costs - Have more independent (outside) directors on the board - Separate the role of Chairman of the BOD from the CEO position - Require Management (i.e., corporate officers and BOD members) to purchase a substantial amount of the company’s common stock. Q13. What are the two basic legal categories of Business Organization Q14. What are the advantages and disadvantages to a business of being unincorporated? What two forms of unincorporated businesses were described in the text?

Intro and Chapter 1 Questions Q11. What is the Agency Problem in Business Finance, and What are Agency Costs? A11. Agency Problem: When Management fails to achieve the Primary Goal; Conflicts between the Business Owner’s goals and Management’s Goals. Agency Costs: The various costs of the Agency Problem. Q12. How can Stockholders manage/minimize the Agency problem? A12. - Aligning Management compensation to the Primary Goal - Sell the company to another company (so Management may lose their jobs) - Incurring monitoring and bonding costs - Have more independent (outside) directors on the board - Separate the role of Chairman of the BOD from the CEO position - Require Management (i.e., corporate officers and BOD members) to purchase a sustantial amount of the company’s common stock. Q13. What are the two basic legal categories of Business Organization A13. Unincorporated and Incorporated. Q14. What are the advantages and disadvantages to a business of being unincorporated? What two forms of unincorporated businesses were described in the text?

Intro and Chapter 1 Questions Q11. What is the Agency Problem in Business Finance, and What are Agency Costs? A11. Agency Problem: When Management fails to achieve the Primary Goal; Conflicts between the Business Owner’s goals and Management’s Goals. Agency Costs: The various costs of the Agency Problem. Q12. How can Stockholders manage/minimize the Agency problem? A12. - Aligning Management compensation to the Primary Goal - Sell the company to another company (so Management may lose their jobs) - Incurring monitoring and bonding costs - Have more independent (outside) directors on the board - Separate the role of Chairman of the BOD from the CEO position - Require Management (i.e., corporate officers and BOD members) to purchase a substantial amount of the company’s common stock. Q13. What are the two basic legal categories of Business Organization A13. Unincorporated and Incorporated. Q14. What are the advantages and disadvantages to a business of being unincorporated? What two forms of unincorporated businesses were described in the text? A14. Adv: simple to form; subject to only the Individual Income Tax Code Disadv: Personal Assets at risk; harder to finance and to sell (must sell assets separately). Forms: Sole Proprietorships and Partnerships

Intro and Chapter 1 Questions Q15. What are the basic forms of being incorporated? Q16. What are the advantages and disadvantages of Incorporation?

Intro and Chapter 1 Questions Q15. What are the basic forms of being incorporated? A15. - Limited Partnerships - Corporations (“Inc.” or “Corp.”) - “S” Corporations (Income Tax Code designation - Limited Liability Companies (“LLCs”) Q16. What are the advantages and disadvantages of Incorporation?

Intro and Chapter 1 Questions Q15. What are the basic forms of being incorporated? A15. - Limited Partnerships - Corporations (“Inc.” or “Corp.”) - “S” Corporations (Income Tax Code designation - Limited Liability Companies (“LLCs”) Q16. What are the advantages and disadvantages of Incorporation? A16. Adv.: - Lower risk to Owners, Management and Employees because an incorporated business (in all of its forms) is a legally separate Person - Easier to sell the company (i.e., just sell the stock to sell all assets) - Easier to obtain external financing Disadv.: - More complicated to form and maintain - Subject to the Corporate Income Tax Code - “Double Taxation” = Business’ Net Earnings are subject to Corporate Income Tax and any distributed Net Earnings to shareholders (dividends) are subject to either the Personal or Corporate Income Tax Code