Q1. What are the three types of financial management decisions? For each type, give an example of a business transaction that would be relevant.
Capital Budgeting, Capital Structure, and Working Capital are the three types of financial management decisions.
According to our text capital budgeting is the process of planning and managing a firms long term investments. In this step the financial manager is looking to see what investment opportunities are likely to be worth more than they cost to acquire. Our book uses the example of a large chain of stores deciding whether or not to open a new location.
Capital Structure is a specific mix of long-term debt and equity the firm uses to finance its operations. In this the financial manager is deciding both how much is needed to borrow and what would be the least expensive options for the firm. The financial manager would need to figure out what options were available to borrow the amount of money needed at that time and how much money to borrow.
Working Capital has to do with the firms short-term assets and liabilities. The financial manager has to make sure the firm has enough assets such as inventory to keep the business running and avoid costly time where they would not be able to produce. With working capital it is important for the financial manager to decided how much inventory is needed at the time and how much should be kept on hand all of the time.
Q3. What is the primary disadvantage of the corporate form of organization? Describe at least two advantages of the corporate organization.
The primary disadvantage of the corporation form of organization is the corporation has to pay taxes because legally it is considered a person and then the money paid to stockholders is taxed. The term for this is double taxation and it means the profits are taxed two times (at the corporate level and at the personal level after pay out). Advantages of corporate organizations are ownership is easy to transfer, the life of...