Chapter 1 - Self-Study Problems

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Chapter 1 - Self-Study Problems

Give an example of a financing decision and a capital budgeting decision

Financing decisions determine ho a firm will raise capital. Examples of financing decisions include the decision to borrow from a bank or issue debt in the public capital markets. Capital budgeting involves deciding which productive assets the firm invests in, such as buying a new plant or investing in the renovation of an existing facility.

What is the appropriate decision criterion for financial managers to use when selecting a capital project?

Financial managers should select a capital project only if the value of the project's expected future cash flows exceeds the cost of the project. In other words, managers should only make investments that will increase firm value, and thus increase the stockholders' wealth

What are some of the things that managers do to manage a firm's working capital?

Working capital management is the day-to-day management of a firm's short-term assets and liabilities. Working capital can be managed by maintaining the optimal level of inventory, managing receivables and payables, deciding to whom the firm should extend credit, and making appropriate investments with excess cash

Which of the following characteristics does not pertain to corporations?

Can enter into contracts

Can borrow money

Are the easiest type of business to form

Can be sued

Can own stock in other companies

What are typically the main components of an executive compensation package?

The three main components of an executive compensation package are: base salary, bonus based on accounting performance, and compensation tied to to the firm's stock price