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Financial Management

Chapter 1

QuestionAnswer
What are the functions of financial management? 1. How a business obtains funds required to operate, how it uses the funds, and how it uses the income it earns. 2. External forces affect the decisions a business makes.
What are the sources of capital? Owners & Creditors.
What is equity capital? This is when owners invest their own capital into a business, and, therefore, the profits earned belong to the owners.
What is debt capital? This is when a business obtains capital from outsiders through borrowing.
What are the forms of business organizations? 1. Sole proprietorship 2. Partnership 3. Corporation
What are the two components of shareholders' equity? 1. Contributed capital 2. Retained earnings
What is contributed capital? the money invested by owners in the form of shares, both common and preferred.
What is retained earnings? the profits made and retained by a company.
What are common shareholders' rights? 1. The right to vote for the members of the board of directors. 2. The right to receive dividends if declared. 3. The right to a share of assets, in case of liquidation.
What are preferred shareholders' rights? 1. The annual dividend is fixed and must be paid in full before the common shareholders receive any dividend. 2. Upon liquidation, the preferred shareholders must receive all of their capital back, before common shareholders receive and capital back.
Preferred shareholders give up which two rights that the common shareholders have? 1. The right to vote (for the board of directors) 2. The right to participate in earnings growth of the company. They only get their fixed dividend - no matter how well the company is doing.
What is the main goal of financial management? It is the maximization of shareholder wealth!!!