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FSM
Finance Skills for Managers Unit 1
| Question | Answer |
|---|---|
| What is finance? | Finance is the management and allocation of capital with the goal of achieving future objectives. |
| What are some key activities included in finance? | Investing, forecasting, budgeting, saving, and borrowing. |
| How is accounting different from finance in terms of time focus? | Accounting is backward-looking; finance is forward-looking. |
| What is the primary purpose of accounting? | To record and report past financial activity. |
| What is the primary purpose of finance? | To plan how to use money in the future. |
| How do accounting and finance work together? | Accounting produces financial data; finance uses it to make decisions. |
| What are the three main subspecialties in finance? | Corporate finance, investments, and financial institutions. |
| What is corporate finance? | A subspecialty focusing on how organizations manage money to create value. |
| What are key activities in corporate finance? | Sourcing and allocating capital, determining capital structure, budgeting, and strategic planning. |
| What types of organizations use corporate finance? | Corporations, startups, nonprofits, and private companies. |
| What does the investments subspecialty focus on? | Managing money to generate returns and build wealth. |
| What are two key areas in investments? | Asset management and asset pricing. |
| What are common careers in investments? | Financial advisor, portfolio manager, mutual fund or hedge fund analyst. |
| What do financial institutions do? | Facilitate the flow of money and financial services. |
| Give examples of financial institutions. | Commercial banks, credit unions, insurance companies, central banks. |
| What are typical careers in financial institutions? | Loan officer, risk analyst, compliance manager, claims underwriter. |
| What are some additional finance fields? | Personal finance, financial planning, real estate finance, entrepreneurial finance, financial engineering. |
| In the bakery example, what is the accountant’s role? | Track income/expenses, show profits, and explain past performance. |
| In the bakery example, what is the finance professional’s role? | Analyze investment in equipment, forecast benefits, and evaluate options. |
| What is the key takeaway about accounting vs. finance? | Accounting looks back; finance looks forward. Both are essential. |
| What is the role of finance in decision-making? | Finance helps guide smart, value-driven decisions in both personal and business settings. |
| What is the essential question in both personal and business finance? | Do the benefits outweigh the costs? |
| Do the benefits outweigh the costs? | To maximize utility (personal satisfaction or happiness). |
| What is utility in personal finance? | A measure of personal satisfaction or happiness from financial choices. |
| Give an example of a personal financial trade-off. | Skipping short-term pleasures today to save for a home or retirement. |
| What is the primary goal of a firm in business finance? | To maximize wealth. |
| What is the goal of public companies in business finance? | To maximize shareholder wealth. |
| What is the goal of private companies in business finance? | To maximize owner wealth. |
| Who makes key financial decisions in a firm? | The financial manager. |
| What does a financial manager do? | Makes investment and financing decisions to increase firm value. |
| Why is the role of the financial manager important in public firms? | Because ownership is spread among many shareholders, decisions must increase overall value. |
| What are examples of personal finance questions? | Should I rent or buy a home? How much should I save for retirement? Which investments will grow my wealth? |
| What are examples of business finance questions? | Will launching a new product increase value? Should we outsource operations? How should we raise capital? |
| What are key decisions in personal finance? | Renting vs. buying Choosing loans Saving for retirement Evaluating investments |
| What are key decisions in business finance? | Investing in assets Financing with loans or equity Maximizing owner/shareholder value |
| Why do financial principles matter in both personal and business finance? | Because both require comparing options, weighing benefits and costs, and focusing on long-term goals. |
| What will you learn in this finance course? | Core financial concepts Personal and professional decision-making tools Real-world finance application skills |
| What is the central principle of finance in any setting? | Benefits must outweigh costs. |
| What do financial tools and analysis help you do? | Make better, more strategic decisions. |
| What is the primary goal of the financial manager of a firm? | To maximize owner wealth |
| What should be the main question a firm asks when considering any investment decision? | Do the benefits of this investment outweigh the costs? |
| What is the primary aim of personal finance goals? | To maximize satisfaction from products purchased and services obtained |
| What is the primary goal of finance in business? | To maximize owner or shareholder wealth. |
| What are the three core responsibilities of financial managers? | Making investment decisions Making financing decisions Managing working capital |
| What is the most important responsibility of a financial manager? | Making investment decisions. |
| What is the objective of investment decisions? | To determine whether expected future returns outweigh the costs. |
| What are examples of financing options? | Issuing equity (selling shares) Issuing debt (bonds or loans) Using internal funds (retained earnings) |
| What does managing working capital involve? | Managing cash flow Setting customer credit policies Controlling inventory Timing supplier payments |
| What are three aspects of working capital management? | Liquidity, operational efficiency, and short-term asset/liability management. |
| What is an entry-level job in corporate finance? | Financial Analyst. |
| What is the top leadership role in corporate finance? | Chief Financial Officer (CFO). |
| What does investment banking focus on? | Helping companies raise capital and complete complex transactions. |
| What are typical roles in investment banking? | Analyst, Associate, Vice President, Managing Director. |
| What are key specializations within investment banking? | Mergers and Acquisitions (M&A) Public offerings Sales and trading |
| What is private equity (PE)? | Investing in private companies or startups. |
| What are three types of private equity investing? | Angel investing, venture capital, and leveraged buyouts (LBOs). |
| What does a career in commercial banking involve? | Providing loans, deposits, and mortgage services. |
| What is a common career path in commercial banking? | Teller → Credit Analyst / Personal Banker → Management. |
| What does a financial planner do? | Helps individuals reach financial goals through budgeting, retirement planning, and investment advice. |
| What certification is common in financial planning? | Certified Financial Planner (CFP). |
| What is the focus of insurance careers? | Risk assessment and management. |
| What are common jobs in insurance? | Agent or broker Underwriter Risk manager Claims adjuster |
| What are the main branches of insurance? | Property & casualty Life insurance Corporate risk management |
| What is real estate finance? | The valuation, investment, and management of real property. |
| What are career options in real estate finance? | Real estate analyst Appraiser Property manager Real estate investment banking Development & construction management |
| What skills are needed for a career in finance? | Analytical, strategic, and interpersonal skills. |
| Which task does a financial manager perform when choosing to obtain a loan to purchase a piece of equipment for a new project? | Making financing decisions |
| Which financial career focuses on investing capital into firms whose shares are not currently sold on any public stock exchange? | Private equity |
| Which task does a financial manager perform when assessing the costs and benefits of potential projects? | Making investment decisions |
| What is the core principle of personal finance? | Only take financial actions when the benefits outweigh the costs. |
| What are the four key applications of personal finance? | Budgeting and cash flow management Setting and assessing financial goals Financing major goals Investing to reach long-term goals |
| What is budgeting? | Tracking income and expenses to ensure spending does not exceed earnings. |
| What does managing personal cash flow mean? | Ensuring you have enough cash to cover regular expenses—similar to working capital in business. |
| Why is setting financial goals important? | It helps prioritize spending and plan for both short- and long-term objectives. |
| Give examples of short- and long-term financial goals. | Short-term: Saving for a car or vacation Long-term: Saving for a home, education, or retirement |
| How should you finance large purchases like a home or education? | Through loans or credit, while understanding repayment terms and affordability. |
| What are ways to redirect funds toward financial goals? | Reduce discretionary spending, eat out less, use discounts, and shop smart. |
| Why invest money? | To grow savings over time and reach long-term goals. |
| What type of investment is best for an emergency fund? | Liquid, low-risk options like savings accounts or CDs. |
| What type of investment is best for retirement? | Long-term options such as stocks, bonds, or mutual funds. |
| What should you understand before investing? | The risks involved and the expected returns. |
| What is the definition of finance (reminder)? | The management and allocation of money to meet future goals. |
| What are common everyday financial decisions? | Grocery shopping Replacing or repairing a car Paying for education Saving for a major trip |
| How do financial principles help you personally? | Set goals Choose appropriate investments Understand timeframes and returns Make confident financial decisions |
| What is the main message of the lesson summary? | You are the financial manager of your life, and smart decisions come from understanding and applying finance. |
| What tool can you use to understand your overall personal cash flows? | Budgeting |
| What is a reasonable alternative to keeping an emergency stash of cash? | Investing in a savings account |
| You want to buy a house, so you obtain a mortgage for which you can afford the monthly payments. What process have you engaged in as part of your financial decision-making? | Financing |
| What area of finance involves deciding which assets to invest in to create wealth in the future? | Investments |
| Which professional works with individuals to help them achieve their financial goals? | Financial planner |
| What is the main purpose of financial markets? | To provide liquidity, enable capital raising, and ensure price discovery. |
| What are financial securities? | Financial instruments like stocks, bonds, and derivatives used to raise capital. |
| Why do firms issue financial securities? | To raise capital and increase shareholder value. |
| Where are public company shares traded? | On organized financial markets. |
| What are Treasury Securities? | Low-risk U.S. government-issued debt instruments with 60-day to 30-year maturity. |
| Why are Treasury Securities considered low-risk? | They are backed by the U.S. government. |
| What are Corporate Bonds? | Debt issued by corporations, paying interest and repaying principal at maturity. |
| Who has priority in bankruptcy: bondholders or shareholders? | Bondholders |
| What do stocks represent? | Ownership in a company. |
| What is the goal of investors who buy stocks? | To gain returns from company growth. |
| What is the Money Market used for? | Short-term debt instruments under 1 year. |
| Who commonly uses the Money Market? | Governments and corporations for temporary funding. |
| What is the Capital Market used for? | Long-term investments over 1 year, including stocks and bonds. |
| What happens in the Primary Market? | New securities are issued for the first time. |
| Who facilitates the Primary Market? | Underwriters or syndicates, typically investment banks. |
| What is the Secondary Market? | A market where existing securities are traded between investors. |
| Name two secondary market exchanges. | New York Stock Exchange (NYSE) and NASDAQ. |
| What is an Auction Market? | A physical location where prices are determined by the highest bidder. |
| Who manages trades in an Auction Market? | A specialist. |
| What is a Dealer Market? | An electronic market where dealers compete to offer the best prices. |
| How do financial markets reduce costs for firms? | By providing liquidity, transparency, and efficient capital allocation. |
| What is liquidity in financial markets? | The ease of buying and selling securities. |
| How is market liquidity different from firm liquidity? | Market liquidity refers to trading ease; firm liquidity refers to turning assets into cash. |
| What is a Limit Order? | An order executed only when a specific price is reached. |
| What is a Market Order? | An order executed immediately at the best available price. |
| Why do order types and liquidity matter? | They help markets function efficiently and reduce transaction costs. |
| What are Milton Friedman's three roles of prices? | Convey information, create incentives, and affect income distribution. |
| What is market efficiency? | When prices fully reflect all available information. |
| Give an example of an efficient market response. | Positive earnings → stock price increases. |
| What are the benefits of market efficiency? | Fair access, accurate info, reduced speculation, better capital allocation. |
| What is the role of the SEC? | To regulate financial markets and protect investors. |
| What are the main responsibilities of the SEC? | Ensure fair markets, promote capital formation, enforce disclosure and anti-fraud rules. |
| What are the purposes of financial markets? | To provide liquidity and determine prices |
| In which financial market are securities such as stocks and bonds are traded after their initial issuance? | Secondary market |
| What kind of market primarily allows institutions to borrow and lend in the short term? | Money market |
| A local start-up company just hit its five-year anniversary and is planning an initial public offering sometime this year. In order to issue public stock, which market will the company use? | Primary market |
| What is the main role of financial institutions in the economy? | They act as intermediaries that circulate money by connecting savers, borrowers, and investors. |
| How do individuals use financial institutions? | To save, invest, borrow, and lend money. |
| How do businesses use financial institutions? | To raise capital and fund growth. |
| How does money circulate in the economy through financial institutions? | Savers deposit money → banks lend it → borrowers generate income and repay loans → investors earn returns and reinvest. |
| What are depository institutions? | Institutions that accept deposits and offer loans. |
| How do depository institutions make a profit? | By charging higher interest on loans than they pay on deposits. |
| Give examples of depository institutions. | Commercial banks (e.g., JPMorgan Chase), credit unions, savings and loan associations. |
| What are non-depository institutions? | Financial institutions that do not accept deposits but offer investment and lending services. |
| What are securities firms? | Firms that help companies issue and trade securities in primary and secondary markets. |
| Give examples of securities firms. | Morgan Stanley, Goldman Sachs. |
| What are investment firms? | Firms that invest in securities and manage funds like mutual funds and pensions. |
| Give examples of investment firms. | Vanguard, Fidelity, Charles Schwab. |
| What are contractual savings institutions? | Firms that raise capital through contracts like insurance or pensions and invest long-term. |
| Give examples of contractual savings institutions. | Insurance companies, pension funds. |
| How do depository and non-depository institutions differ in their services? | Depository: accept deposits and lend money; Non-depository: provide investment/lending services without taking deposits. |
| What do securities and investment firms do in primary markets? | Help companies issue new stocks and bonds (e.g., IPOs). |
| What do they do in secondary markets? | Facilitate the trading of existing securities. |
| What services do securities firms offer? | Brokerage, asset management, underwriting. |
| Which firms underwrote Zoom’s IPO in 2019? | JP Morgan, Goldman Sachs, Credit Suisse. |
| What are pension funds? | Institutions that invest retirement contributions in long-term securities. |
| What are private equity funds? | Firms that invest in private companies for returns from future growth or sale. |
| What types of private equity firms exist? | Venture capital firms and angel investors. |
| What are examples of companies that received venture capital before going public? | Uber and Lyft. |
| What are banks and credit unions primarily known for? | Accepting deposits, paying interest, and issuing loans. |
| What do investment and asset management firms help clients with? | Investing in bonds, mutual funds, securities, and managing retirement accounts. |
| What do private equity firms provide? | Early-stage or growth financing for private companies. |
| Why are financial institutions important to individuals? | They help people save and invest for future needs. |
| Why are financial institutions important to businesses? | They provide access to capital for innovation and expansion. |
| How do financial institutions support the economy overall? | By moving money to where it’s most productive, they drive growth and stability. |
| What is the primary role of financial institutions? | To conduct financial transactions such as investments, loans, and deposits |
| What is a depository institution? | An institution that accepts and pays interest on deposits of money, as well as extends loans |
| Name the seven major types of financial institutions. | Central banks, consumer and commercial banks, credit unions, insurance companies, investment banks, mortgage companies, pension fund managers. |
| What does a central bank do? | Regulates other banks, controls money supply and interest rates, and implements monetary policy. |
| What is an example of a central bank? | The Federal Reserve (U.S.). |
| What services do banks and credit unions provide? | Checking and savings accounts, loans, and basic financial advice. |
| How do banks and credit unions differ? | Credit unions are member-owned, but both offer similar services. |
| What is the role of insurance companies? | Help manage financial risk by providing coverage and paying claims. |
| What types of insurance do these companies offer? | Life, auto, health, mortgage, renters, and disability insurance. |
| How do insurance companies fund future claims? | By collecting premiums and investing the funds. |
| What do mutual funds do? | Pool investor money to buy a diversified portfolio of securities like stocks and bonds. |
| Do mutual fund investors have direct shareholder rights? | No, they own a share of the fund, not the individual assets. |
| What determines returns in mutual funds? | The performance of the overall fund. |
| What are pension funds? | Institutions that manage retirement savings for employees. |
| How are pension funds funded? | Through regular employer and employee contributions. |
| What do pension funds do with collected money? | Invest it to generate income for retirees. |
| What do investment banks specialize in? | Underwriting securities, facilitating mergers and acquisitions, and trading financial assets. |
| Who uses investment banks? | Large corporations, governments, and institutional investors. |
| What are private equity firms? | Firms that invest in private companies to restructure and grow them, often aiming to sell for a profit or take them public. |
| Who provides capital for private equity firms? | Institutional investors and high-net-worth individuals. |
| What’s a key goal of private equity investing? | To earn returns through business growth or eventual sale/IPO. |
| What are macroeconomic institutions? | Institutions like central banks that operate at a national level to regulate economic stability. |
| What is the Federal Reserve’s role? | Manages the U.S. money supply, interest rates, and regulates banks. |
| What are community-level financial institutions? | Banks, credit unions, insurance agencies, and investment firms used by individuals daily. |
| Why are financial institutions vital to the economy? | They direct money to productive uses, helping individuals manage finances and businesses grow. |
| What are three core functions of financial institutions? | Facilitating saving, borrowing, and investing. |
| What indicates an organization is a financial institution? | It accepts deposits and issues loans. |
| What services might other financial institutions provide? | Mortgage lending, mutual fund management, and financial advising. |
| What’s the function of a mortgage company? | Specializes in providing loans for property purchases. |
| How do financial institutions support personal financial needs? | By offering services like checking accounts, loans, and insurance. |
| How do financial institutions support national economic goals? | By maintaining financial stability, promoting savings and investments, and enabling efficient capital flow. |
| Which financial institution ensures that a nation’s economy remains healthy by controlling the amount of money circulating in the economy? | Central bank |
| How do insurance companies pay policyholders when a claim is made? | They use returns from stocks and bonds. |
| Which type of financial institution deals mainly with providing for retirement through employers? | Pension fund |
| A large corporation is looking to merge with another large corporation. Which financial institution can help them do this? | Investment bank |
| What are economic indicators? | Statistics used to measure the overall health of the economy. |
| What are the three main types of economic indicators? | Leading, lagging, and coincident indicators. |
| What is a leading indicator? | An indicator that changes before the economy shifts, used to forecast future trends. |
| Give two examples of leading indicators. | Yield curve and stock market return. |
| What does a normal yield curve suggest? | Expected economic growth. |
| What does an inverted yield curve suggest? | A possible recession. |
| Why is the stock market return considered a leading indicator? | It reflects investor expectations about economic growth or decline. |
| What is a lagging indicator? | An indicator that changes after the economy has already shifted, confirming trends. |
| Give two examples of lagging indicators. | Unemployment rate and Consumer Price Index (CPI). |
| What does a rising unemployment rate typically indicate? | A recession or economic slowdown. |
| What does the Consumer Price Index (CPI) measure? | Inflation based on the cost of a fixed "basket of goods." |
| What does an increase in CPI signify? | Inflation |
| What is a coincident indicator? | An indicator that changes at the same time as the economy, showing current conditions. |
| Give two examples of coincident indicators. | Gross Domestic Product (GDP) and personal income. |
| What does GDP measure? | The total value of goods and services produced in an economy. |
| What does rising personal income indicate? | Increased consumer spending power. |
| How do financial markets influence economic indicators? | They reflect investor confidence, expectations, and reactions to events. |
| What happened in August 2019 due to economic uncertainty? | U.S. stock market fell over 4% due to trade tensions and an inverted yield curve. |
| What role does the Federal Reserve play in the economy? | It adjusts interest rates to control inflation and maintain employment. |
| How did the Federal Reserve respond to the 2008 recession? | It lowered interest rates to stimulate borrowing and job growth. |
| What was the Federal Reserve's action in 2019 in response to slowing growth? | It lowered interest rates again to support the economy. |
| What is the connection between interest rates and financial products like mortgages or CDs? | They are influenced by the Federal Reserve's benchmark interest rate. |
| Why are economic indicators important for investors, businesses, and governments? | They guide financial decisions and help forecast or respond to economic trends. |
| What do leading indicators help predict? | Future economic trends. |
| What do lagging indicators help confirm? | Past economic performance. |
| What do coincident indicators reflect? | The current state of the economy. |
| Unemployment rate is which type of economic indicator? | Lagging |
| The Federal Reserve sometimes adjusts the interest rate at which commercial banks can borrow from it. What is the purpose of adjusting the interest rate? | To regulate inflation and unemployment |
| What would an inverted yield curve signal? | It may indicate an economic downturn |
| In what way are coincident indicators useful? | They are analyzed during economic shifts to provide information about the current state of the economy. |
| Which responsibility is a focus of the U.S. Securities and Exchange Commission? | To protect investors |
| Which type of financial institution provides individuals and firms access to financial markets? | Investment institutions |
| Which financial institution includes entities that receive money from institutional investors and wealthy individuals to buy troubled companies to improve them and earn returns by selling them or going public? | Private equity |
| Yield curve is which type of economic indicator? | Leading |
| About a year ago, the short-term Treasury bill had 1.54% interest and the long-term Treasury note had 2.54% interest. This week, the 1-year Treasury bill has an interest rate of 3.13%, while the 10-year Treasury note has an interest rate of 2.28%. What do | It may indicate an economic downturn. |
| What does "ethical" mean? | Acting according to accepted standards of conduct influenced by culture, codes, and societal norms. |
| What does "moral" mean? | Following one’s personal beliefs about right and wrong, based on values or upbringing. |
| What does "legal" mean? | Following rules and laws established by governments or authorities. |
| Who sets ethical standards? | Organizations, professions, or society (e.g., workplace codes). |
| Who sets moral standards? | The individual, based on personal convictions. |
| Who sets legal standards? | Governmental bodies and regulatory authorities. |
| Can something be legal but unethical? | Yes. Legal actions may still violate ethical or moral standards. |
| Can something be moral but illegal? | Yes. Some actions may feel morally right but break the law. |
| Real-world example: In Queensland, Australia, is breaking a car window to save a dog legal? | No, it's illegal—but considered ethical and moral by many. |
| What happened in the 2008 financial crisis? | Banks legally sold high-risk mortgage-backed securities, but ethically and morally it was questionable. |
| What did banks prioritize over client interests in 2008? | Profit, despite knowing the risks of the investments. |
| Why is it important to distinguish ethics, law, and morals? | Because responsible decisions often require evaluating all three. |
| What are the three key questions in ethical decision-making? | Is it ethical? Is it legal? Is it moral? |
| What should responsible financial decision-making align with? | Ethical standards, legal obligations, and personal moral values. |
| Why might a decision be difficult even if it's legal? | Because it may not meet ethical or moral expectations. |
| What guides ethics in the workplace? | Industry codes of conduct and professional standards. |
| Are morals objective or subjective? | Subjective—based on individual beliefs. |
| Are laws objective or subjective? | Objective—defined and enforced by authorities. |
| Why do investors, managers, and regulators consider all three concepts? | To ensure decisions are fair, compliant, and aligned with shared and personal values. |
| Which term reflects a person’s beliefs about right and wrong, good and bad, or just and unjust? | Moral |
| What characterizes an ethical action? | An ethical action is based on accepted standards of conduct. |
| Which type of error would result in a set repercussion or penalty given by the government? | Legal |
| What is an ethical dilemma? | A situation where none of the options are fully acceptable from an ethical perspective. |
| Why are ethical dilemmas challenging? | They often involve conflicting values, duties, or interests with no clear “right” answer. |
| Give a simple example of an ethical dilemma. | Swerving to avoid an accident protects yourself but may endanger another driver. |
| Why does ethics matter in finance? | It builds public trust, supports stable markets, and promotes long-term success. |
| What values should finance professionals uphold? | Honesty, accountability, and fairness. |
| What happened in the Enron scandal? | Enron misrepresented financial data, misleading investors and losing over $10 billion in shareholder value. |
| What lesson did Enron teach about profit and ethics? | Unethical pursuit of profit can lead to collapse and lost trust. |
| What ethical challenge does TOMS address? | Reducing costs without unethical labor practices. |
| How did TOMS respond to ethical manufacturing concerns? | Through ethical sourcing, transparent supply chains, and anti-slavery standards. |
| What issue contributed to the 2008 Financial Crisis? | Firms sold subprime loans as low-risk investments, hiding true risks. |
| What was the lesson from the 2008 crisis regarding legality and ethics? | Legal compliance alone isn't enough—ethical integrity matters too. |
| What dilemmas might personal financial advisors face? | Recommending high-commission products over better options or misleading clients with jargon. |
| What is the conflict for personal financial advisors? | Profit vs. the client’s best interest. |
| What ethical issues might small business owners face? | Underreporting income or exaggerating performance to attract investors. |
| What was the m3 girl designs case about? | Misusing legal claims for competitive advantage, which hurt credibility in court. |
| What are three qualities of a sound ethical decision? | Ethically sound, legally compliant, and morally responsible. |
| What are the benefits of ethical behavior in finance? | Long-term reputation, sustainable growth, and public trust. |
| Is seeking profit unethical? | No, but seeking profit unethically can harm others and the economy. |
| What does ethical finance foster? | Trust, efficiency, and responsible decision-making. |
| What skills help navigate ethical dilemmas? | Critical thinking, good judgment, and multiple-perspective awareness. |
| What are the effects of attempting to maximize shareholder value for a business in an unethical way? | It often leads to decreased shareholder value for the business. |
| What is the main cause of ethical conflicts in finance? | Competing interests or conflicting responsibilities between stakeholders. |
| Name four common sources of ethical conflict. | Business vs. personal decisions, manager vs. shareholder goals, company vs. client needs, professional duties vs. personal relationships. |
| What do financial managers typically prioritize? | Safe, profitable projects to protect their role and income. |
| What do shareholders usually prefer? | Riskier projects that may raise stock prices and returns. |
| What do bondholders prioritize? | Financial stability and guaranteed repayment. |
| What is an agency problem? | When managers act in their own interest rather than for shareholders. |
| What are agency costs? | Internal costs resulting from conflicts between managers and shareholders. |
| Give an example of an agency problem. | Personal use of company funds or investing in unbeneficial projects. |
| What scandal involved fake accounts created to meet sales goals? | Wells Fargo—resulting in a $185M fine and CEO removal. |
| How can you align manager and shareholder interests? | Offer stock-based compensation. |
| What are common manager vs. shareholder conflicts? | Self-dealing, misreporting financials, wasteful spending, unnecessary acquisitions. |
| Name a case involving falsified accounting. | WorldCom |
| Who was involved in insider trading and obstructed justice? | Samuel Waksal (ImClone) and Martha Stewart. |
| What do shareholders want in contrast to bondholders? | Shareholders want higher dividends and returns; bondholders want safety and repayment. |
| What creates conflict between shareholders and bondholders? | Dividend limits, restrictive covenants, and risky project disagreements. |
| What conflict might a financial advisor face? | Pushing a risky product for a bonus vs. protecting a client’s retirement. |
| What might pressure a stock analyst to be unethical? | Being told to give a positive report to protect internal partnerships. |
| Give an example of a work vs. personal conflict. | Choosing a relative’s overpriced service or accepting personal favors during hiring. |
| What was the 2015 Cancer Charity scandal about? | $187M in donations misused by leadership for personal gain. |
| What is the first step in resolving an ethical conflict? | Identify the problem and who it affects. |
| What should you evaluate when facing an ethical dilemma? | Whether the action is ethical, legal, and moral. |
| Who can you consult in ethical decision-making? | HR, legal counsel, or company policies. |
| What should be considered when exploring alternatives? | All reasonable options and their consequences. |
| How should you make a final decision in an ethical conflict? | Choose the option that maintains integrity and follows ethical and legal standards. |
| What is a key lesson from this topic? | Ethical conflicts are common, but thoughtful decisions grounded in ethics can resolve them. |
| What does the term legal describe? | An action that is in accordance with the laws and rules set by an authority. |
| Why might a manager manipulate accounting procedures? | To make the company’s performance look good |
| Which situation is an example of an agency problem? | Managers follow their own interests instead of the owners’ interest. |
| A company is trying to finance a project with a mortgage loan from a bank. The company's assessment of the project indicates that the company may experience several years of loss until the project becomes profitable. This means that the company might lose | Set a strict covenant that the company cannot easily achieve. |
| Why would bondholders set bond contracts that are very strict to deter the company from taking on risky projects? | Bondholders are primarily interested in making sure they will be paid back. |
| Which kind of projects are bondholders interested in? | Safe projects with a higher chance of providing sufficient compensation |
| Which scenario is an example of an agency problem? | A manager purchases a company car and allocates it as a company expense. |
| How can agency costs be mitigated? | Aligning managers’ interests with shareholders’ interests |
| What is the third step in finding a solution to an ethical dilemma? | Consider all stakeholders involved |
| What are the main services offered by financial institutions? | Accepting a wide variety of deposits, offering investment products, providing loans, and brokering financial transactions |
| What is the main objective of personal financial goals? | To maximize individual utility |
| Which task does the financial manager of a firm perform that involves the issuance of new stocks and bonds? | Making financing decisions |
| Why is understanding the definition of finance important in managing personal finances? | It helps individuals compare the costs and benefits of an action to determine whether to take that action. |
| In which type of market would a company issue bonds or stocks for the first time? | Primary market |
| Which type of financial institution is a mutual fund? | Investment institution |
| Which financial institution specializes in managing and administering retirement funds? | Pension funds |
| Which type of economic indicator is the consumer price index? | Lagging indicator |
| What does the term ethical refer to? | The accepted standards of conduct that guide a person’s behavior |
| A company’s officers and board of directors are selling their stocks in the firm at higher prices due to false accounting reports that made the stock seem more valuable than it truly was. Which ethical issue is occurring in this situation? | Agency problem due to conflicting interests |
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