INTRODUCTION TO CORPORATE FINANCE
LO1 The basic types of financial management decisions and the role of the financial manager.
LO2 The financial implications of the different forms of business organization.
LO3 The goal of financial management.
LO4 The conflicts of interests that can arise between managers and owners.
LO5 The roles of financial institutions and markets.
Answers to Concepts Review and Critical Thinking Questions
2. (LO2) Disadvantages: unlimited liability, limited life, difficulty in transferring ownership, hard to
raise capital funds. Some advantages: simpler, less regulation, the owners are also the managers,
sometimes personal tax rates are better than corporate tax rates.
4. (LO4) The treasurer’s office and the controller’s office are the two primary organizational groups that
report directly to the chief financial officer. The controller’s office handles cost and financial
accounting, tax management, and management information systems, while the treasurer’s office is
responsible for cash and credit management, capital budgeting, and financial planning. Therefore, the
study of corporate finance is concentrated within the treasury group’s functions.
6. (LO4) In the corporate form of ownership, the shareholders are the owners of the firm. The
shareholders elect the directors of the corporation, who in turn appoint the firm’s management. This
separation of ownership from control in the corporate form of organization is what causes agency
problems to exist. Management may act in its own or someone else’s best interests, rather than those
of the shareholders. If such events occur, they may contradict the goal of maximizing the share price
of the equity of the firm.
8. (LO5) In auction markets like the Toronto Stock Exchange (TSX), brokers and agents meet at a
central location (the exchange) to match buyers and sellers of assets. Physical locations for stock
markets are disappearing as trading becomes more electronic. Dealer markets like Nasdaq consist of
dealers operating at dispersed locales who buy and sell assets themselves, communicating with other
dealers either electronically or literally over-the-counter. Dealer