1. Introduction to Corporate Finance Flashcards
What is the objective of the management of the corporation?
Maximise shareholder value
What is finance?
Finance is a term describing the study and system of money, investments, and other financial instruments.
What does Corporate finance involve?
Corporate finance is primarily concerned with maximising shareholder value through long-term and short-term financial planning and the implementation of various strategy
What is equity?
- A stock or any other security representing an ownership interest
- On a company’s balance sheet, the amount of the funds contributed by the owners (the stockholders) plus the retained earnings (or losses). Also referred to as “shareholders’ equity
What is debt?
- Money, goods or services that must be paid pursuant to an agreement between two parties.
- A liability or obligation in the form of bonds, loan notes, or mortgages, owed to another person or persons and required to be paid by a specified date (maturity).
What is the definition of a bond?
- A (long-term) debt security, issued by a corporation or government, with a stated interest rate and fixed due dates when interest and principal must be paid.
- Specific features are written into each bond’s indenture, including:
-> Whether the interest and principal will be paid to the person in whose name the security is registered, or if it will be payable to anyone presenting its coupons, in which case it is considered a bearer bond.
What are some different kinds of bonds?
- Government bonds
- Corporate bonds
- Mortgage-backed securities (MBS, Securities created from mortgage payments of residential homeowners)
- Asset-backed securities (ABS, Securities created from credit card payments)
What is meant by the “time value of money”?
“A dollar today is worth more than a dollar tomorrow”
- Money has time value
- Impatience and inflation
- Consequently, if you have to wait, you can expect to be paid more.
eg. For example, assuming a 5% interest rate, $100 invested today will be worth $105 in one year ($100 multiplied by 1.05). Conversely, $100 received one year from now is only worth $95.24 today ($100 divided by 1.05), assuming a 5% interest rate.
What is the concept of “No Free Lunch”?
The concept of no-arbitrage: You can’t make money by investing nothing
What is the concept of “the risk return trade off”?
Riskier assets are expected to yield higher expected returns and lower risk with a greater probability of smaller return
In what way does an investor face risk return trade off while investing?
–> If he deposits all his money in a saving bank account, he will earn a low return i.e. the interest rate paid by the bank,
–> If he invests in equities, he faces the risk of losing a major part of his capital along with a chance to get a much higher return than compared to a saving deposit in a bank.
What does “market efficiency” refer to?
Market efficiency refers to the degree to which market prices reflect all available, relevant information
If markets are efficient, than all information is already incorporated into prices, and so there is no way to “beat” the market
Are markets efficient?
VERY heated topic, debated.
What is the definition of “behavioural finance”?
It is a sub-field of behavioural economics, which proposes psychology-based theories to explain stock market anomalies. The purpose is to identify and understand why people make certain financial choices.
What is a “capital budgeting decision”?
- Decision to invest in tangible or intangible
assets
(Also called the investment decision, also called capital expenditure or CAPEX
decisions). - Poor capital budgeting (e.g. excessive investing or under-funded investments) can compromise a company’s financial position
What are the 4 cash flows between financial markets and the firms operations?
