BSNS114: Financial Decision Making Flashcards
What is the main objective in financial decision making?
To maximise the current value of corporate company’s share value
What is the financial managers three basic decisions?
Investment, financing and working capital management decisions
What are investment decisions asking?
Which productive assets company should buy
What is the financial decision asking?
How company should finance productive assets purchase
What is the working capital management decision asking?
How company should manage day-to-day financial actitvies
What can the climate change risks be classed into?
Physical, Transition and liability risks
What are the different business forms (3)
Sole proprietorship, partnership and corporation
What is sole proprietorship?
A type of business unit where one person is responsible for providing capital and managing the business
What are the features of sole proprietorship?
- business owned by a single person
- no separation of ownership and management
What are the advantages of sole proprietorship? (4)
- simple and easy to form
- the least expensive and regulated
- no sharing of profit and loss
- taxed as personal income (once)
What are the disadvantages of sole proprietorship? (3)p
- limited access to capital
- costly to transfer ownership
- unlimited liability
What is partnership business form?
A business unit in which two or more owners have joined together legally to manage a business and share its profits
What is
What are the two types of partnership?
General and limited
What is a general partnership?
All patterns are owners and active in managing business
What is a limited partnership?
Both general partners (owners as well as being managers) and limited partners (owners but not managers)
What are the advantages of partnership? (4)
- Two or more owners
- More capital available
- Relatively easy to start
- Income taxed once as personal income
What are the disadvantages of partnership? (3)
- Unlimited liability
- Partnership dissolves when one partner dies or wishes to sell
- Difficult to transfer ownership
What is a corporation?
The legal process used to form a corporate entity (company)
What are the advantages of a corporation? (3)
- Seperate from its owners legal entity
- easy transfer of ownership
- limited liability
What are there disadvantages of a corporation?
- Agency cost
- Corporate tax rate
costly to establish and register
What is the agency cost?
The cost incurred because of conflicts of interest between a principal and agent
What is the agency cost?
Conflicts of interest between a principal and agent to the firm which may diminish firm value
What are some ways to reduce agency cost? (2)
Monitoring, linking employee compensation to company performance
What are financial institutions (intermediaries) ?
An institution whose business is to bring together savers with money to invest or lend with other firms that need money
What is a primary market transaction?
The firm issues new securities and sells them to investors (IPO)
What is an IPO?
Initial public offering
What is a secondary market transaction?
The securities continue to trade between investors without involvement of the firm
What is unlimited liability?
Business owners who are legally liable for any debt their business might accrue.
What is limited liability?
A corporate loss will not exceed the amount invested. In other words, investors’ and owners’ private assets are not at risk if the company fails.
What is debt?
- Contractual obligation
- Usually fixed term
What is equity?
- Keeps the earnings
- Perpetual (infinite
What is an asset?
What a firm owns
What is a liability?
What a firm owes
