BUSN Ch. 8 Financing Flashcards
Chapter 8: Financing: Acquiring and Using Funds to Maximize Value
What is the goal of financial management? (Historically)
It has been to maximize the value of the firm to its owners.
What is the goal of financial management? (Today)
Many of today’s businesses have adopted a broader perspective, believing that they have responsibilities not just to shareholders but also to customers, employees, and other stakeholders.
What is the risk-return tradeoff?
The observation that financial opportunities that offer higher rates of return are generally riskier than opportunities that offer lower rates of return.
What is budgeting?
A management tool that explicitly shows how firms will acquire and use the resources needed to achieve its goals over a specific time period.
How does budgeting help employees?
They tend to be more highly motivated when they understand the goals they are expected to accomplish and believe they are ambitious but achievable.
How does budgeting help managers?
They can compare actual performance to budgeted figures to determine whether various departments and functional areas are making adequate progress towards achieving their firm’s goals.
List major sources of funds for a firm.
Bank loans
Trade credit
Factoring
Commercial paper
What is trade credit?
It is when suppliers ships materials, parts, or goods to a firm without requiring immediate payment.
What are factors in the context of financing?
A factor, is a company that provides short-term financing to firms by purchasing their accounts receivables at a discount.
What are accounts receivables?
It is money owed to a company by its debtors.
What is commercial paper?
Short-term (and usually unsecured) promissory notes issued by large corporations.
Promissory note: a signed document containing a written promise to pay a stated sum to a specified person or the bearer at a specified date or on demand.
What do firms with a surplus of cash usually have instead of actual cash?
Cash equivalents, such as T-bills, commercial paper, and money market mutual funds.
What are in a firm’s inventory?
Materials, work in process, and finished goods.
What is a T-bill?
Treasury bill, issued by the government. An IOU from the government.
What is the “time value of money”?
The principle that a dollar received today is worth more than a dollar received in the future.
What is capital budgeting?
It is the process financial managers use to evaluate major long-term investment opportunities.
What is “present value” in the context of capital budgeting?
The amount of money that, if invested today at a given rate of interest, would grow to become some future amount in a specified number of time periods.
What is the Net Present Value (NPV)?
The sum of the present values of expected future cash flows from an investment minus the net cost of that investment.
If it is positive, it will increase the value of the firm.
If it is negative, it will decrease the value of the firm.
What traits are associated with low leverage?
Mostly equity backing
Lower risk
Lower potential return
What traits are associated with high leverage?
Mostly debt backing
Higher risk
Higher potential return
