ch 1 into to corporate finance Flashcards
4 categories of finance
corporate
personal
public/government
entrepreneurial
corporate finance
a branch of finance that deals with the financial activities and decision of corporations or businesses
- managing financial resources
- making strategic decision to maximize the value of the company for its shareholders and stakeholders
market
a mechanism that brings buyers and sellers together
3 questions to answer when starting a business
- what long-term investments should the firm take on
- where will we get the long-term financing to pay for the investment
- how will we manage the everyday financial activities of the firm
top financial manager of a firm is usually the
chief financial officer (CFO)
financial manager role
answer the three questions
- capital budgeting
- capital structure
- working capital management
oversee the treasurer and controller
treasurer
oversees cash management, capital expenditures, and financial planning
controller
oversees taxes, cost accounting, financial accounting and data processing
capital budgeting
the process of planning and managing a firm’s long term investment
capital structure
specific mixture of short-term debt, long-term debt, and equity the firm uses to finance its operations
working capital management
difference btw a firm’s short-term assets and its short-term liabilities
day-to-day management
3 forms of business organization
- sole proprietorship
- partnership
- corporation
income trust
hold the debt and equity of an underlying business and distribute the income generated to unit holders
advantages of income trusts
not subject to corporate income tax and income is typically taxed in hands of unit holders
investors view income trusts as more tax efficient
disadvantages of income trusts
not corporations and so, do not have the same advantages as one
co-operative
an enterprise that is equally owned by its members, who share the benefits of co-operation based on how much they use the co-operative’s services
advantages of co-op
- equally owned by its members
- helps its members compete more effectively while creating social capital
disadvantages of co-op
potentially difficult to reach decisions based on premise of equal ownership by members
goal of financial management
maximize the current value per share of the existing stock
agency relationship
principal hires an agent to represent their interests
- stockholders (principles) hire managers (agents) to run the company
agency problem
conflict of interest that can exist btw the principal and the agent
agency problems can be among
- owners and managers
- shareholders and bondholders
- informational asymmetry about prospective value
ESG ratings
environmental, social, governance research
based on 60-90 indicators that measure how well issuers proactively manage the environmental, social and governance issues that are most material to their business
two types of agency costs
direct
indirect
ways to manage managers
managerial compensation
- incentives can be used to align management and stockholder interests
- the incentives need to be structured carefully to make sure that they achieve their goal
corporate control
- the threat of a takeover may result in better management
conflicts with other stakeholders
social responsibility and ethical investing
- EDI, ESG
financial markets
a mechanism that brings buyers and sellers together. here debt and equity securities are bought and sold
money market
market in which short-term securities are bought and sold
- dealer market - dealers buy and sell from their inventories
capital market
market for long-term debt and equity shares
- brokered market - match up buyers and sellers
primary market
the original sale of securities
- dealer market
secondary market
resale of securities
- brokered market
financial institutions
act as intermediaries between suppliers and users of funds
indirect finance
earn interest on the spread btw loans and deposits
- ex bank loan
direct finance
service fees
financial engineering
the creation of new securities or financial processes which help to reduce risk, lower financing costs and/or minimize taxes
derivative securities
financial assets that depend on the value of other assets
