ch 1 into to corporate finance

Question 1

4 categories of finance

Answer 1

corporate
personal
public/government
entrepreneurial

Question 2

corporate finance

Answer 2

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

Question 3

market

Answer 3

a mechanism that brings buyers and sellers together

Question 4

3 questions to answer when starting a business

Answer 4

1. what long-term investments should the firm take on
2. where will we get the long-term financing to pay for the investment
3. how will we manage the everyday financial activities of the firm

Question 5

top financial manager of a firm is usually the

Answer 5

chief financial officer (CFO)

Question 6

financial manager role

Answer 6

answer the three questions
- capital budgeting
- capital structure
- working capital management
oversee the treasurer and controller

Question 7

treasurer

Answer 7

oversees cash management, capital expenditures, and financial planning

Question 8

controller

Answer 8

oversees taxes, cost accounting, financial accounting and data processing

Question 9

capital budgeting

Answer 9

the process of planning and managing a firm’s long term investment

Question 10

capital structure

Answer 10

specific mixture of short-term debt, long-term debt, and equity the firm uses to finance its operations

Question 11

working capital management

Answer 11

difference btw a firm’s short-term assets and its short-term liabilities
day-to-day management

Question 12

3 forms of business organization

Answer 12

• sole proprietorship
• partnership
• corporation

Question 13

income trust

Answer 13

hold the debt and equity of an underlying business and distribute the income generated to unit holders

Question 14

advantages of income trusts

Answer 14

not subject to corporate income tax and income is typically taxed in hands of unit holders
investors view income trusts as more tax efficient

Question 15

disadvantages of income trusts

Answer 15

not corporations and so, do not have the same advantages as one

Question 16

co-operative

Answer 16

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

Question 17

advantages of co-op

Answer 17

• equally owned by its members
• helps its members compete more effectively while creating social capital

Question 18

disadvantages of co-op

Answer 18

potentially difficult to reach decisions based on premise of equal ownership by members

Question 19

goal of financial management

Answer 19

maximize the current value per share of the existing stock

Question 20

agency relationship

Answer 20

principal hires an agent to represent their interests
- stockholders (principles) hire managers (agents) to run the company

Question 21

agency problem

Answer 21

conflict of interest that can exist btw the principal and the agent

Question 22

agency problems can be among

Answer 22

1. owners and managers
2. shareholders and bondholders
3. informational asymmetry about prospective value

Question 23

ESG ratings

Answer 23

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

Question 24

two types of agency costs

Answer 24

direct
indirect

Question 25

ways to manage managers

Answer 25

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

Question 26

financial markets

Answer 26

a mechanism that brings buyers and sellers together. here debt and equity securities are bought and sold

Question 27

money market

Answer 27

market in which short-term securities are bought and sold
- dealer market - dealers buy and sell from their inventories

Question 28

capital market

Answer 28

market for long-term debt and equity shares
- brokered market - match up buyers and sellers

Question 29

primary market

Answer 29

the original sale of securities
- dealer market

Question 30

secondary market

Answer 30

resale of securities
- brokered market

Question 31

financial institutions

Answer 31

act as intermediaries between suppliers and users of funds

Question 32

indirect finance

Answer 32

earn interest on the spread btw loans and deposits
- ex bank loan

Question 33

direct finance

Answer 33

service fees

Question 34

financial engineering

Answer 34

the creation of new securities or financial processes which help to reduce risk, lower financing costs and/or minimize taxes

Question 35

derivative securities

Answer 35

financial assets that depend on the value of other assets