CH 1 - Introduction

Question 1

What does corporate finance deal with?

Answer 1

financial decisions made by companies to increase their value

Question 2

What do financial decisions involve?

Answer 2

(1) The management of long-term investments (capital budgeting).
(2) How to get and manage the money to make these investments (capital structure).
(3) The management of customer and supplier accounts (working capital).

Question 3

What is the financial manager responsible for?

Answer 3

They are responsible for making these decisions to maximize the current share value of the existing stock.

Question 4

What characterizes real assets?

Answer 4

(1) Tangible assets

(2) Includes personal and business assets

Question 5

What are some examples of personal assets?

Answer 5

Houses, cars, and appliances

Question 6

What are some examples of business assets?

Answer 6

Office buildings, factories, mines, machinery

Question 7

What are financial intermediaries?

Answer 7

(1) Firms or entities that invest funds on behalf of others
(2) They change the nature of the transaction between savers and borrowers

ex. Bill deposits money in his savings account at RBC, RBC then lends this money to Mary so she can buy a house.

Question 8

What are market intermediaries?

Answer 8

(1) Firms or entities that facilitate the transaction in the market
(2) Do not change the nature of the transaction between savers and borrowers (stock brokers, real estate brokers)

Question 9

What defines a debt instrument?

Answer 9

(1) Legal obligation to repay borrowed funds to lender at or before the maturity rate.
(2) Debt instruments typically carry interest.

Question 10

Examples of a debt instrument

Answer 10

Loans, mortgages, notes, bonds, debentures, commercial paper, treasury bills, bank drafts

Question 11

What defines an equity Instrument?

Answer 11

(1) Ownership stakes in a company
(2) Entitled to a share in the profits of the company (dividends)
(3) No legal obligation to pay dividends

Question 12

Examples of an equity instrument

Answer 12

Common shares, preferred shares

Question 13

What are marketable securities?

Answer 13

(1) Assets that can be traded between investors
(2) Money market
(3) Capital Market

Question 14

Define the money market and provide examples

Answer 14

Short-term securities which are less risky

ex. T-bills, commercial paper, and bankers acceptances

Question 15

Define the capital market and provide examples

Answer 15

Long-term securities which are more risky

ex. Bonds, debentures, and stocks

Question 16

What are non-marketable securities?

Answer 16

Assets that cannot be traded between investors. These include demand deposits and Canada Savings bonds.

Question 17

What are the 4 market levels?

Answer 17

Primary market, secondary market, third market, fourth market.

Question 18

Define the primary market

Answer 18

(1) Financial instruments are issued (underwritten) for the first time.
(2) Connects borrowers that need money with lenders that have money.

Question 19

Define the secondary market

Answer 19

(1) Financial instruments are traded among investors

(2) The issuing organization is not involved in theses transactions.

Question 20

Define the third market

Answer 20

Where large transactions take place between institutions with the help of a broker or dealer

Question 21

Define the fourth market

Answer 21

Where large transactions take place between institutions without the help of a broker or dealer