Ch1 Flashcards
Interest Compounding
Future Value (FV) based on interest earned on both initial principal and accumulated interest.
(when you earn interest not just on the money you put in, but also on the interest you’ve already earned.)
Discounting
**Present Value (PV) **
The process of determining the present value of a payment or stream of payments that will be received in the future.
Risk Return Trade Off:
The principle that potential return rises with an increase in risk; investors must balance their desire for the lowest possible risk against the highest possible returns.
Diversification:
A risk management strategy that mixes a wide variety of investments within a portfolio to reduce exposure to any single asset or risk.
Reducing risk by spreading investments across various assets.
Market Trends:
Analysis of stock market movements, including bull markets (rising prices) and bear markets (falling prices), influencing investment strategies.
Cost of Capital:
The required return necessary to make a capital budgeting project worthwhile; it reflects the risk of the investment and the opportunity cost of using funds elsewhere
(amount a company has to pay to finance its operations or investments.)
Sole Proprietorship (Advantages)
Easiest to start and least regulated.
Single owner retains all profits.
Income taxed once as personal income.
few government regulations, small businesses.
Sole Proprietorship (Disadvantages)
Limited to the life of the owner.
Equity capital limited to owner’s wealth.
Unlimited liability; difficult to sell ownership interest.
Partnership (Advantages)
More than one owner increases available capital.
Relatively easy to establish.
Income taxed once as personal income.
Partnership (Disadvantages)
Unlimited liability for general partners.
Partnership dissolves upon death or withdrawal of a partner.
Difficult to transfer ownership.
limited life
Corporate Organization: (Advantages)
Limited liability protects owners’ personal assets.
Unlimited life; continues beyond owners’ involvement.
Easier to raise capital through stock issuance.
Ownership transfer is straightforward.
Corporate Organization: (Disadvantages)
Agency problem due to separation of ownership and management.
Double taxation on corporate income and dividends.
More complex regulations and formalities.
Finance
System involving circulation of money, granting credit, making investments, and providing banking facilities.
what are the areas of finances
Financial management (corporate finance)
Capital markets
Investments
Financial Management (Corporate Finance):
Asset acquisition decisions
Capital raising strategies
Maximizing firm value
Capital Markets
**Determination of interest rates, stock, and bond prices
Financial institutions supplying capital
long-term funds through the buying and selling **
Investments:
Decisions on stocks, bonds, and other instruments
Security analysis, market analysis, portfolio theory
Investment Strategies:
Understanding risk-return trade-off
Diversification to mitigate risks
Analyzing bull and bear markets
Borrowing and Lending:
borrowing is taking money you’ll repay later, and** lending** is giving money to someone who’ll repay you with interest.
Stockholder-Manager Conflicts
Balancing shareholder wealth maximization with social responsibility.
What is the primary financial goal of management in a corporate setting?
Maximizing shareholder wealth
What are the key differences between a sole proprietorship and a corporation in terms of liability?
sole proprietorship has unlimited liability, meaning the owner is personally responsible for all debts and obligations of the business
- corporation offers limited liability, protecting the owners’ personal assets from business liabilities.
How does the concept of compounding interest affect the future value of an investment?
increases the future value of an investment by earning interest on both the initial principal and the accumulated interest from previous periods, leading to exponential growth over time.
concept involves understanding the relationship between risk and potential returns?
Risk Return Trade off
What is the significance of the risk-return trade-off in financial decision-making?
that higher potential returns on investments are associated with higher risks.
What should the founders consider when assessing venture capital?
. Impact on control and decision-making
What is the primary financial goal of a firm?
Creating value for investors
Businesses are frequently started as ,,and then converted to ,,,when their growth results disadvantages outweighing advantages.
Sole proprietorships
corporations
Limited liability company (LLCs) and limited liability partnerships (LLPs)
LLC Owned by one or more people, LLP two or more partners
have limited liability protection like
corporations
double taxed like
stock’s intrinsic value
estimate of a stock’s “true” value based on accurate risk and return data.
stock’s actual market price is equal to its intrinsic value
the stock is in equilibrium
What is S&P 500
stock market index that tracks the performance of 500 of the largest publicly traded companies in the United States
