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FINA1221 Introduction to Finance > Ch1 Introduction > Flashcards

Ch1 Introduction Flashcards

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1
Q

What is the most important difference between a corporation and all other organization forms?

A
  • A corporation is a legal entity separate from its owners
  • ownership shares in the corporation can be freely traded.
  • investors in a corporation can remain anonymous
  • no limit on the number of owners a corporation can have.
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2
Q

Limited Liability

A
  • Owners’ liability is limited to the amount they invested in the firm.
  • Shareholders are not responsible for any encumbrances of the firm
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3
Q

Financial manager’s most important decision

A

Investment Decision = how to put owners money to best use

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4
Q

Main goal for Financial Manager

A

Maximizing shareholder wealth

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5
Q

Difference between a public and private corporation

A

The shares of a public corporation are traded on an exchange while the shares of a private corporation are not traded on a public exchange.

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6
Q

Difference between a primary and secondary market

A

A primary market is where the company sells shares of itself to investors. The secondary market is where investors can buy and/or sell the company’s shares with other investors

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7
Q

Five Basic Corporate Finance Functions

A
  • Financing
  • Financial Management
  • Capital Budgeting
  • Risk management
  • Corporate governance
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8
Q

What is the Financing Function?

A

Involves raising capital to support companies operations.
- Maintaining mix of debt and equity

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9
Q

What is the Financial Management Function?

A

Managing company’s operating cash flows as efficiently as possible (enough funds for day to day)

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10
Q

What is the Capital Budgeting Function?

A

Selecting the best projects in which to invest the company’s funds based on risk

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11
Q

What is the Risk Management Function?

A

Identifying, measuring and managing company exposure to risk

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12
Q

What is the Corporate Governance Function?

A

Developing company wide structure that influence managers to behave ethically + make decisions that benefit shareholders

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13
Q

Types of Firms

A
  • Sole Proprietorship
  • Partnership
  • Corporation
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14
Q

What is a Sole Proprietorship

A

+ Owned and run by one person = easy to create/manage
- does have unlimited personal liability

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15
Q

What is a Partnership

A

+ More than one owner, all partners are personally liable
GENERAL PARTNERS = same rights/liabilities as partners
LIMITED PARTNERS = limited liability, cannot be legally involved in managerial decisions

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16
Q

What is a Corporation

A

Artificial being, separate from owners
PUBLIC = unlimited shareholders + needs an auditor
PRIVATE = restrictions on number of non employee shareholders, no auditor

17
Q

Principal Agent Problem

A

managers may act in their own self interest > shareholders best interest

18
Q

Corporate governance

A

system of controls/regulations designed to minimise agency costs + prevent fraud.

19
Q

ASIC

A

Australian Securities and Investments Commission = regulating Australian corporations + promote economic reputation and ensuring the market is fair and transparent.

20
Q

The Financial Cycle

A

Money -> Companies (with projects/ideas) -> Wages, profits, interest -> Savers -> Money

21
Q

Seven types of Financial Institutions

A

Bank + Credit Unions
Insurance Companies
Mutual Funds
Superannuation Funds
Hedge Funds
Venture Capital Funds
Private Equity Funds

22
Q

Bank + Credit unions

A

-Source of Money = deposits (savings)

-Use of Money = loans to people and businesses

23
Q

Insurance Companies

A

-Source of Money = Premiums and investment earnings

-Use of Money = invest in bonds, shares, using investment income to pay claims

24
Q

Mutual Funds

A

-Source of money = Peoples investments

-Use of Money = Buy Shares, bonds and other financial instruments on behalf of investors

25
Q

Hedge Funds

A

-Source of Money =investment by wealthy individuals

-Use of Money =invest in any kind of investment to maximize returns

26
Q

Venture Capital Funds

A

-Source of Money = Investment by wealthy individuals and endowments

-Use of Money = Invest in start-up, entrepreneurial firms

27
Q

Private Equity Funds

A

-Source of Money = Investment by wealthy individuals and endowments

-Use of Money = Purchase whole companies by using a small amount of equity and borrowing the rest

28
Q
A

FINA1221 Introduction to Finance (3 decks)

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