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FNCE317 > Ch1- Introduction to Corporate Finance > Flashcards

Ch1- Introduction to Corporate Finance Flashcards

1
Q

Corporate Finance

A

study of answering these 3 questions

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2
Q

3 questions to answer in Corporate Finance

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

Who answers the 3 questions of corporate finance

A

financial manaers

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4
Q

Whos the top financial manager

A

the CFO

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5
Q

treasurer

A

oversees cash management, capital spending, financial planning

this is who we focus on the most

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6
Q

Controller

A

oversees taxes, cost accounting, financial acocunting and data processing

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7
Q

What are the 3 types of financial management decisions? ANSWERS TO THE 3 BIG QUESTIONS

A
  1. Capital budgeting
  2. Capital Structure
  3. Working capital managment
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8
Q

Capital Budgeting

A

q1- what long term investetns or projects should the business take on?

process of planning & managing long term inv.

ex: retailer deciding to open a new store

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9
Q

What is capital structure?

A

q2. How should we pay for assets? Should we use debt or equity?

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

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10
Q

What is working capital management?

A

How do we manage the day to day finances of the firm?

managing the working capital

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11
Q

Balance sheet model of the firm?

A

All the assets of the firm needs to be financed by either debt or equity!

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12
Q

What are the five forms of Business Organization

A

Sole propreitorship

Partenrhsip

Corproation

income trust

cooperative

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13
Q

Corportation other names

A

joint stock company, public limited company, limited liability copanies

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14
Q

Sole proprietorship

A

one owner

-least regulated, easy to start, one owner gets $$, taxes once as personal income

-unlimited liability, limited life, equity capital =owners personal wealth, difficult to sell ownership interest

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15
Q

Partnership

A

2 or 2+ owners

-2+ owners, more human and financial capital, relatively easy to start, income taxed once as personal income

-unlimited liabilitiy (general partenrship or limited partnership), partenrship dissolves when one dies or sells, difficult to transfer ownership, disagreements

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16
Q

Corporation

A

separate legal entity

-limited liability, unlimited life, separation of ownership and management, transfer of ownership easy, easy to raise capital

-separation of ownership and management, double taxation (income is taxed at corporate rate, then dividends taxes at personal rate)

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17
Q

what is double taxation

A

Govt taxes companies on income

dividends recieved to ppl are taxed again

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18
Q

What is an income trust

A

non corporate form of organization

income funds; they HOLD the debt and equity of a business and distribute the income to unitholders (middlemen)

corporations pay income to the trust as TAX DEDUCTIBLE interest payments, then these are paid out to owners!!! so its tax efficient

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19
Q

Advantages of an income trust

A

not subject to corporate income tax and income is typically taxed in hands of unit holders

investors view income trust as more tax efficient

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20
Q

disadvantages of income trust

A

income trust are NOT corproations, so they dont have the advantages one has

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21
Q

Co-operatiove

4 types

A

a co-op is an enterprise that is equally owned by its members, who share the benefits of co-operations based on how much they use the co-ops services

  1. consumer
  2. producer
  3. worker
  4. multi stakeholder
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22
Q

advantage of co-op

A

equally owned by its members

helps its members compete more effectively while creating social capital

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23
Q

disadvantages of co=op

A

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

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24
Q

2 subtypes of business organization

A

co-operative and icnome trust

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25
Q

3 goals of financial management

A
  1. max shareholder wealth
  2. max share price
  3. max firm value
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26
Q

Agency Relationship

A

relation b/w SH & management

princpal hires an agent to represent their interests

strockholders are the principals, and they hire managers (Agents) to run the company

27
Q

Agency Problem

A

Conflicts of interest can exist between the principal (SH) and the agent

28
Q

Agency Costs

A

Direct agency costs

Indirect Agency costs: lost opportunity

29
Q

What are 3 aspects of managing managers

A

managerial compensations
corproate control
conflicts with other stakeholders

30
Q

what is managerial compenation

A

incentives that cam be used to align management and stockholder interests

the incentives need to be structured carefully to make sure that they acheive their goal

31
Q

Corporate control

A

the threat of a takeover may result in better maangement

32
Q

What is social responsiblity and ethical investing

A

investors are increasingly demanding that corps be responsible

issues include how a corp treats the community in which it operates their customers corp gov, their empoyees, ENVIRIOENMT ETC.

33
Q

where does cash flow to? and from?

A

the firm

34
Q

What is a capital market

ex:

A

long term debts and shares of stock!!!

TSX NYSE

35
Q

Waht is money market
-dealers
-location

A

short term debt securities are bought/sold (IOUs)

chartered banks and investment dealers

no physical locations

36
Q

Steps in the cash flows between the firm and the financial markets

A

A. ORIGINAL firm issues securities, purchasing firm buys sercurties (Cash purch->orig)

B. ORIGINAL Firm invests cash in cash assets (cureent assets & fixed assets)

C. Cash flow from firm’s assets (original company has cash flow outwards)

D. Govt and other stakholders get cash flow from C (Original firm)

E. Cash flows from C reinvested into Original firm

F. Dividends and debt payments from Cash flow from assets fo to purchasing firm

37
Q

What are financial institiutions

A

intermediaries between suppliers and users of funds

ex: banks or investmetn dealers

38
Q

upcoming trend in fin markets and management- financial engineering

A

process of desinging new securiities or financial processes

39
Q

upcoming trend in fin markets and management- e business

A

e commerce

40
Q

upcoming trend in fin markets and management- deregulation

A

reduction or elimination of government power in a particular industry, usually enacted to create more competition within the industry

41
Q

primary market
-who runs markets

A

where govt/companies issue a new security, not previously traded on any exchange

  • invesetment dealers (RBC capital market, cibc capital markets etc,) UNDERWRITE public offerings
42
Q

secondary marekt

A

where investors buy and sell securities.

Trades take place on the secondary market between other investors and traders rather than from the companies that issue the securities.

43
Q

Can you transfer general partner ownership easier or limited partner ownership?

A

Limited partners interest can be sold easily

General Parnter interest is not easily transferred

44
Q

why did a lot of income trusts convert back?

A

because bell threatened to become an income trust cuz of the immense benefits, now they are also taxed so there are not very many benefits

45
Q

consumer co-op

A

provides products’services to its memberrs

(Retail / housing / health care/childcare)

46
Q

producr co-op

A

process and marekts g/s produced by members

(entrepreneur co-op, artisan co-op, farmer co-op)

47
Q

wroker c-op

A

provides employment to members

48
Q

multi-stakheolder co=op

A

serves the needs of different stakeholder groups

49
Q

The key benefits
of co-ops are helping producers compete effectively in the marketplace, serving rural and remote
communities, developing community leadership, building social capital, and promoting local ownership
and control.

A
50
Q

Indirect Agency Cost

A

Cost of a loss opportunity when SH & manager disagree

EX; chance of a new venture could be very profitable for SH, but management doesnt go forth with it cuz it could be risky for management jobs

51
Q

2 types of direct agency costs

A
  1. corporate expense: beenfits management but costs the Shareholders
  2. expense that arises from the need to monitor management
    actions or the incentive fee paid to the managers.
52
Q

What is underwrritng public offerings

A

when an investment dealer purchases security from the firm and markets to the public in primary market

profit: sell for higher price than purchase

53
Q

what is a syndicate

A

group of investment dealers

54
Q

are private offerings of debt and equity underwrritten?

A

no! only public offerings are

55
Q

two types of secondary markets

A

auction market: stocks are auctioned (TSX)

dealer market: stocks and long term debt (over the counter market)

56
Q

How do banks make income

A

indirect finance/spread income: spread between interest paid on deposits and higher rate earned on loans

direct finance/fee income: offering other services (bankers acceptances and stamping fees_

57
Q

regulatory dialectic

A
58
Q

big 6

A

the big sic chartered banks

59
Q
A
60
Q

capital formula

A

debt + equity

61
Q

return on equity formula

A

net income/shareholders equity

or

leverage * turnover * efficiency ratio

62
Q

last question on lemond stand slide 1 - do you need the formulas memorized?

A
63
Q
A

FNCE317 (21 decks)

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