Chap 1 Flashcards
What is the difference between the investment decision and the financing decision?
Investment decision: purchase of real assets
Financing decision = sale of financial assets
Explain “selling claims on assets”
The corporation pays for the real assets by selling claims on them and on the cash flow that they will generate.
These claims are called financial assets or securities
What are investment decisions also referred to?
CAPEX: capital budgeting
What is the capital structure decision?
The choice between debt or equity financing
What is the payout decision?
The decision to pay dividends or repurchase shares
What is more important, financing or investment decisions?
investment decisions
What is market capitalization rate?
share price x shares outstanding
Corporations are like people, but what cant they do?
vote
What do shareholders want to maximize?
market value
What defines a smart, effective, financial manager?
A smart and effective manager makes decisions that increase the current value of the company’s shares and the wealth of its stockholders.
What are the 3 things each stock holder wants?
a. To be as rich as possible, that is, to maximize his or her current wealth.
b. To transform that wealth into the most desirable time pattern of consumption either
by borrowing to spend now or investing to spend later.
c. To manage the risk characteristics of that consumption plan.
What is the investment trade off?
Whenever a corporation invests cash in a new project, its shareholders lose the opportunity to invest the cash on their own.
What are agency problems?
conflicts between shareholders’ and managers’ objectives
When do agency problems arise?
when agents work for principals (shareholders are principles, managers are agents)…
1) managers do not attempt to maximize firm value
2) shareholders incur costs to monitor the managers and constrain their actions
