Chapter 1 Flashcards
How do corporations pay for assets?
Sell claims on assets and the cash flow they will generate
What are claims?
Financial assets or securities
What defines a security?
Traded in financial markets
What do securities include?
Bonds, shares of stock, other specialized instruments
What’s an investment decision?
Purchase of real assets
What is a financing decision?
Sale of financial assets
What is CAPEX?
capital expenditure or capital budgeting
Where can corporation raise money from?
lenders or shareholders
What are shareholders?
equity investors who contribute equity financing
What is a capital structure decision?
choice between debt and equity financing
What is a payout decision?
decision to pay dividends or repurchase shares
How do companies create value?
From retaining and reinvesting cash flow, not from sophisticated financing.
What are risks a business will face?
recessions, changes in commodity prices, interest rates, exchange rates, adverse political developments
What is a corporation?
A legal entity.
What does it mean by shareholders having limited liability?
They cannot be held personally responsible for the corporation’s debts.
What gives a corporation permanence?
separation of ownership and control
What defines a CFO?
Someone who explains earnings results and forecasts to investors and the media.
What does the treasurer and controller do?
Treasure: short-term cash management, current trading, financing transactions, and bank relationships. Controller: manage internal accounting systems and oversees preparation of financial statements and tax returns.
What are roles of financial managers?
Responsible for investment or financing decisions. Manage money flow between investors and the corporation.
How shareholders decide between investment vs. taking cash?
If return of investment higher than what share holders can achieve on their own, they will pursue the project.
When will corporations decide on investing in new projects?
When the project earns more than the opportunity cost of capital.
What is the opportunity cost?
expected return investors achieve in financial markets at the same level of risk
What are stakeholders of the company?
employees, customers, suppliers, communities where the firm’s plants and offices are located.
How do shareholders control the managers?
Through the board of directors.
When are agency costs incurred?
(1) managers do not attempt to maximize firm value (2) shareholders incur costs to monitor managers and constrain their actions
