Chapter 1

Question 1

What is capital structure?

Answer 1

mixture of debt and equity maintained by the firm

Question 2

What is working capital?

Answer 2

a firm’s short-term assets and liabilities

Question 3

What is the goal of financial management?

Answer 3

to maximize the current value per share of the existing stock

Question 4

What is the agency relationship?

Answer 4

Stockholders (principals) hires managers (agents) to run the company

Question 5

What is the agency problem?

Answer 5

Conflict of interests between principal and agent (i.e. management goals and agency costs)

Question 6

What is are agency costs?

Answer 6

costs of the conflict of interest between stockholders and management - Direct (i.e. corporate expenditure or expense to monitor management) - Indirect (i.e. lost opportunity)

Question 7

What is a stakeholder?

Answer 7

Someone other than a stockholder or creditor who potentially has a claim on the cash flows of the firm

Question 8

What is the difference between a primary market vs a secondary market?

Answer 8

In a primary market, corporations are the sellers, and the transactions raises money for the corporation. In a secondary market, one owner or creditor sells to another.

Question 9

What is the difference between dealer markets vs auction markets?

Answer 9

In a dealer market, the dealer buys and sells for themselves at their own risk (aka over-the-counter markets). In an auction market, the dealer matches those who wish to sell with those who wish to buy.

Question 10

Stocks that trade an organized exchange are said to be _______.

Answer 10

listed

Question 11

What is capital budgeting?

Answer 11

Process of planning/managing a firm’s long-term investments

Question 12

What are Real assets [Capital Budgeting]?

Answer 12

–Those assets that generate CASH FLOWS for the firm. –Generally projects e.g.produce goods and/or services. –Tangible (e.g.building, plant) –Intangible (e.g.trademarks, patents, brand recognition)

Question 13

What are financial assets (securities) [Capital Structure]?

Answer 13

–Loans (debt), shares (equity) –Claims to cash generated by real assets-sold by firms to pay for real assets –Is there an optimal mix of long-term financing (debt and equity)

Question 14

What are Short-term real and financial assets?

Answer 14

–This is the management of short-term cash flows (payables and receivables).

Question 15

Objectives of the Financial Manager?

Answer 15

Maximise Shareholder Value by Maximising Economic Value Added

Question 16

How does the Financial Manager act as an intermediary?

Answer 16

By taking cash raised from markets and making decisions about how to use it in the firm’s operations. (1) Cash raised from investors(1)(2) Cash invested in firm(2)(3) Cash generated by operations(3)(4a) Cash reinvested(4a)(4b) Cash returned to investors

Question 17

What kinds of financial institutions act as intermediaries?

Answer 17

Banks, insurance companies, hedge funds, mutual funds, private equity.

Question 18

What are the 5 key concepts in corporate finance?

Answer 18

1.Agency Relationships 2.Opportunity Cost of Capital 3.The Balance Sheet 4.Tax System 5.Efficient Market Hypothesis