Chapter 1

Question 1

Financial Management

Answer 1

How should day-to-day financial matters be managed to enable the firm to pay bills and meet routine financial obligations?
How should surplus cash be invested?

Question 2

Financial Markets

Answer 2

Where will the firm get the financing to pay for the investments?
Financial Markets:
Money Markets: short-term borrowing from an investor
Treasury Bills (T-Bills) – The U.S. Government borrows.
CDs – A bank borrows.
Commercial Paper – A company borrows.
Capital Markets: long-term financing
Equity (Stocks) – A company sells ownership to an investor.
Bonds – A company or government borrows from an investor.

Question 3

Capital Budgeting

Answer 3

Should the firm take on a new project?

What long-term investments/assets should the firm purchase to execute accepted projects?

Question 4

Money

Answer 4

Money is the place where created value is stored.

Question 5

Capital

Answer 5

Money a business uses to purchase assets, which are used to generate returns for the business owner.

Question 6

Equity

Answer 6

Sale of ownership - issuing stock

Question 7

Bond

Answer 7

A loan the investor makes to the company. Investor gets his original money back (the principal) with interest, but no ownership.

Question 8

Stock

Answer 8

Actual ownership. The stockholder get a share of the profit (leftover after expenses are met).

Question 9

Investment Bank

Answer 9

helps companies issue stocks and bonds. It buys the securities (takes ownership of security and delivers cash to the capital seeker), and locates investors to purchase the security. (For this, they are well paid by the capital seeker.)

Question 10

Present Value Formula

Answer 10

FV/(1+Rate)^t

Question 11

Compounding

Answer 11

The process of earning money not only on the initial investment, but also on the interim earnings (such as interest payments) during the term of the investment.
Calculated on the future value formula.

Question 12

Discounting

Answer 12

The opposite of compounding. Determines what today’s (present) value of future cash flows is. This is the most fundamental question for financial analysts.
Discounted Cash Flow (DCF) calculation uses the Present Value formula, algebraically re-arranging the Future Value formula to solve for Present Value.

Question 13

Future Value

Answer 13

PVx(1+rate)^t