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comm 308: introduction to corporate finance > CHAPTER 1: AN INTRODUCTION TO FINANCE PP > Flashcards

CHAPTER 1: AN INTRODUCTION TO FINANCE PP Flashcards

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1
Q

what is Finance?

A

the study of how savings (money) are allocated between lenders and borrowers

the study of under what terms savings (money) are allocated between lenders and borrowers

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2
Q

how is finance distinct from economics?

A

it addresses more than how resources are allocated

addresses also under what terms and through what channels resources are allocated

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3
Q

when do Financial contracts or securities occur?

A

whenever funds are transferred from issuer to buyer

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4
Q

two main finance branches

A

asset pricing

corporate finance

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5
Q

asset pricing

A

Investor perspective

Price formation in capital markets

Investments

Portfolio management

CAPM (CapitalAsset
Pricing Model)

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6
Q

Corporate Finance

A

CEO perspective

Financial decisions of the corporation

Capital Budgeting

Capital Structure

Working Capital Management

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7
Q

Capital Budgeting

A

What assets to buy

involves real assets and financial assets

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8
Q

Capital Structure

A

how to pay for the assets you want

Mix of debt and equity

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9
Q

theory of value

A

Buy low, sell high

buy high sell low trust

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10
Q

Real assets

A

tangible items owned by persons and businesses

ex: Residential structures and property

Major appliances and automobiles (consumer durables)

Office towers, factories, and mines

Machinery and equipment

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11
Q

Financial assets

A

what one individual has lent to another

ex: Consumer credit

Loans

Mortgages

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12
Q

what type of assets do households own?

A

both real and financial assets

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13
Q

Why do households with no financial assets often face financial problems?

A

because real assets cannot be easily used to pay off or service debt

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14
Q

what is more liquid between real and financial assets?

A

financial assets

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15
Q

the primary provider of funds to businesses and government

A

households

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16
Q

what do financial intermediaries do?

A

transform the nature of the securities they issue and invest in

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17
Q

what type of intermediaries are the following:

banks

trust companies

credit unions

insurance firms

mutual funds

A

financial intermediaries

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18
Q

who are market intermediaries and what do they do?

A

investment dealers and brokers (investment advisors)

help to make markets work by adding liquidity

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19
Q

in which three ways can funds be channeled from savers to borrowers?

A

Direct transfer from saver to borrower in a non-market transaction

Direct intermediation through a market intermediary such as a broker in a market-based transaction

Indirect claims through a financial intermediary where the financial intermediary, such as a bank, offers deposit-taking services and ultimately lends the deposited funds out as mortgages or loans

20
Q

Financial Intermediaries: Canadian Chartered Banks

how do they function?

A

Deposits from numerous depositors from across Canada are ‘pooled’ into banks

Pooled funds are lent to households and businesses in the form of mortgages and loans

The bank transforms the original nature of the savers’ (depositors’) money

21
Q

what do banks do to transfer depositors’ money? how do they do it?

A

a bunch of depositors save in small amounts

Loans and mortgages are usually large in amount, pooling the many deposits

Banks can perform this transformation function because they become experts at risk assessment, financial contracting, and monitoring the activities of borrowers

22
Q

financial contracting

A

pricing the risk

23
Q

Financial Intermediaries: Insurance Companies

how do they work?

A

Insurers sell policies and collect premiums from customers based on the pricing of those policies

Premiums are invested so that the accumulated value in the future will grow to meet the anticipated claims of the policyholders

Risks that would be unsupportable by an individual are shared among a large number of policyholders through the insurance company

allow households, business and government to engage in risky activities without having to bear the entire risk of loss themselves

24
Q

Financial Intermediaries:
Pension Plan Assets

how do they work?

A

Individuals and employees make payments over their entire working lives to pension plans

these invest those funds to grow over time and accumulate large sums of money

The accumulated value of the pension can be used to fund retirement

their managers invest those funds with long-term investment time horizons in diversified investment portfolios

These investments are a major source of capital, fueling investment in research and development, capital equipment, and resource exploration, which ultimately contributes to the growth of the economy

25
Q

Financial Intermediaries:
Canadian Mutual Fund Assets

how do they work?

A

Mutual funds give small investors access to diversified, professionally-managed portfolios of securities

pool a bunch of little funds together to buy large financial instruments (denomination intermediation)

26
Q

The Major Borrowers of Public Debt

A

the federal government

Provincial and territorial Governments

Municipalities

Crown corporations

27
Q

The Major Borrowers of Private Debt

A

Households

Non-financial corporations

28
Q

There are two major categories of financial securities

A

Debt instruments

Equity instruments

29
Q

Debt instruments

A

commercial paper

bankers’ acceptances

Treasury bills (T-bills)

mortgage loans

bonds

debentures

etc

you lend your money basically and you expect to receive interest at the end of the maturity date

30
Q

Equity instruments

A

common share

preferred share

you own the company or the organization that issued the equity instrument

no maturity date

31
Q

as an important decision maker in a firm, how to get the money?

A

I can sell a part of my business (firm): e.g. Issue stocks

I can borrow money: e.g. get a loan from a bank, or Issue bonds

32
Q

as an important decision maker in a firm, how to spend the money?

A

I can invest in a certain project (I have the money); should I invest in it or not?

I can invest in several projects; which one should I pick?

33
Q

Non-Marketable Assets

A

Cannot be traded between or among investors

May be redeemable

ex: savings accounts

term deposits

guaranteed investment certificates (GICs)

Canada Savings Bonds

34
Q

MarketableAssets

A

Can be traded between or among investors after their original issue in public markets and before they mature or expire

The market value will change over time due to changes in the general economic environment and/or changes in the financial condition or prospects of the issuer of the security

35
Q

Money market securities

A

short-term debt securities

pure discount notes

usually have maturities less than one year

ex: Bankers’ acceptances

commercial paper

Treasury bills

36
Q

Capital market securities

A

long-term debt or equity securities with maturities greater than one year

ex: bonds

debentures

common and preferred shares

37
Q

Primary Markets

A

Markets that involve the issue of new securities by a company

issue IPOs

the money goes to the company

38
Q

Secondary Markets

A

Markets that involve buyers and sellers of existing securities

Funds flow from the buyer to the seller of the securities, and the buyer becomes the new owner of the security

the money does not go to the company that has the share (no new capital is formed)

39
Q

Types of Secondary Markets

A

Exchange or auction markets

Dealer or over-the-counter (OTC) markets

40
Q

Exchange or auction markets

A

involve a bidding process that takes place in a specific location

ex: Toronto Stock Exchange (TSX)

New York Stock Exchange (NYSE)

41
Q

Dealer or over-the-counter (OTC) markets

A

do not have a physical location

consist of a network of dealers who trade directly with each other

ex: bond market

42
Q

Market capitalization

A

the total market value of a company

43
Q

how to calculate the total market cap

A

multiplying the number of shares outstanding by the market price of each share

44
Q

outstanding shares

A

company’s stock currently held by all its shareholders

45
Q

Goals of a Financial Manager

A

maximize current value of existing stock (share price)

select investments and capital structure that maximize stock value

comm 308: introduction to corporate finance (13 decks)

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