chapter 1 flashcards
what two major decisions are made by finance managers ?
- Capital Budgeting/Investment Decision: a decision about which real assets the firm should acquire and how much to invest in these assets
- Financing Decision: a decision about how to raise the money there firm needs for its investments and operations
what is the Investment Decision?
the financial manager needs to place a value on the uncertain future cash flows (benefits) generated by capital investment projects.
what are the three things a financial manager needs to account for in order to place a value on the uncertain cash flows?
- amounts of the future cash flows
- timing of the future cash flows
- the risk of the future cash flows
how is a project attractive financially?
if the project’s value is greater than its required investment
what are the two things a financial manager can use to raise money for the investments and operations of the firm?
- internally generated funds
- external financing sources
what are the two broad categories of external financing?
- debt financing
- equity financing
what is the term called for the choice between debt and equity financing ?
Capital Structure Decision
what are Real Assets??
assets used to produce goods and services
what are Financial Assets?
financial claims to the income generated by the firm’s real assets
list examples of Real Assets?
machinery, factories, trademarks, and patents
list examples of Financial Assets
share of stock, a bank loan
what is a Corporation?
a business (separate legal entity) owned by the shareholders who are not personally liable for the business’s liabilities
what’s another word for shareholders?
owners
who runs corporations?
employees led by the CEO
what’s a pro and con for corporations?
although the separation of ownership and control adds flexibility to the operation and gives permanence to the corporation, it also creates agency problems
Corporation characteristics…
- shareholders can SELL shares (ownership)
- has a BOARD OF DIRECTORS elected by the shareholders
- must abide by the RULES of stock exchanges, accounting standards and securities laws
- TAXED TWICE-on the company profits and also in the hands of shareholders (dividends and/or capital gains)
- must share INFORMATION with the public
whats a Sole Proprietorship ?
a business owned and operated by one individual who is personally liable for all the firm’s obligations
whats a Partnership?
business owned by 2 or more people who are personally responsible for all of its liabilities.
whats a Hybrid Form?
have characteristics of coproations and partnerships
who is the Financial Manager?
anyone responsible for a significant coporate investment or financing decision
what are the two broad categories under the Chief Financial Officer?
- Treasurer: responsible for cash managment, raising new capital and maintain relationship with banks and other investors
- Controller: responsible for preparing financial statements, managing internal accounting and taxes
what are the goals of a Corporation?
- shareholders want managers to maximize market value of the corporation
- increasing market value increases shareholders wealth
- maximizing profit does not necessarily increase overall market value
- the objective should be to maximize the current market value
what are Agency Problems?
in most large companies, the managers are not the owners and they may not always act in the best interest of the owners
how are Agency Problems created?
when the personal gaols of these agents create conflict in their roles in the corporation
list some ways Agency Problems can occur?
- managers may over indulge in unnecessary expenses
- they may shy away from attractive but risky projects
- they may engage in empire building
how can Agency Problems be reduced?
- executive compensation
- corporate governance
- threat of takeovers
- specialist monitoring
- shareholder pressure
using unethical means..
to increase share price will only lead to failure
list some careers in finance?
- commercial banking
- corporate finance
- investment banking
- insurance industry
CFO?
oversees Treasurer and Controller
