Chapter 1: Foundations of Financial Management Flashcards
incremental cash flows
The additional operating cash flow that an organization receives from taking on a new project.
5 Principles
- Cash Flow is What Matters
- Money Has a time value
- Risk Requires a Reward
- market prices are generally right
- Conflicts of Interest Cause Agency Problems
opportunity cost
the highest valued alternative that you had to give up when you made the choice
investors require…(2)
- a return for delaying consumption
2. an additional return for taking on risk
efficient market
one where the prices of the assets traded in that market fully reflect all available information at any instant in time
agency problem
problems and conflicts resulting from the separation of the management and ownership of the firm
what is finance?
the study of how people and businesses evaluate investments and raise capital to fund them
3 basic types of issues:
- Capital Budgeting
- Capital Structure decisions
- Working capital management
capital budgeting
the decision-making process with respect to investment in fixed assets (what long-term investments to undertake)
Capital Structure decisions
how the firm will raise this money
Working capital management
how the firm can best manage its cash flows
financial markets
institutions and procedures that facilitate financial transactions
sole proprietorships
- business owned by an individual
- responsible generally without limitation for liabilities
Partnerships
- more than one owner
general or limited
general partnerships
each partner is fully responsible for the l liabilities inured by the partnership
