Chapter 1 - Introduction To Corporate Finance Flashcards
What are the three questions any business owner must ask themselves
- What long-term investments should you take on?
- Where will you get the long-term financing to pay for your investment?
- How will you manage your everyday financial activities?
What is the controller’s office responsible for?
Cost and financial accounting, tax payments, and management information systems
What is the treasurer’s office responsible for?
Managing the firm’s cash, its financial planning, capital expenditures
What are the three basic questions a Financial Manager must be concerned with?
- Capital Budgeting
- Capital Structure
- Working Capital Management
What is Capital Budgeting?
Capital Budgeting is the act of planning and managing a firm’s long-term investments
What is Capital Structure?
Capital Structure is the act of planning and managing a firm’s long term financing.
A firm’s Capital Structure (Financial Structure) refers to the specific mixture of short-term debt, long-term debt and equity the firm uses to finance its operations.
What is Working Capital Management?
Working capital refers to the difference between a firm’s short-term assets and its short-term liabilities. Working Capital Management is the management of those processes
What are the five different legal forms of business organization?
Sole proprietorship, partnership, corporation, income trust, co-operative.
What is a Sole Proprietorship and what are some of its features?
A sole proprietorship is a business owned by one person
- Owner has unlimited liability for business debts
- Transfer of a sole proprietorship is difficult since this requires the sale of the entire business to a new owner
What is a Partnership and what are some of its features?
A partnership is a business with two or more owners.
In a general partnership, all partners share in gain and loss and have unlimited liability
In a limited partnership one or more general partners have unlimited liability, while the limited partners are liable to the amount contributed to the partnership
- Partnership terminates when one party wishes to sell
- A limited partners interest can be sold without dissolving the partnership
What is a Corporation and what are some of its features?
A corporation is a legal entity, separate and distinct from its owners.
- More complicated to start
- Must prepare articles of incorporation and a set of bylaws
- Can be incorporated under either the federal or provincial laws
- Owners in a corporation have limited liability
What does the article of incorporation contain?
- Corporation’s name
- Intended life
- Business purpose
- Number of shares that can be issued
What is an Income Trust?
A non corporate form of business organization.
Business income trusts hold the debt and equity of an underlying business and distribute the income generated to unitholders.
What is a Co-operative
An enterprise that is equally owned by its members, who share the benefits of cooperation based on how much they use the cooperative services.
Four types:
Consumer Coop
Producer Coop
Worker Coop
Multi-Stakeholder Coop
Help producers compete in the marketplace, serving rural and remote communities
What is an efficient capital market
In an efficient capital market, security prices fully reflect available information.
What is ultimately the goal of Financial Management?
To maximize the value of the owners’ equity
What are some shortcomings of the goal of profit maximization?
Due to options incentives and reports, short-term profitability can risk the organization’s stability
What is an agency relationship?
A relationship where a principal hires an agent to represent the principal’s interests
What is an agency cost?
Costs of the conflict of interests between shareholders and management. These costs can be direct or indirect
What are some examples of direct agency costs?
Corporate expenditure that benefits management but costs shareholders.
Charges related to monitoring management actions or the incentive fees paid to the managers
What is a poison pill provision?
When management takes actions to make a stock unattractive to avoid getting bought out
What is a stakeholder?
A stakeholder is a shareholder, creditor, or other individual / group that potentially has a claim on the cash flows of the firm.
(Employees, customers, suppliers, etc.)
What act was passed to further enhance the rights of Canadian Stakeholders?
The Canada Business Corporations Act in 2019
What is Corporate Social Responsibility (CSR)?
The triple bottom line is defined as a company’s commitment to operating in an economically, socially, and environmentally sustainable manner.
Well-managed corporations seek to maintain a reputation as good corporate citizens
Describe the Cash Flow to and from the firm
- Firm issues securities and money flows from the financial markets and from short / long term debt as well as equity shares
- The firm invests in assets, both current and fixed
- Cash flow from the firm’s assets go into 3 groups
- Government and other stakeholders
- Reinvested cash flows
- Dividends and debt payments
What are financial markets classified as?
Money Markets - Financial markets where short term debt securities are bought and sold
Capital Markets - Financial markets where long term debt and equity securities are bought and sold
What type of market is the money market?
The money market is a dealer market, dealers buy and sell something for themselves at their own risk.
The largest money market dealers are chartered banks and investment dealers.
What is a primary market?
The original sale of securities by governments and corporations
What is a secondary market?
The reselling after the initial purchase on the primary market
What are some characteristics of the primary market?
- Most publicly offered debt and equity securities are underwritten
- Securities regulation is a provincial matter
- Registration requires the firm to disclose a great deal of information before selling any securities
- Debt and equity are often sold privately to large financial institutions such as life insurance companies since they do not have to be registered with the provincial regulator and do not require the involvement of underwriters.
What are some characteristics of the secondary market?
Two types: auction markets and dealer markets
- Dealer markets in stocks and long-term debt are called over-the-counter (OTC) markets.
Which of the two TSX exchanges have less strict listing requirements?
The TSX Venture Exchange has less listing requirements than the TSX, although the listing process is quite similar
Who are financial institutions intermediaries for?
Investors (funds suppliers) and firms raising funds.
Households and individuals so that they can borrow and save money
What are some of the financial institutions present in Canada?
Chartered banks, trust companies, credit unions, investment dealers, insurance companies, pension funds, and mutual funds
What is a banker’s acceptance (BA)?
Interest bearing note stamped by a bank guaranteeing the borrower’s credit for which the bank receives a stamping fee.
What is the key difference between spread income and fee income
For fee income the funds do not pass through the bank’s balance sheet in the form of a deposit and loan.
Give me an example of securitization
When a BA is created
What do Trust Companies do?
Trust companies accept deposits and make loans. They also engage in fiduciary activities such as managing assets for estates, RRSPs and so on
What do Investment dealers do?
Non depository institutions that assist firms in issuing new securities in exchange for fee income. They also aid investors in buying and selling securities
How do Life insurance companies engage in indirect finance?
They accept funds in a form similar to deposits and then make loans.
What is the largest auction market in Canada?
The TSX
What variables has globalization increased the volatility of?
Interest rates, foreign exchange rates, and other macroeconomic variables
What is financial engineering?
The creation of new securities or financial processes
What are derivative securities?
Financial assets that represent claims to another financial asset
What is regulatory dialectic?
The pressures financial institutions and regulatory bodies exert on each other
Who are the Big Six?
Royal Bank of Canada, Toronto Dominion TD, Bank of Nova Scotia, Bank of Montreal, Canadian Imperial Bank of Commerce, National Bank of Canada
What is a REIT?
A Real Estate Investment Trust owns or finances income-producing real estate
