Chapter 1: Introduction to Corporate Finance Flashcards
What must a company do before it can invest in assets?
It must raise money to pay for the investments.
How are the forms of finance shown on a balance sheet?
They are show as debts and equity shares.
What questions does finance answer?
- In what long-lived assets should the firm invest?
- How can the firm rasie cash for required capital expenditures?
- How should short-term operating cashflows be managed?
Capital budgeting definition
Describes the process of making and managing expenditures on long-lived assets
Capital Structure definition
represents the porportions of the firm’s financing from current liabilities, long-term debt, and equity
Define: Net working capital
Current assets - Current liabilities.
Short-term management of cash flow is associated with a firm’s net working capital
Define: Sole Proprietorship
A business owned by one person.
5 important facts about sole proprietorship (re: business formation, taxes, liability, business vs personal assets, and equity)
- cheapest business to form. No formal charter and few gov. regs.
- pays no corporate income taxes. All profits taxed as individual income
- unlimited liability for business debts and obligations. No distinction btw personal and business assets.
- life of sole proprietorship is limited by life of sole proprietor.
- Equity raised by sole proprietory is limited bto the person’s personal wealth.
What are the types of partnerships (and define them)?
- General Partnership - all partners agree to provide some fraction of the work and cash and to share the profits and losses.
- Limited partnerships = permits the libability of some of the partners be limited to the amount of cash contributed to the partnership. Requires at least one general partner and the limited partner doesn’t participate in managing the business.
5 important facts about partnerships (re: business formation, taxes, liability, business vs personal assets, and equity)
- Partnerships are usually inexpensive and easy to form.
- General partners have unlimited liability for all debts.
- The general partnership is terminated when a general partner dies or withdraws (but this is not so for a limited partner).
- It is difficult for a partnership to raise large amounts of cash.
- Income from a partnership is taxed as personal income to the partners.
- Management control resides with the general partners.
What don’t sole proprietorships and partnerships work on a large scale?
- unlimited liability
- limited life of enterprise
- difficulty in transferring ownership
- difficulty in raising cash
Are corporations people?
Legally, yes.
What are articles of incorporation?
Documents necessary to start a corporation.
What are the 6 parts that must be included in articles of incorporation
- Name of corporation
- intended life of corporation
- business purpose
- number of shares of stock.
- nature of the rights granted to shareholders?
- number of membors of initial board of directors
What are the three disinct interests within a corporation?
- shareholders/owners
- the directors
- corporation officers ( the top management)
3 benefits of corporation
- no limit of transferability.
- unlimited life
- liabilities are limited to investment
1 disadvantage of corporation
Corporate taxes on federal and state level
What is an LLC?
an entity that’s taxed like a partnership but limited liabiltiy for owners. Must meet specific criteria for this to happen.
How do financial managers create value?
Firm should create more cashflow for the shareholders and bondholders than it uses.
How does accounting profit differ from cashflow?
accounting profit is based on the time that services are provided.
Corporate finance’s perspective is whether the cash came in or not…(account receivables isn’t enough for this perspective)
How does timing affect value of an investment?
The value of an investment depends on the timing of cashflows? One dollar received today is more than a dollar received next year.
How are possible financial goals usually grouped?
- Profit maximization
2. Controlling risk
What is the goal of financial management?
Goal: to maximize the current value per share of existing stock
What is the goal when there’s no traded stock?
goal: to maximize the value of existing owner’s equity
What is agency relationship?
It’s the relationship between stockholders and management. (the principal hires the agent to represent his/her interests)
Define: agency cost
when management doesn’t take the investment and then the stockholders may lose a valuable opportunity.
Generally refers to the costs of the conflict of interest between stockholders and management.
Define: Proxy fight
when a group solicits proxies in order to replace the existing board and thereby the entire existing management.
Define: stakeholder
Someone other than a stockholder or creditor who potentially has a claim on cashflows.
