Chapter 1 - Introduction to Financial Management Flashcards
What is finance?
Applies specific value and financial management
Finance applies specific value to ____ .
things owned, services used, decisions made
Financial management is an organization’s approach to ____ .
valuation
Type 1 Participants
do not lend or spend in business context
No direct role in financial markets
Indirect role: to provide labor and consume products
Type 4 Participants use financial tools to ______ and _____ and are ______, so no need for financial markets.
evaluate own businesses; choose highest-potential ideas;
self-funded
Types 2 and 3 Participants use financial institutions and financial markets for ______ .
mutually beneficial exchange
Type 2 Participants make _____ to Type 3.
temporary loans
Type 3 Participants typically consist of _______ .
companies engaging in R & D
make questions for slide
6
Economically successful projects _____ (plus profit) to investors. Friction occurs when not all cash is returned to ____ . Examples are
repay money; investors; retained earnings and taxes
Subareas of finance are ____ .
investments; financial management; financial institutions and markets; international finance
investments
Involve methods and techniques for making decisions about what kinds of securities to own
financial management
decisions about acquiring and using cash
Examples of financial management include ____ .
organizing and raising capital
tax decisions
projects to fund
Financial institutions and markets ____ .
facilitate flow of capital between investors and companies.
International finance is ______ .
finance theory used in global business environment
Risk is the _____.
uncertainty of future cash flows due to timing and size
Financial asset is the _____.
ownership in cash flow represented by securities like stocks, bonds, and other assets
Real assets are _______.
physical property like gold, machinery, equipment, real estate
Real markets are _____.
places/processes that facilitate real asset trading
Time Value of Money (TVM) is the ______.
theory and application of valuing cash flows at various points in time
Finance vs Accounting
Accounting
Tracks what happened to firm’s money in the past
Financial Management
Combines historical figures and current information
Determines what should happen with firm’s money now and in the future
Accounting tracks _____ .
what happened to firm’s money in the past
Financial management combines _______ and determines _____.
historical figures and current information; what should happen with firm’s money now and in the future
The Chief Financial Officer is the _____ level financial officer.
highest level
The Controller oversees _____.
accounting function
The Treasurer is responsible for managing _____.
cash, credit, financing, capital budgeting, risk management
______ are the most visible finance-related positions.
CFO and Treasurer
Finance is used throughout and organization. It is used to ______ strategy. It is also used in day-to-day business operations such as ______.
develop and manage; operations, marketing, human resources
Finance can be used in a persons personal life to help make good _____ decisions.
financial
When organizing a business each type of ownership whether it be a single owner, partners, or corporations have advantages and disadvantages related to:
Controls and ownership of firm
Owners’ risks
Access to capital and tax ramifications
business form types
Sole Proprietorships
General Partnerships
Corporations
Hybrids
Sole proprietorships are _____ separate from the owner.
not legally
Disadvantages of sole proprietorships are _____.
Unlimited liability
Limited access to capital
Advantages of sole proprietorships are _____.
Easy to start
Light regulatory and paperwork burden
Single taxation at the personal tax rate
General partnerships are formed when ______.
partners own the business together
Advantages of general partnerships are _____.
Relatively easy to start
Single taxation
Disadvantages of a general partnership are ____.
Partners jointly share unlimited liability
Personally liable for legal actions and debts of firm
Difficult to raise large amounts of capital
A public corporation is a legally ______ entity separate from its owners.
independent entity
Advantages of forming a public corporation are ____.
Limited liability for owners
Can raise large amounts of capital
Easy to transfer ownership
Disadvantages of forming a public corporation are ____.
Double taxation (corporate level and personal level)
Hybrid Organizations are formed ______.
when attributes of several forms are combined.
Advantages of forming a hybrid organization are ___.
Offer single taxation and limited liability to all owners
S Corporations
Limited Liability Partnerships (LLPs)
Limited Liability Companies (LLCs)
Firm goals are when an owner seeks to maximize shareholder wealth and company’s value through ____.
Maximizing present value of future cash flows
Maximizing owners’ equity
Decisions about
attracting additional funds
projects in which to invest
returning profits to owners over time
Corporate Goals are made with the intent to maximize value of owners’ equity by _____.
increasing the current value per share (stock price) of existing shares
Common methods of increasing the current value per share (stock price) of existing shares are _____.
Common methods
Maximize net income or profit
Minimize costs
Maximize market share
Agency theory says that problems arise when _____
Manager’s interest may not be aligned with _____.
principal (shareholder) hires agent (manager) to operate firm but cannot monitor the agent’s actions; shareholder goals
Three approaches to minimizing this conflict (Agency Theory) of interest are _____.
Ignore if effect is minimal
Use accountants, debt holders to monitor managers
Provide incentives to managers
Equity stakes
Stock options
Employee Stock Option Plan (ESOP)Corporate Governance is a set of ______ designed to handle issues arising from the separation of ownership and control.
laws, policies, incentives, and monitors
