Chapter 1: Introduction to Financial Management Flashcards
What does finance comprise of?
(FM) Finance management aka corporate finance
(CM) Capital Markets
(I) Investments
What is finance management?
To decide how much and what type of assets to acquire.
To raise capital to obtain the asset.
To maximise an asset value.
What are capital markets?
Consists of markets where the interest rates, stocks and bond prices are determined.
Financial institutions providing capital for businesses Banks, investment companies, insurance companies, stockbrokers, mutual funds.
These bring people or “savers” to pool money to be used in businesses that need capital.
What are investments?
Decisions regarding stocks and bonds.
1) Security analysis - Analysis of the “proper” value of an individual security.
2) Portfolio Theory - Having a variety or basket of securities to reduce risk. How to structure it.
3) Behavioural Finance - Analysis of the investor psychology, to see if there might be a speculative bubble or perhaps an undervalued stock.
Types of businesses?
1) Proprietorship
2) Partnerships
3) Corporations
4) Limited Liability Company
5) Limited Liability Partnership
What is a proprietorship?
ADVANTAGES An unincorporated business One Owner Easy to startup, inexpensive Low taxation Few regulations
DISADVANTAGES
Unlimited Liability
Troublesome to restructure to bring in new life to the business
Difficult to obtain captial
What is a partnership?
ADVANTAGES An unincorporated business Two owners (minimum) or more unlimited At least one general partner and one limited Easy to startup, inexpensive Low taxation Few regulations
DISADVANTAGES
Unlimited liability to all partners (Unless Limited Liability Partnership)
Limited life
Difficult to obtain capital
What is Limited Liability Partnership/Limited Liability Company? (LLP)/(LLC)?
Limited liabilities like corporations, with taxes similar to partnerships.
All partners have votes in proportion to owner interests.
Limited liability Partnerships also refers more towards professional firms such as accounting, law, architecture.
What is Shareholder Wealth Maximisation?
To raise an intrinsic value of an asset in the long run. Managers primary goal.
What is intrinsic value?
Estimation of a true value of the stock with regards to the return value and accurate risk.
Cannot be measured accurately.
What is market price?
Value of a stock as perceived by the marginal investor.
What is a marginal investor?
An investor that determines the price of a stock.
Etc.Buy more if share price falls a little, and vice versa.
What does an equilibrium mean?
When intrinsic value of a stock equals its market price.
What is a corporate raider?
Someone that does a hostile takeover of a company if its market price is too low/undervalued.
What is a hostile takeover?
Acquisition of a company in opposition of its management.
