Chapter 15 Flashcards
What are the 4 keys a financial manager follows
- Determine firm’s LT invest. goals
- Obtain funds to pay for invest.
- Conduct firm’s everyday financial activities
- Help manage risks firm takes
What is the financial manager responsible for
Planning, overseeing financial ressources of a firm ex: cash-flow management, financial planning and controlling
Define cash flow management
Managing pattern of cash inflows (rev) and outflows (dept payments)
Investing funds not needed to service debt
Use funds either to maintain firm, earn interest, but NOT sit idle
Define financial control
Check performance against strategic plans
Make adjustments
Prep budgets to ensure there is sufficient cash on hand to meet operational/debt-service needs
Define financial planning
Plan to achieve desired financial status
ex: project revenue flows, source/planned use for funds ST/LT, time when funds are required
Define ST expenses
Operating expenses
Accounts receivable (credit policy)
Inventory (raw materials, WIP)
Define LT expenses
Capital expenses
Funding fixed assets with long life/lasting value (land, building, machine)
Not normally sold/converted to cash
Acquistion requires large investment, tying up firm’s ressources
Define a ST fund
Allows a firm to cover op expenses and implement ST plans such as
Trade credits
Secured loans
Unsecured loans
Factoring accounts receivable
Define trade credit
Granting credit by selling firm to buy firm
Ex open book credit, promissory note, trade draft
Define a secured ST loan
Borrower required to put up collateral, interest rates lower than unsecured, appeals to firms whose credit is not sufficient to qualify for unsecured
Give examples of an unsecured ST loan
Line of credit, revolving credit agreement, commercial paper
What are 4 sources of LT funds
Debt financing
Equity financing
Hybrid financing
Risk-return relationship
Define debt financing
LT loans: borrow money for 3-10 years at fixed or floating rate
Corp bond: promise by borrower to pay lender amt of money at maturity date
Give examples of bond types
Secure
Unsecured (debenture)
Registered
Bearer (coupon)
Callable
Serial
Convertible
Define callable bonds
may be called at anytime, or after a minimum period of time, and paid off for a specified call price
Define serial bonds
redemption rates are staggered so that the bond is paid off gradually over time
Define convertible bonds
option of receiving common stock instead of cash
Define common stock
Firm selling ownership rights by issuing shared, and investors purchase hoping they appreciate in value
Define retained earnings
Financing by retaining profits in firm and NOT paying dividends to shareholders
Define market value (stocks)
Current price of share on secondary secuirities marktes
Define book value (stocks)
Shareholders’ equity divided by # of shares outstanding
Define par value (stocks)
Arbitrary value set by company’s board of directors and stated on stock certificates
Define preffered stock
Form of hybrid financing
Required fixed payments
No maturity date
No voting rights, affecting firm’s control
Define capital structure
Mix of debt vs equity
What is the difference between debt and equity financing
Debt: cheaper, but comapny may not be able to service it
Equity: more expensive, but company has no obligations to shareholders
Define primary securities market
Sale, purchase of newly issued stocks/bonds
Define secondary securities market
Sale, purchase of previously issued stocks/bonds
Define the stock exchange
Setting where members buy/sell stock in accordance with rules of the exchange
Define the TSX
Large exchange in Canada with 110 members
Securities of most major Canadian companies listed
Define the 2 major foreign exchanges
New York, London stock exchange
Define the OTC Market
Numerous dealers trading amongst themselves for smaller firms not listed on exchanges, trade all fixed-income securities
Define the NASDAQ
National association of securities dealers automated quotation
First electronic stock market
Define a market index
Summarizes trends in stock market and specific industires ex S&P
Bear vs bull market
Bear: stock prices drop
Bull: stop prices rise
Define market order
Buy, sell at current price
Define limit order
Buy only at certain price
Define stop order
Sell stock if it falls to certain $
Define round lot
Buying shares in multiples of 100
Define odd lot
Fractions of round lots
Define margin traiding
Investor makes down payment of portion of price with rest financed by a broker, broker then borrows amt from bank secured by stock and charges investor a higher interest rate than the bank
Define short sale
Investor borrows share from broker and sells, then must repurchase equal number of shares and return them to original broker in hopes of making more money himself (same principle as stock borrowing on wealthsimple)
Define a mutual fund
Company pooling ressources of many investors and purchasing various types of securities with them, professionally managed, all with difference goals and risk levels
Define ethical funds
Socially responsible investing in companies producing safe, useful products and emphasizing employee relations, environmental practices, human rights
Define an ETF
Bundle of stocks/bonds in index tracking overall movement of market, low operating expenses
Define hedge funds
Private money pools looking for positive returns regardless of stock market performance, sold to wealthy/knowledgeable investors, principle-protected notes
Define principle-protected notes
Orginial principal returned, but no guarantee of extra return
Define a commodity
Undifferentiated products, futures contract (agreement of purchasing specific amount at certain price on set future date)
Call vs put option
Call: buy stock at certain price until set date
Pull: sell stock at certain price until set date
Are securities legislations federal or provincial
Provincial
Define the blue sky law
Regulates how firms back up securities
Define prospectus
Detailed registration statement about new stock filed with provincial securities exchange
What are 3 things small businesses can do as responsible financial management
Establish bank/trade credit
Plan for cash flow
Venture capital approach
Define risk management
Conserving a firm’s financial power or assets by minimizing the financial effect of accidental losses
Define risk
Uncertainty about future events
Define speculative risk
Change for gain or loss
Define pure risk
Only chance of loss
Define the risk management process
- identify risk and potential losses
- measure frequency, severity of losses and impact
- evalute alts and choose techniques that can best handle losses
- implement program
- monitor results
Define risk management alts
Avoidance, control, transfer, retention
