Chapter 16 Flashcards
financial management
Planning for a firm’s money needs and managing the allocation and spending of funds.
risk/return trade-off
The balance of potential risks against potential rewards.
financial plan
A document that outlines the funds needed for a certain period of time, along with the sources and intended uses of those funds.
accounts receivable
Amounts that are currently owed to a firm.
accounts payable
Amounts that a firm currently owes to other parties.
zero-based budgeting
A budgeting approach in which each department starts from zero every year and must justify every item in the budget rather than simply adjusting the previous year’s budget amounts.
budget
A planning and control tool that reflects expected revenues, operating expenses, and cash receipts and outlays.
debt financing
Arranging funding by borrowing money.
equity financing
Arranging funding by selling ownership shares in the company, publicly or privately.
capital structure
A firm’s mix of debt and equity financing.
short-term financing
Financing used to cover current expenses (generally repaid within a year).
long-term financing
Financing used to cover long- term expenses such as assets (generally repaid over a period of more than one year).
cost of capital
The average rate of interest a firm pays on its combination of debt and equity.
secured loans
Loans backed up with assets that the lender can claim in case of default, such as a piece of property.
trade credit
Credit obtained by a purchaser directly from a supplier.
leverage
The technique of increasing the rate of return on an investment by financing it with borrowed funds.
collateral
A tangible asset a lender can claim if a borrower defaults on a loan.
unsecured loans
Loans that require a good credit rating but no collateral.
line of credit
An arrangement in which a financial institution makes money available for use at any time after the loan has been approved.
commercial paper
Short-term promissory notes, or contractual agreements, to repay a borrowed amount by a specified time with a specified interest rate.
factoring
Obtaining funding by selling accounts receivable.
lease
An agreement to use an asset in exchange for regular payment; similar to renting.
bonds
A method of funding in which the issuer borrows from an investor and provides a written promise to make regular interest payments and repay the borrowed amount in the future.
private equity
Ownership assets that aren’t publicly traded; includes venture capital.
bond market
The collective buying and selling of bonds; most bond trading is done over the counter rather than in organized exchanges.
money market
An over-the-counter marketplace for short-term debt instruments such as Treasury bills and commercial paper.
derivatives
Contracts whose value is derived from some other entity (usually an asset of some kind, but not necessarily); used to hedge against or speculate on risk.
stock exchanges
Organizations that facilitate the buying and selling of stock.
rate of return
The gain (or loss) of an investment over time, expressed as a percentage.
derivatives market
A market that includes exchange trading (for futures and some options) and over-the-counter trading (for all other derivatives, at least currently).
bull market
A market situation in which most stocks are increasing in value.
bear market
A market situation in which most stocks are decreasing in value.
investment portfolios
Collections of various types of investments.
asset allocation
Management of a portfolio to balance potential returns with an acceptable level of risk.
broker
A certified expert who is legally registered to buy and sell securities on behalf of individual and institutional investors.
smart contracts
Digital agreements in a distributed ledger such as blockchain that automatically execute when their criteria are fulfilled by incoming data.
3 fundamental concepts
Balancing short-term and long-term demands, Risk/return trade-off, balancing leverage and flexibility
Business lifecycle stages
Startup, growth, maturity, decline or exit
Budgeting challenges
Limited amount of money to spend, Revenues and costs are difficult to predict, Not clear how much to spend
Main players in IPO’s
underwriters (investment banks), legal experts, accounting firms (auditors)
Hedging
Protecting against cost increases with contracts that allow a company buy supplies in the future at designated prices
