Chapter 16: understanding finance and investment strategies

Question 1

define financial management

Answer 1

planning firms money needs and manage allocation of funds.

Question 2

3 fundamental concepts of financial management

Answer 2

1. spending a lot of money to meet short-term demand might take up resources for future investments.
2. risk/return trade off: balancing risks against rewards.
3. finance choices affect company’s flexibility and resilience

Question 3

A buisness lifecycle stage

Answer 3

1. startup–> high uncertainty, initial funding is required
2. growth–> higher und needs, expanding quickly
3. maturity–> stabilized growth, focus to maintain profitability
4. decline/exit–> low growth, less profits

Question 4

financial plan definition

Answer 4

• document that contains the funds needed for a certain period of time, resoruces and uses.

Question 5

How to maintain a positive cash flow

Answer 5

• monitoring working capital accounts: acc.receivable, cash reserves, inventory and accounts payable.

Question 6

The three budgeting challenged

Answer 6

1. limited amount of money to spend:
2. revenues and costs are difficult to predict
3. not clear how much should be spent

Question 7

what is a budget

Answer 7

• planning tool to control revenues, expenses etc.

Question 8

what is zero-based budgeting

Answer 8

• each year it starts from zero and must justify every item in the budget.

Question 9

types of budgets

Answer 9

• start-up budget–> ,money a new company needs to spend to launch
• operating budget–> identifying all revenues +expenses company expects to see over a time period.
• cash budget–> identyfying cash flows
• financial budget: cash budget, budgeted income statement +balance sheet.
• master budget: budgets incorporated together, presents a complete view of financial status.

Question 10

cost of capital meaning

Answer 10

• return a company needs to earn to meet investor expectations.

Question 11

why is it important

Answer 11

• decision making: whether to invest on a project or not
• valuation: helps investors evaluate risk of investing
• capital structure: find balance between debt and equity to decrease costs and maximise returns.

Question 12

debt vs equity financing

Answer 12

debt–> borrowing money
equity–> sell owenership shares in the company

Question 13

what is capital structure

Answer 13

Debt+ equity financing

Question 14

shorterm financing vs long-term financing

Answer 14

shorterm–> finance that will be rapid within one year
long-term–> used to cover longterm expenses

Question 15

prime interest rate

Answer 15

lowest interest rate bank charges for short-term loans to creditworthy customers.

Question 16

define opportunity cost

Answer 16

• loss of other alternatives when one alternative is chosen

Question 17

what is leverage

Answer 17

• increase rate of return on an investment by financing it with borrowed funds

Question 18

types of short-term debt finance

Answer 18

• credit cards–> short-term loan every time cardholder makes purchase.
  -trade credit–> making purchases without immediately paying for them
• secured loans–> backed up with asset that lender can claim in case of default.
• unsecured loans->

Question 19

types of long-term financing

Answer 19

• long.term loans
• leases - company earning right to use an asset in exchange of regular payments.
• corporate bonds: selling bonds to investors, promise to repay them.

Question 20

define lease vs bonds

Answer 20

• lease–> agreement to use an asset in exchange for regular payment similar to renting
• bonds–> borrow funds from investors and provide written promise to regular interest payments in future.

Question 21

Three types of corporate bonds

Answer 21

1. secured: backed with assets to secure it is paid.
2. debentures: unsecured bonds backed online by the promise.
3. convertible: can be exchanged to common stock of the issuing company

Question 22

advanatges and disadvanages of equity financing

Answer 22

• selling shares of ownership in a company
  ADV:
• growth opportuntities
• cash flow

DSV:
- loosing company control
- expensive
- time consuming

Question 23

Types of financial markets

Answer 23

1. stock market: stock exchange
2. bond markets: buying+ selling of bonds
   3.. money markets
   4.. derivative markets: contracts whose values derive from other entity

Question 24

define bull market

Answer 24

• market where stocks are increasign in value n

Question 25

define bear market

Answer 25

• market where stocks are decerasing in value.

Question 26

what is an investment portfolio

Answer 26

• the collection of diferent investements

–> A BROKER: expert that legally registers the selling or buying of securities on behelf on an individual or institution

Question 27

what are smart contracts

Answer 27

• a digital agreement that is automatic when criteria is fullfilled by incoming data
• replaced error prone contract

Question 28

define stocks and list the types

Answer 28

stock: equity in a company

1. common stock–> shares of ownership that include voting rights
2. preferred stock: no voting rights but defined dividends

Question 29

what are some advantages of bonds?

Answer 29

• less risky than stocks
• regular source of income