Chapters 1-6 Test Flashcards
What is financial management?
planning, organizing, directing and controlling the financial activities of the enterprise
What is the goal of financial management?
to maximize shareholder wealth
What are the five principles of financial management?
- cash flow
- time value of money
- risk-return trade off
- efficient capital markets
- the agency problem
What is the cash flow principle?
Cash flow is what matters, and incremental cash flows are important.
What is the time value of money principle?
A dollar received today is worth more than a dollar received in the future.
What is the risk-return trade off principle?
We won’t take on additional risk unless we expect to be compensated with additional return.We also expect a return for delaying consumption.
What is the efficient capital markets principle?
That the markets are quick and the prices are right.
What is the agency problem principle?
Managers won’t work for the firm’s owners unless it’s in their best interest.
What are capital markets?
all institutions and procedures that facilitate transactions in long-term financial instruments
What is the role of intermediaries?
to facilitate the channeling of funds between lenders (savers) and borrowers (spenders) indirectly
What are venture capitalists?
an investment firm or individual investor that provides money to business start-ups
What are angel investors?
a wealthy private investor who provides money to business start-ups
What is the importance of opportunity costs when analyzing financial decisions?
It helps put your decisions in context. Costs and benefits are framed in terms of what is most important to you at the time of the decision.
What is the concept of risk and return?
That higher rewards are expected for higher risk investments. It is important to remember opportunity cost when comparing financial decisions.
What is the difference between Diversifiable and non-diversifiable risks?
Diversifiable risk is an unsystematic risk that is company specific. Non-diversifiable risk is a systematic risk that cannot be avoided by investors by diversification.
