corporate finance Flashcards
areas of finance
corporate finance
investments
financial markets & institutions
financial management
managing firms money to meet its goals; managers work w/ financial personnel, use financial data by accountants to make decisions
financial manager responsibilities
financial planning
investment
financing
goals of financial manager
maximize value of firm to its owners; make balance between opportunity for profit and potential for loss
risk-return tradeoff
higher the risk, greater return that is required
risk: potential for loss
return: opportunity for profit
how do organizations use funds
short-term expenses: support day to day activities
long-term expenses/capital expenditures: fixed assets
cash: lifeblood of business, ensure enough to meet unexpected expenses
shorten time between purchase of inventory or services and collection from sales
accounts receivable
sales for which firms hasn’t yet been paid
goal: collect money asap
inventory
production, marketing, finance managers have different perspective on inventory
- production: wants lots of raw materials to avoid production delays
- marketing: lots of finished goods to fulfill customer orders quickly
- financial: want least inventory possible without harming production/sales
long-term expenses/capital expenditures
analyze long-term projects and select those that offer best returns while maximizing firm’s value
obtaining financing
borrow money, sell ownership shares, retained earnings
unsecured vs. secured loans
unsecured: made on basis of firm’s credit worthiness and lender’s previous experience with the firm
secured: require borrower to pledge specific assets as collateral or security; lender can take collateral if borrower doesn’t repay loan
debt vs. equity financing: ability to influence management
debt
- creditors usually have none, unless borrower defaults on payment
equity
- common stockholders have voting rights
debt vs. equity financing: claim on income and assets
debt
- debt holders rank ahead of equity holders. payment of interest and principal is contractual obligation of firm
equity
- equity owners have residual claim on income; no obligation to pay dividends
debt vs. equity financing: maturity
debt
- stated maturity, required repayment of principal by particular date
equity
- company not required to repay equity, has no maturity date
debt vs. equity financing: tax treatment
debt
- interest is tax deductible expense
equity
- dividends not tax deductible; paid from after tax income
term loan
business loan with maturity of more than one year
- usually 5-14 years
- un or secured
- payments include interest/principal, loan balance declines over time
bonds
long term liabilities of corporations and government issuer of bond must pay buyer fixed amount of money – “interest” – on a coupon rate, regular schedule
mortgage loan
long-term loan made against real-estate as collateral lender takes on mortgage on property, lets lender size/sell if borrower fails to make scheduled payments
selling new issues of common stock
common stock: security that represents ownership interest in a corporation
initial public offering (IPO): company’s first sale of stock to public
dividends and retained earnings
dividends: payments to stockholders from a corporation’s profits; can be paid in cash/stock
retained earnings: profits that have been reinvested in firm, big advantage over other sources of equity capital
preferred stock
has dividend mount that’s set at time stock is issued. increases firm’s financial risk; more expensive than debt financing
venture capital
often used by small firms not big enough to sell public securities
- invest in new business in return for ownership
- private foundations, states, wealthy individuals
accounting vs. finance
accounting -
purpose: communicate financial position
fin. statements: prepare
orientation: past, results
focus: rules, accuracy
finance -
purpose: determine how and where to add value
fin. statements: analyze
orientation: future, projections
focus: analysis, insights
public company reporting
public companies are required to file w/ the SEC:
- annual reports (form 10-k)
- quarterly reports (form 10-q)
- current reports (8-k)
SEC sets the disclosure requirements - topics that all companies must cover in their 10-K or 10-Q, how the information should be presented
- companies cannot make material false/misleading statements
- CFO and CEO must certify to accuracy of 10-K and 10-Q
- quarterly reports must be reviewed by external auditors
- SEC does not vouch for accuracy of 10-K or 10-Q
annual report 10-K
- primary method of communication with external users is the annual report
- management discussion and analysis
- external auditor’s report
- financial statements
MD&A
- narrative explanation of company’s financial performance and condition
- provide context for financial statements
- risks facing the company
footnotes
disclose the accounting policies that are most important to the portrayal of the company’s financial condition and results
