Finance: ch 1 intro to corporate finance Flashcards
explain real assets
rea assets refer to tangible, physical assets. Unlike financial assets such as stocks and bonds (which are claims on real assets or a company’s profits), real assets are things you can see, touch, or use directly.
What is the main difference between a bond and a bank loan?
The main difference is that bonds can be sold second-hand in financial markets, whereas bank loans are not tradeable. Tradeable financial assets like bonds are known as securities.
What is the relationship between investment and financing decisions?
An investment decision involves purchasing and managing real assets, including handling risks and deciding when to shut down unprofitable assets. A financing decision involves raising cash and fulfilling obligations to banks, bondholders, and shareholders.
What happens if a corporation cannot meet its debt obligations?
If a corporation cannot repay its debts when due, it becomes insolvent and may face bankruptcy.
explain the difference between investment decisions and finantial decisions
Investment decisions deal with where to invest money to generate future returns (e.g., acquiring a startup, building new facilities, launching a new product line).
Financial decisions deal with how to manage the money already within the company, including funding operations, paying dividends, or raising capital (e.g., reinvesting profits, cutting dividends, issuing new debt).
What is the capital structure decision?
The capital structure decision is the choice between debt and equity financing, which refers to the firm’s sources of long-term financing.
The shareholders are
The shareholders are
equity investors, who contribute equity financing
What are two ways a corporation can raise equity financing?
A corporation can raise equity financing by issuing new shares of stock or by reinvesting the cash flow generated by its existing assets.
What are two primary financing options for large corporations?
Large corporations can choose between borrowing (from banks or by issuing bonds) or raising equity by issuing new shares of stock.
What is the payout decision in corporate finance?
The payout decision refers to whether a company decides to return cash to shareholders through dividends or by repurchasing shares.
What is the primary financial objective that most shareholders agree on?
Shareholders generally agree that the primary financial objective is to maximize the current market value of their investment in the firm.
Why is maximizing market value beneficial for shareholders with different financial goals?
Maximizing market value benefits all shareholders as it increases the value of their shares, which they can then use as they wish, whether they sell them or hold onto them.
How do financial markets help shareholders with different time horizons?
Financial markets allow short-horizon investors to sell their shares at higher prices and long-horizon investors to hold on to shares, aligning their preferences while maximizing market value.
What must financial markets provide to allow stockholders to agree on value maximization?
Financial markets must provide flexibility for stockholders to manage their own savings and investment plans.
Does maximizing shareholder wealth mean ignoring other stakeholders?
No, successful companies consider the welfare of customers, suppliers, employees, and local communities.
