Finance Week 1 Flashcards
What is Finance?
It is about the uses and sources of assets with a focus on valuation of assets
What 2 decisions do Financial managers have to make?
Investing and financing decisions
What are investment decisions?
Decisions about the uses of funds, can invest in tangible, intangible or financial assets
What are financial decisions?
Sources of funds, raise money for investments`
What are financial decisions a firm can use to raise money?
Can retain earnings, issue new debt or new equity
What are tangible assets?
Touchable assets, e.g. stores, delivery trucks, planes
What are intangible assets?
Untouchable assets e.g. patents, data
What are real assets?
Real assets are used to produce goods and services. Tangible or intangible.
What are financial assets?
Claims to income generated by a firms real assets. E.g. a share of stock issued by a company or a mortgage loan taken out to help pay for a new home
How do firms finance their investments in real assets?
By issuing financial assets to investors
What are the 3 types of business organizations?
Sole proprietorship, partnership and corporations
What is a corporation?
A business that is organized as a separate legal entity owned by shareholders. Managers and owners separate.
What is the benefit of a corporation?
Shareholders are not personally liable for the businesses’ liabilities. So there is limited liability. There is a wide access to capital markets. Managers can be fired with no affect on ownership and ownership can be transferred without affecting operations.
What is double taxation of a corporation?
Owners and businesses are taxed separately
What is the goal of a corporation?
To maximize market value of shareholders equity
What is the shareholders equity?
Share price * number of shares
Why is the goal of a corporation dangerous?
Can lead to earnings manipulation- increase profits in one year to look good
How are environmental and social aspects kept in mind?
Investors punish irresponsible firms by selling their shares, decreasing market value
What is the agency problem?
Due to separation of owners and managers (agents), managers may be tempted to act in own interest rather than in owners interest
What is the agency cost?
It is the loss from the agency problem or the loss from cost of mitigating it
What ways can you diminish the agency problems?
Can diminish this problem through internal controls and policies. Can introduce executive compensation (tie compensation package of managers to financial performance of corporation)
What is corporate governance?
Laws, regulations and institutions that protect shareholders and investors from agency problem
What is the benefit of the board of directors?
They oversee managers and ensure they are also acting in owners interests. Appoint CEO and CFO and approve dividends and issuance of new shares
Why are financial markets important?
Businesses need to go to financial markets and institutions for financing as they need to grow
Where does money that corporations use to invest in real assets ultimately come from?
The savings of investors via financial markets (firm issues new debt or equity and sell it to investors on financial markets) or company can get loan from bank which are savings from individual investors.
What ways can a firm also use to raise money?
It can retain earnings and pay less dividends
What are examples of financial markets here investors savings can be?
Bond market (long term debt), stock market, money market, commodity market, forex market, derivatives market (options), crypto
What are examples of financial institutions where an investors savings may be?
Banks, insurance companies, pension funds, mutual funds, hedge funds
What is a financial market?
Place where financial assets are issued and traded
What is a stock market?
Where stocks are issued and traded. Public corporations use stock market to raise money and invest
What are the largest stock markets?
NYSE and Nasdaq
What is the primary market?
Where company issues new bonds/shares and sells to investors to raise money. Proceeds from this is the money corporations raise.
What is an IPO?
Initial public offering- firs time a stock issues new shares to the public.
What is the secondary market?
Where investors trade previously issued securities with each other- this does not raise money for corporation
What are financial intermediates?
Financial institutions that are organizations that raise money from investors and invest it in financial assets
What are examples of financial intermediates?
Banks, insurance companies, mutual funds pool, hedge funds, pension funds
What are the financial markets and intermediaries functions?
Transport cash across time, risk transfer and diversification, provide liquidity, payment mechanism and provide info
Is hiring new employees an investment decisions?
Yes
