Finance Week 1

Question 1

What is Finance?

Answer 1

It is about the uses and sources of assets with a focus on valuation of assets

Question 2

What 2 decisions do Financial managers have to make?

Answer 2

Investing and financing decisions

Question 3

What are investment decisions?

Answer 3

Decisions about the uses of funds, can invest in tangible, intangible or financial assets

Question 4

What are financial decisions?

Answer 4

Sources of funds, raise money for investments`

Question 5

What are financial decisions a firm can use to raise money?

Answer 5

Can retain earnings, issue new debt or new equity

Question 6

What are tangible assets?

Answer 6

Touchable assets, e.g. stores, delivery trucks, planes

Question 7

What are intangible assets?

Answer 7

Untouchable assets e.g. patents, data

Question 8

What are real assets?

Answer 8

Real assets are used to produce goods and services. Tangible or intangible.

Question 9

What are financial assets?

Answer 9

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

Question 10

How do firms finance their investments in real assets?

Answer 10

By issuing financial assets to investors

Question 11

What are the 3 types of business organizations?

Answer 11

Sole proprietorship, partnership and corporations

Question 12

What is a corporation?

Answer 12

A business that is organized as a separate legal entity owned by shareholders. Managers and owners separate.

Question 13

What is the benefit of a corporation?

Answer 13

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.

Question 14

What is double taxation of a corporation?

Answer 14

Owners and businesses are taxed separately

Question 15

What is the goal of a corporation?

Answer 15

To maximize market value of shareholders equity

Question 16

What is the shareholders equity?

Answer 16

Share price * number of shares

Question 17

Why is the goal of a corporation dangerous?

Answer 17

Can lead to earnings manipulation- increase profits in one year to look good

Question 18

How are environmental and social aspects kept in mind?

Answer 18

Investors punish irresponsible firms by selling their shares, decreasing market value

Question 19

What is the agency problem?

Answer 19

Due to separation of owners and managers (agents), managers may be tempted to act in own interest rather than in owners interest

Question 20

What is the agency cost?

Answer 20

It is the loss from the agency problem or the loss from cost of mitigating it

Question 21

What ways can you diminish the agency problems?

Answer 21

Can diminish this problem through internal controls and policies. Can introduce executive compensation (tie compensation package of managers to financial performance of corporation)

Question 22

What is corporate governance?

Answer 22

Laws, regulations and institutions that protect shareholders and investors from agency problem

Question 23

What is the benefit of the board of directors?

Answer 23

They oversee managers and ensure they are also acting in owners interests. Appoint CEO and CFO and approve dividends and issuance of new shares

Question 24

Why are financial markets important?

Answer 24

Businesses need to go to financial markets and institutions for financing as they need to grow

Question 25

Where does money that corporations use to invest in real assets ultimately come from?

Answer 25

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.

Question 26

What ways can a firm also use to raise money?

Answer 26

It can retain earnings and pay less dividends

Question 27

What are examples of financial markets here investors savings can be?

Answer 27

Bond market (long term debt), stock market, money market, commodity market, forex market, derivatives market (options), crypto

Question 28

What are examples of financial institutions where an investors savings may be?

Answer 28

Banks, insurance companies, pension funds, mutual funds, hedge funds

Question 29

What is a financial market?

Answer 29

Place where financial assets are issued and traded

Question 30

What is a stock market?

Answer 30

Where stocks are issued and traded. Public corporations use stock market to raise money and invest

Question 31

What are the largest stock markets?

Answer 31

NYSE and Nasdaq

Question 32

What is the primary market?

Answer 32

Where company issues new bonds/shares and sells to investors to raise money. Proceeds from this is the money corporations raise.

Question 33

What is an IPO?

Answer 33

Initial public offering- firs time a stock issues new shares to the public.

Question 34

What is the secondary market?

Answer 34

Where investors trade previously issued securities with each other- this does not raise money for corporation

Question 35

What are financial intermediates?

Answer 35

Financial institutions that are organizations that raise money from investors and invest it in financial assets

Question 36

What are examples of financial intermediates?

Answer 36

Banks, insurance companies, mutual funds pool, hedge funds, pension funds

Question 37

What are the financial markets and intermediaries functions?

Answer 37

Transport cash across time, risk transfer and diversification, provide liquidity, payment mechanism and provide info

Question 38

Is hiring new employees an investment decisions?

Answer 38

Yes