Financial Management

Question 1

Real assets

Answer 1

• determine productive capacity of the economy
• land, buildings, machines, knowledge
• used to produce goods and services

Question 2

Financial assets

Answer 2

• give claims on real assets
• shares: claims on company’s cash flows
• financial assets fuel investment in real assets

Question 3

Primary concerns of finance manager

Answer 3

• what investments to make

- how to fund investments

Question 4

Corporate goals

Answer 4

• ownership often diffuse
• managers run companies on behalf of shareholders - separation between ownership and control
• corporate governance aims at ensuring managers run companies in best interest
• mangers might have aligned incentives (wasteful spending etc)

Question 5

Mergers & Acquisitions

Answer 5

• Buy all (or stake) of another company to (target) gain control over their resources
• Often large & complex transactions that will have major impact on companies involved

Question 6

Corporate control

Answer 6

the power to make investment and financing decisions

Question 7

Mergers and acquisitions may enrich shareholders of acquiring firm if

Answer 7

• they can acquire the target at less than its ‘true value’
• the two enterprises are worth more if merged than if operating as separate entities (and the price does not fully reflect this)

Question 8

Merger motives

Answer 8

Economies of sales: - reduce marginal cost of production - horizontal mergers

Economies of scope: - combining complementary resources

Removing inefficient management: - separation ownership & control. - M&A market for corporate control