Foundations of Finance

Question 1

What are the 6 building blocks of Finance

Answer 1

1. Concept and structure of Business
2. Importance and Measurement of Cash Flows
3. Definition and Measurement of Risks
4. Time Value of Money
5. Basics of Valuation
6. Trading Fundamentals

Question 2

Define
6 Building Block of Finance: Concept and structure of Business

Answer 2

Finance is always Forward looking, not backward looking

Question 3

Define
6 Building Block of Finance: Importance and Measurement of Cash Flows

Answer 3

Earnings are just stopping point, not the destination

Question 4

Define
6 Building Block of Finance: Definition and Measurement of Risks

Answer 4

Risks is neither good nor bad, its always part of the business

Question 5

Define
6 Building Block of Finance: Valuation Basics

Answer 5

Valuation of an asset is the present valuation of its cashflows

Question 6

Define
6 Building Block of Finance: Trading Fundamentals

Answer 6

The world is full of friction

Question 7

Define
6 Building Block of Finance: Time Value of Money

Answer 7

A one peso right now is worth more than a peso in the future

Question 8

True or False
We breakdown a business into Assets

Answer 8

True

Question 9

True or False
The value of assets in finance is not what you invested in them but what they will generate in the present

Answer 9

False
Its value is what it will generate in the future not the present

Question 10

Identification:
There are only 2 ways to fund a business, what are these 2?

Answer 10

Debt and Equity

Question 11

True or False
Finance is the heart and the measurement rod of the business

Answer 11

True

Question 12

True or False
Finance depends on earnings while accounting use cashflows to measure performance

Answer 12

False
Finance use cashflows while accounting use earnings to measure performance

Question 13

What are the 3 forms of cashflows?

Answer 13

Contractual, Residual, Contingent

Question 14

These are cash flows
set at the time a contract is initiated. They are
sometimes a constant and sometimes tied to an
mutually agreed upon scalar.
This includes company bond.

Answer 14

Contractuale

Question 15

Cash flows left over after
contractual obligations have been met. These includes owner of the business or shareholder value.

Answer 15

Residual

Question 16

Cash flows that will occur
only in if a specified event occurs

Answer 16

Contingent

Question 17

What are the 3 steps in adjusting to a risk?

Answer 17

1. Define risks based on its 2 nature : positive and negative outcome
2. Decide on which perspective on risk matters ( Opinion of manager? friend, ceo?)
3. Convert risk definition to risk measure

Question 18

True or FALSE

Valuation is just an extension of present value concept

Answer 18

True

Question 19

It is the buy and sell of an asset to take advantage of the price differences on the market

Answer 19

Arbitrage

Question 20

What are the 2 frictions that get in a way of finance?

Answer 20

1. Cost in trading
2. Government taxes

Question 21

3 types of Accounting expenses

Answer 21

operating, capital and financing expenses