GLOBEFM Flashcards
What is the classic simplified organizational chart from the point of a CFO?
- CFO
- Treasurer’s office
- cash management
- credit management
- capital expenditure
- financial planning
- Controller’s office
- tax manager
- cost accounting manager
- financial accounting manager
- data processing manager
- Treasurer’s office
What are the CFOs main 3 areas of concern?
- Capital budgeting: managing long-term investments in assets
- Size, type of fixed assets, timing and riskiness of future cash flows
- Capital structure: obtaining long-term financing
- Financing cost (interest), the size, timing, source, optimal mix
- Working Capital Management: managing short-term assets and liabilities
- Size of inventory, credit policy and source
What are the different forms of business organization? (large firms)
- Sole proprietorship
- owned by one person who gets all profits but who is also unlimited liable for debts
- Other disadvantages are business lifetime and issues of transferring ownership
- Partnerships
- 2 or more owners who divide profits according to the partnership agreement and who are liable for business debts.
- Other disadvantages are business lifetime and issues of transferring ownership
- Corporation
- Legal ‘person’ and distinct from its owners
- Difficult to form and requires a lot of administrative work
- Easier to raise capital

What is (ACCORDING TO THE BOOK) the goal of financial management?
To maximize the current value per share of the existing stock
If no stocks ⇒ maximize the market value of existing owner’s equity.
What is the Sarbanes-Oxley act?
A 2001 law passed by US Congress which has increased the supervision and requirements regarding accounting activities to protect investors from corporate abuses.
What is an agency problem and why might it occur with corporations?
Agency problem: the possibility of conflict of interest between the stockholders and management of a firm
With corporations, there can be so many owners that the management effectively controls the firm and thus might pursue their own goals at the stockholder’s expense.
How can you help solve the classic agency problem?
- Through the managerial compensation structure
- Having a “proxy fight” such that stockholders can easily fire unwanted management (proxy fight = opportunity for voting with other’s stock shares).
What is the difference between primary and secondary markets?
- Primary market: the corporation is the seller of corporate securities (public offerings and private placements)
- Secondary markets: one owner or creditor selling to another
- Stock exchanges /NYSE, HKex) and OTC markets (NASDAQ)
What is the difference between dealer and auction markets?
- Dealers: buy and sell for themselves at their own risk
- Dealer-markets in stock and long-term debt = over the counter (OTC) markets
- Auction markets:
- Physical location like Wall Street (NYSE)
What does OTC refer to?
Over the counter markets/transactions which is transactions in stock and long-term debt with dealers.
Largest OTC market is NASDAQ
What are the two types of agency costs?
- Direct: corporate expenditure that benefits management + costs to monitor management
- Indirect: lost opportunity due to management forgoing profitable but risky projects for fear of losing job if project fails
Why is cash flow at Time 0 denoted -CF0?
Because it is a negative cash flow. An outflow of cash occurs.
What is present value?
The value of a cash flow at an earlier period on a time line. The value at Time 0 unless anything else is stated.
What is future value?
The value of a cash flow at some time in the future.
What is the difference between annuity and perpetuity?
Annuity = a finite series of equal payments
Perpetuity = an infinite series of equal payments
What is the principal?
The original amount borrowed or invested
What is the difference between simple and compounded interest?
With compounded interest, you also earn interest on your interest whereas with simple interest you only earn interest on your principal amount.
What is the formula for calculating future value?
FV = PV * (1+ r)^t
What is the formula for calculating present value?
PV = FV / (1+ r)^t
What is the formula for calculating r?
r = SQRT(FV/PV) - 1
What is the formula for calculating t?
t = Log(FV/PV) / Log*(1+r)
What is the rule of 72 and what is it used for?
Used to calculate the number of periods it takes to double an investment.
It is an approximation.
If you take 72 and divide by the interest rate. Fx. r = 0.12 (12 %), then it will take 72/12 = 6 years.
Interest rate is also called what?
- Discount rate
- Cost of capital
- Opportunity cost of capital
- Required return
What is the difference between an ordinary annuity and an annuity due?
- Ordinary annuity: first payment at the end of period 1
- Annuity due: first payment at time 0




