IB CH 16 Mastering Financial Management Flashcards
Financial management
all the activities concerned with obtaining money and using it effectively
What should be done with excess cash?
Should be invested in certificates of deposit (CDs), government securities, or conservative, marketable securities
Who is a Chief financial officer (CFO) and what does he do?
A CFO is a high-level corporate executive who manages a firm’s finances and reports directly to the company’s chief executive officer or president
short-term financing
money that will be used for one year or less
cash flow
is the movement of money in and out of an organization
speculative production
the time lag between the actual production of goods and when the goods are sold
risk-return ratio
a ratio based on the principle that a high-risk decision should generate higher financial return for a business and more conservative decision s often generate lower returns
financial plan
a plan for obtaining and using the money needed to implement an organization’s goals and objectives
The 3 steps of financial planning
- Establish organizational goals and objectives
- Budget the money needed to accomplish the goals and objectives
- Identify the sources of funds
(sales revenue; Equity capital; Debt capital; sale of assets)
-monitor and evaluate continuously
budget
a financial statement of projects income, expenditures over a specified future period
cash budget
a financial statement that estimates cash receipts and cash expenditures over a specified period
receipt
Eingang
zero-base budgeting
is a budgeting approach in which every expense in every budget must be justified
capital budget
a financial statement that estimates a firm’s expenditures for major assets and its long-term financing needs
(e.g. Berkshire Hathaway purchased Duracell for $6 billion and constructed a capital budget to determine the best way to finance the acquisition
Where does equity capital derive from and for which type of investment is it used?
Sole proprietor:
provided by the owner of the business
corporation:
from the sale of shares of ownership in the business.
–> for long term investments
What is debt capital and for which type of investment is it used for?
- it is borrowed money, through loans
–> for long and short term investment
interim
zwischenzeitlich
interim budgets
(weekly, monthly or quarterly)
certificate of deposit (CD)
a document stating that the bank will pay the depositor a guaranteed interest rate on money left on deposit for a specified period of time
check
a written order for a bank or other financial institution to pay a stated dollar amount to the business or person indicated on the face of the check
line of credit
a loan that is approved before the money is actually needed
revolving credit agreement
a guaranteed line of credit
collateral
real estate or property pledged as security for a loan
debit card
a card that electronically subtracts the amount of a customer’s purchase from her or his bank account at the moment the purchase is made
electronic funds transfer (EFT) system
a means of performing financial transactions through a computer terminal
- ATM
- ACHs
- POS
- ECC
Automated clearinghouses (ACHs)
Designed to reduce the number of paper checks, automated clearinghouses process checks, recurring bill payments, Social Security benefits, and employee salaries. For example, large companies use the ACH network to transfer wages and salaries directly into their employees’ bank acounts, thus eliminating the need to make out individual paychecks.
Point-of-sale (POS) terminals
a computerized cash register located in a retail store and connected to a bank’s computer.
Electronic check conversion (ECC)
is a process used to convert information from a paper check into an electronic payment.
letter of credit
is a legal document issued by a bank or other financial institution guaranteeing to pay a seller a stated amount for a specified period of time
banker’s acceptance
a written order for a bank to pay a third party a stated amount of money on a specific date
unsecured financing
financing that is not backed by collateral
trade credit
a type of shortterm financing extended by a seller who does not require immediate payment after delivery of merchandise
- is a form of short-term financing (no interest is charged)
promissory note
a written pledge by a borrower to pay a certain sum of money to a creditor at a specified future date
prime interest rate
is the lowest rate charged by a bank for a short-term loan
- this lowest rate is generally reserved for large corporations with excellent credit ratings
commercial paper
is a short-term promissory note issued by large corporations
(e. g. microsoft has a good credit rating and can raise large sums of money quickly by issuing a commercial paper)
- no collateral is involved
factor
a firm that specializes in buying other firms’ accounts receivable
- the factor buys the accounts receivable for less than their face value, however, it collects the full face value dollar amount when each account is due.
(the firm selling its accounts receivable gets less than face value, but gets cash immediately.
accounts receivable
Forderung, Außenstände
face value
Nennwert (the value printed or depicted on a coin…)
primary market
a market in which an investor purchases financial securities (via an investment bank) directly form the issuer of those securities)
investment banking firm
assists corporations in raising funds, usually by helping to sell new issues of stocks, bonds, or other financial securities
secondary market
a market for existing financial securities that are traded between investors
securities exchange
a marketplace where member and brokers meet to buy and sell securities
over-the-counter (OTC) market
a network of dealers who buy and sell the stocks of corporations that are not listed on a securities exchange
common stock
stock whose owners may vote on corporate matters but whose claims on profit and assets are subordinate to the claims of others
preferred stocks
stock whose owners usually do not have voting rights but whose claims on dividends and assets are paid before those of common stock owners
retained earnings
the portion of a corporation’s profits not distributed to stockholders
private placement
occurs when stock and other corporate securities are sold directly to insurance companies, pension funds, or large institutional investors
financial leverage
the use of borrowed funds to increase the return on owners’ equity
(works as long as the firm’s earnings are larger than the interest charged for the borrowed money.)
term-loan agreement
a promissory note that requires a borrower to repay a loan in monthly, quarterly, semiannual, or annual installments
corporate bond
a corporation’s written pledge that it will repay a specified amount of money with interest
registered bond
a bond registered in the owner’s name by the issuing company
debenture bond
a bond backed only by the reputation of the issuing corporation
mortgage bond
a corporate bond secured by various assets of the issuing firm
convertible bond
a bond that can be exchanged, at the owner’s option, for a specified number of shares of the corporation’s common stock
bond indenture
a legal document that details all the conditions relating to a bond issue
serial bond
bonds of a single issue that mature on different dates
sinking fund
a sum of money
to which deposits are made each
year for the purpose of redeeming
a bond issue
trustee
an individual or an
independent firm that acts as a
bond owner’s representative
