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FIN20040 - Foundations of Finance > Intro to financial management and corporate governance > Flashcards

Intro to financial management and corporate governance Flashcards

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1
Q

What are the three pillars or areas of corporate finance?

A

Investment
Financing
Liquidity

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2
Q

What is the role of a financial manager in a corporation?

A

To make decisions on: 1. Investment and
Capital budgeting
2.Financing
and capital structure
3. Working Capital Management
All three roles are interconnected and interdependent
Objective of financial managers is to achieve optimal allocation of the scarce resources available to them.

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3
Q

Define the accounting function

A

Allows managers to assess performance, risk of firm and decide on future corporate activity

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4
Q

Give six examples of financial management goals

A 
maximise profits
maximise sales
earning growth
survive
avoid distress
be the best
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5
Q

Why are profitability and risk control not compatible financial management goals?

A

They are contradictory and cannot both be achieved at once

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6
Q

Why is maximising profits not necessarily a good financial goal

A

It is not necessarily in shareholders best interests. This goal is vague and can hurt long term profits as managers may sacrifice long term profits to get a good figure on the income statement. ex: cutting R&D department is not good for company but it maximises profits

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7
Q

What should influence a companys financial goals

A

Stakeholders of that corporation rather than the firms mission

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8
Q

Define a stakeholder

A

Someone other than shareholders or creditors who potentially has a claim on the cash flows of the firm

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9
Q

What should be the goal of financial management?

A

Maximise the value of the company (market value) of the existing owners equity - wealth maximisation for those who provide capital to the business

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10
Q

What are the traits of a sole proprietorship?

A

Owned and managed by one person
Easy to form
Profit is taxed as personal income
Unlimited Liability
Life of a company linked to the owners life
Limited funding - personal wealth is the limit

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11
Q

Name three different forms of business

A

Sole proprietorship, partnership, limited corporation

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12
Q

What are the traits of a partnership?

A

2 or more owners
Easy to form - need partnership agreement
Limited + unlimited partners
Its terminated if a partner dies or leaves
Difficult to raise the capital
Profit is taxed as personal income
Controlled by general partners

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13
Q

What are the traits of a limited corporation?

A

Limited liability
Articles and Memorandum of incorporation required
Double taxation - corporation tax and dividends
Board of Directors
Life of Company hypothetically unlimited

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14
Q

Define unlimited liability

A

Assets are liable as payment to creditors

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15
Q

Define a Limited partnership

A

Partnership that has some general partners who run the partnership and some limited partners who are not active participants in the game

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16
Q

Define corporate governance

A

How a business manages itself

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17
Q

What is the difference in a single tier country to a two tier country about the Board of Directors

A

In single tier - shareholders dircectly elect the BOD

In two tier country - Shareholder elect a supervisory board who then elect BOD, not directly elected by shareholders

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18
Q

Define agency cost

A

Cost of resolving problematic agency relationships

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19
Q

What issue does agency theory examine?

A

The relationship between managers and owners and any conflict of interest in this relationship

20
Q

Why is it important in a public corporation rather than a private corporation?

A

For private firms those who manage the firm also own the firm

21
Q

What two types of agency problems are there?

A

Conflicts of interest in relationship between management and shareholders
Conflict of Interest in relationship between majority shareholders and minority investors

22
Q

Can shareholders control managers?

A

Through the elected directors

23
Q

What are the costs of Agency theory problems 1 (M&Owners)

A

Direct Costs:
Corporate expenditure benefiting managers ex: expensive excessive hotels
Expenses to monitor and control managers ex: auditors
Indirect: Lost opportunities

24
Q

Why must managers be kept in check with examples

A

Managers unchecked would maximises resources they have control over in the business
Ex: Enron scandal or Luckin coffee accounting scandal

25
Q

What are some possible solutions to agency problem type 1 (M&Owners)

A

Managers pay is linked to share value

Changes to voting systems for BOD

26
Q

Explain using case study the solution of linking manager pay to share value for agency problem one

A

In US managers have a lot of economic incentive to increase share value
In EU not as much emphasis on this. Not a lot of stock option pay across Europe

27
Q

Explain how many votes each owner gets in a firm and name two type of voting

A

1 share is 1 vote for Board voting system

Two types of voting are cumulative and straight voting

28
Q

Explain cumulative voting, its benefits and how it works

A

Shareholders may cast all votes for one member of BOD
Directors are elected all at once
More seats means it’s easier to get a seat because with N directors up for election you need 1/N+1 % plus one share of votes to guarantee a seat
There is not as much power for dominant shareholders in this way of voting

29
Q

Explain staggered election and it’s effects

A

Staggered election means fraction of directorships are up for election at a particular time. Limits minority power to elect director with cumulative voting.
Staggering makes takeover attempts less likely to succeed
Provides institutional memory - continuity on BOD

30
Q

Define proxy voting

A

Proxy is the grant of authority by shareholder to someone else to vote his or her shares, Management often tries to get more proxies transferred to them to vote.

31
Q

What is and when would a proxy fight happen?

A

If shareholders are unhappy with management a proxy fight can happen - outside shareholders can get more proxy to elect more directors on the board

32
Q

Explain how dividends work in a corporation

A

Dividend is only paid if declared by the boar dof directors - not a firm liability
Paid out of the corporations after-tax profits
Shareholder prefer dividends as it acts as a form of discipline on managers

33
Q

Explain agency problem type 2 with majority and minority shareholders - explain types of problems with an example

A

Controlling shareholder makes one of her firms trade on attractive terms with another of her firms - related party transaction and it’s self benefiting
Controlling shareholder can force firm to declare a large dividend if they need cash
Ex: Problems could arise in Tullow Oil plc as it has a very complex ownership structure

34
Q

Name some standard sources of financing

A

Private investors, bank loans, equity, bonds, short term financing

35
Q

Explain shadow banking

A

Set of financial intermediaries that lie outside the realm of traditional banks. ex:

36
Q

Explain project finance

A

Financing of long-term infrastructure, industrial projects, public services based upon projected cash flows of the project. Debt and equity used to finance the project are paid from cash flow generated by the project. It’s off balance sheet so is quite popular

37
Q

Explain crowdfunding

A

Funding venture by raising small amounts of money from a large number of people ex: via the internet

38
Q

Explain microfinance

A

Financial services targeting individuals and small businesses who lack access to conventional banking and related services

39
Q

Explain primary markets

A

Original sale of securities by governments and corporations. Direct trading to the public or private individuals

40
Q

Explain secondary market

A

Securities bought and sold after the original sale. Investor to investor. Owners sell to one another and the corporation is not involved

41
Q

What is an underwriter

A

Underwriter is a seller. Usually a bank or institution that publicise shares to be issued

42
Q

Explain why an underwriter syndicate would be formed

A

Group is formed because selling shares is a risky process as may not be sold - it spreads risk
Most lose money selling some shares at loss on secondary market

43
Q

Define a dealer market

A

When a dealer buys shares and sells them at their won risk. The bid-ask spread is the difference in price and is the dealer profit

44
Q

Define auction markets

A

They have no dealer. They match a buyer to a seller

45
Q

Define ECN

A

Electronic communication network - for listing shares

46
Q

Define Over the counter Markets

A

Off- exchange trading is done directly between two parties with no supervision of exchange

47
Q

Name three types of trading on secondary markets

A

Listing
Dealer markets
Auction markets

FIN20040 - Foundations of Finance (9 decks)

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