l1&2 : intro to finance

Question 1

what are the four perspectives on finance?

Answer 1

1. corporate finance
2. investments
3. financial intermediaries & markets
4. government

Question 2

what are some examples of corporate finance as a perspective of finance?

Answer 2

• capital budgeting
• financing (shareholder funds, retained profits, bank loans, bonds and debenture loans)
• liquidity / working capital mgt

Question 3

what are some examples of investments as a perspective of finance?

Answer 3

individual investors

Question 4

what are some examples of financial intermediaries as a perspective of finance?

Answer 4

banks, pension funds, unit trusts

Question 5

what are some examples of the government as a perspective of finance?

Answer 5

gilts, tax, regulation

Question 6

what are the two forms of business structure?

Answer 6

1. unincorporated
2. incorporated

Question 7

explain what an unincorporated business structure is.

Answer 7

sole traders, partnerships

Question 8

give three advantages of an unincorporated business structure.

Answer 8

• cheap and easy to establish
• ownership & control concentrated
• no requirement to publish accounts

Question 9

give three disadvantages of an unincorporated business structure.

Answer 9

• difficult to sell –> finite life
• unlimited liability
• difficult to raise funds to grow

Question 10

explain what an incorporated business structure is.

Answer 10

separate legal identity from its owners. companies limited by shares. financed by share and debt capital. shareholders elect board of directors, board appoint managers.

Question 11

give three advantages of an incorporated business structure.

Answer 11

• ownership can be transferred by selling shares –> infinite life
• limited liability
• funds raised publicly through equity and debt markets

Question 12

give four disadvantages of an incorporated business structure.

Answer 12

• difficult and expensive to establish
• tax disadvantages
• management is separate from owners
• requirement to publish accounts

Question 13

what are financial markets?

Answer 13

allows investors to buy and sell financial claims (securities) and facilitate this exchange

Question 14

what are primary stock markets?

Answer 14

markets where companies raise new equity finance by issuing new securities

Question 15

what are secondary stock markets?

Answer 15

markets where investors buy and sell existing shares. information and liquidity motivated

Question 16

how are directors elected in single-tier board countries?

Answer 16

UK, Ireland, Sweden
shareholders elect boards of directors who then select managers
shareholders —> BoD —> managers

Question 17

how are directors elected in two-tier board countries?

Answer 17

Denmark, Germany, the Netherlands
exec board manages day to day operations and reports to supervisory board which monitor exec boards performance

Question 18

give three advantages of a secondary stock market.

Answer 18

1. investment v borrowing horizons
2. liquidity / marketability
3. active market gives correct valuations

Question 19

when was the “big-bang” in the secondary market?

Answer 19

27 oct 1986

Question 20

when was the “big-bang ii” in the secondary market?

Answer 20

20 oct 1997

Question 21

what were the problems pre big-bang in the secondary stock market?

Answer 21

• increased concentration / reduced competition in jobs
• fixed brokerage commissions
• LSE membership restricted
• jobbers undercapitalised

Question 22

what happened after big-bang ii?

Answer 22

more changes were made to the trading system eg. trading floor v SEAQ & telephone

Question 23

define IPO.

Answer 23

intial public offering. when a private company sells its first shares of stock to the public. in essence, the company is moving from private to public ownership.