Lecture 1

Question 1

What are the 3 scopes of finance?

Answer 1

i) Investments
ii) Financial Markets
iii) Corporate Finance

Question 2

What is Finance?

Answer 2

A discipline concerned with determining value and making decisions based on that value assessment.

A finance function allocates resources, including the acquiring, investing, and managing of resources.

Question 3

What is Investments?

Answer 3

The study of financial transactions from the perspective of investors outside the firm

Question 4

What does Corporate Finance address?

Answer 4

i) Long Term Investments & financing, everyday activities

Question 5

What is the goal of Financial Management?

Answer 5

The primary goal is shareholder wealth maximisation, which is the same as maximizing stock price.

Maximize

• Value of the firm
• Wealth of its owners
• Price of its stock
• Contribution to economy

Question 6

What 3 factors determine stock prices- the underlying firm’s ability to generate cash flows

Answer 6

• Amount of cash flows expected by shareholders
• Timing of the cash flow stream
• Riskiness of the cash flow stream

Question 7

What is the difference between Intrinsic Value and Market Price

Answer 7

i) Intrinsic value is an estimate of a stock’s ‘true’ value based on accurate risk and return data. AN ESTIMATED VALUE, NOT A PRECISE OBJECTIVELY KNOWN MEASURE
ii) The market price is based on perceived information as seen by the marginal investor (can be theoretically incorrect)

Question 8

Roles & Decisions of the Financial Manager. What are the 3 roles in the realm of a Finance Manager?

Answer 8

i) Capital Budgeting - What long-term investments should the business take on?
ii) Capital Structure - How should we pay for our assets? Debt or equity?
iii) Working Capital Management - Day-to-day finances of the firm.