Lecture 9. Finance Flashcards
What are the three main types of businesses in New Zealand?
Sole traders
Partnerships and joint ventures
Companies
Define a sole trader…
- Own all assets of business
- Responsible for all risks (obligations and debts)
Define partnership and joint venture…
- Operating a business with others
- Can combine overseas capital or expertise with business networks and ownerships of resources here.
Define a company…
- Can be done solo or with someone.
- Must have registered name.
- One or more shares.
- Need to find out riles of running.
- Need to register company.
What lays within the structure of companies?
- Shareholders
- Board of directors
- Top management (ceo, coo, cfo etc)
- Staff
What the shareholders?
Owners of the company
What is the board of directors?
- Under direction, manager by or supervised by board of company.
- Board is composed of directors elected by shareholders
Agency problems,
in notes, i dont understand
How to combat agency problems?
- Compensation plans
- Board of Directors
- Takeovers
- Monitoring
What is accounting?
- Preparation, analysing, interpretation of accounting records.
What is economics?
- Study of choices made by people who are faced with scarcity.
What is finance?
- Investments
- Decisions of institutions as they choose to invert and managerial finance, which involves the actual management of the firm.
Role of the financial manager?
- Make project decisions
- Issue shares
- Borrow (?)
- Certainty against market fluctuations (?)
- Short term decisions (?)
Investment decisions..
- Whether to do a project
- Which project to do if projects are mutually exclusive.
- Payback/ROI/NPV/PI
What does payback period mean?
Time until cash flow recovers initial investment.
Emphasis is on liquidity (?)
When is a payback period accepted?
If the payback period is less that the specified cutoff period.
No value given to cash flow after cut-off (cut of is arbitrary).
What does ROI stand for and what does it mean?
- Return on Investment
- The ratio of cashflow (gained) and initial investment.
- No account of time value of money.
- No account of the size of a project.
Describe the project cash flow diagram in the lecture notes?
During pre-project phase there is a loss of money, during the project phase there is even more loss, during the operation phase there is earnings.
Value of money equations?
In lecture notes.
What is the net present value rule?
Managers increase shareholders value by accepting all projects that are worth more than they cost.
(all projects with a positive net present value)
What is the present value of a stream of cash flows?
Calc each PV and add them up.
What is the net present value?
Present value of cash flows minus investment.
What does NPV stand for?
Net present value
Considerations relating to investment in equipment?
- Choice between equipment (life time, output etc).
- Investment timing.
- Replacement decision.
What is equivalent annual cost?
The cost per period with the same present value as the cost of buying and operating a machine.
Present value of costs/EAA factor (there is a formula for the EAA factor).
What is investment timing?
You want to calculate when you should invest in a system.
When are replacement decisions done?
Done when we want to, not when the machine breaks down.
What is equipment investments?
Calculate when the right time is for investing in new equipment.
What does profitability index identify?
The relationship between NPV and initial investment.
