Lecture 9. Finance

Question 1

What are the three main types of businesses in New Zealand?

Answer 1

Sole traders
Partnerships and joint ventures
Companies

Question 2

Define a sole trader…

Answer 2

• Own all assets of business

- Responsible for all risks (obligations and debts)

Question 3

Define partnership and joint venture…

Answer 3

• Operating a business with others

- Can combine overseas capital or expertise with business networks and ownerships of resources here.

Question 4

Define a company…

Answer 4

• 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.

Question 5

What lays within the structure of companies?

Answer 5

• Shareholders
• Board of directors
• Top management (ceo, coo, cfo etc)
• Staff

Question 6

What the shareholders?

Answer 6

Owners of the company

Question 7

What is the board of directors?

Answer 7

• Under direction, manager by or supervised by board of company.
• Board is composed of directors elected by shareholders

Question 8

Agency problems,

Answer 8

in notes, i dont understand

Question 9

How to combat agency problems?

Answer 9

• Compensation plans
• Board of Directors
• Takeovers
• Monitoring

Question 10

What is accounting?

Answer 10

• Preparation, analysing, interpretation of accounting records.

Question 11

What is economics?

Answer 11

• Study of choices made by people who are faced with scarcity.

Question 12

What is finance?

Answer 12

• Investments
• Decisions of institutions as they choose to invert and managerial finance, which involves the actual management of the firm.

Question 13

Role of the financial manager?

Answer 13

• Make project decisions
• Issue shares
• Borrow (?)
• Certainty against market fluctuations (?)
• Short term decisions (?)

Question 14

Investment decisions..

Answer 14

• Whether to do a project
• Which project to do if projects are mutually exclusive.
• Payback/ROI/NPV/PI

Question 15

What does payback period mean?

Answer 15

Time until cash flow recovers initial investment.

Emphasis is on liquidity (?)

Question 16

When is a payback period accepted?

Answer 16

If the payback period is less that the specified cutoff period.
No value given to cash flow after cut-off (cut of is arbitrary).

Question 17

What does ROI stand for and what does it mean?

Answer 17

• 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.

Question 18

Describe the project cash flow diagram in the lecture notes?

Answer 18

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.

Question 19

Value of money equations?

Answer 19

In lecture notes.

Question 20

What is the net present value rule?

Answer 20

Managers increase shareholders value by accepting all projects that are worth more than they cost.
(all projects with a positive net present value)

Question 21

What is the present value of a stream of cash flows?

Answer 21

Calc each PV and add them up.

Question 22

What is the net present value?

Answer 22

Present value of cash flows minus investment.

Question 23

What does NPV stand for?

Answer 23

Net present value

Question 24

Considerations relating to investment in equipment?

Answer 24

• Choice between equipment (life time, output etc).
• Investment timing.
• Replacement decision.

Question 25

What is equivalent annual cost?

Answer 25

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).

Question 26

What is investment timing?

Answer 26

You want to calculate when you should invest in a system.

Question 27

When are replacement decisions done?

Answer 27

Done when we want to, not when the machine breaks down.

Question 28

What is equipment investments?

Answer 28

Calculate when the right time is for investing in new equipment.

Question 29

What does profitability index identify?

Answer 29

The relationship between NPV and initial investment.