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2021 - Financial Mgmt > Module 1 > Flashcards

Module 1 Flashcards

1
Q

role of the financial manager

A

to use a blend of tools and analyses to make financial decisions that will create firm value for the owners

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2
Q

the value of an asset

A

determined by the future cf it will generate thru use or sale

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3
Q

three fundamental decisions

A
  • investing
  • financing
  • wcm
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4
Q

investing decision

A

capital budgeting/expenditure decision

  • deciding what productive assets to buy
  • most important decision bc = generates most inflows, long-term, involve huge cash outlays
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5
Q

sole proprietor adv & disadv

A
  • easy and cheap to form, less regulated, single taxing

- no perp succ, unlimited liability, capital limited to one owner

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6
Q

partnership adv & disadv

A
  • adv: single taxation, can raise more capital, can share duties and expertise
  • no perp succ, partners jointly liable for debts, possible disputes
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7
Q

company adv & disadv

A

incorporated legal entity seperate from owners. governed by companies act.

  • limited liability, perp succ, more capital can be raised, easy to sell ownership interest
  • owner & mgmt separate = principle agent problem, double tax, more regulated
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8
Q

the BOD

A

elected at the annual governance meeting and represent the SH and appoint a CEO

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9
Q

CEO

A
  • CFO reports to them

- resp for day-to-day company mgmt and reports to the board

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10
Q

audit committee

A

oversees both int and ext auditors and AFS prep

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11
Q

CFO

A
  • reports to CEO

- responsible for managing the financial function (treasury, risk mgmt and acc)

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12
Q

problems with profit maximization

A
  • manipulation of acc profits
  • does not reflect cash flows / when they are to be rec
  • ignores uncertainty / risk associated with cf (ignores tvm)
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13
Q

how firm share value is determined

A

by examining future cash flows (size, timing, riskiness)

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14
Q

appropriate goals

A

for unlisted = maximizing the current value of OE

for listed = maximizing share price

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15
Q

agency relationship

A
  • shareholders (principle) hire managers (agent) to run the company and represent their interests
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16
Q

internal mechanisms to minimize agency problem

A
  • aligning interests by tying mgmt compensation to company performance / share options schemes
  • cash bonuses
  • performance shares
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17
Q

corporate governance mechanisms

A

(BOD)

  • board chair should be independent from CEO = ned
  • board should have majority NEDs to ensure effective monitoring of exec directors
  • developing / enforcing corp ethics code
  • audit committees
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18
Q

external mechanisms to minimize agency problem

A
  • corporate raiders takeover

- managerial labour market (bad firms can’t hire good managers, good firms won’t hire bad managers)

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19
Q

executive directors

A

involved in d2d bus activities, are part of the board

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20
Q

two parts of the financial system

A
  • fin markets

- fin institutions

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21
Q

financial markets

A

securities are traded, bonds, shares, comm paper

22
Q

what do fin institutions do?

A

gather small amts of money and loan it / inv in shares or bonds (banks ins firms pension funds)

23
Q

what is the capex/capital budgeting decision?

A

involves deciding what productive assets to buy

24
Q

what is the decision rule?

A

if future cash inflows > outflows, accept the project

25
Q

why is the capex decision considered the most important?

A
  • productive assets generate most of the firm’s inflows (firm value)
  • capex decisions are long-term (if you make a mistake, stuck with it for long)
  • decisions involve huge cash outlays
26
Q

what is the financing capstructure decision?

A
  • determines how productive assets are defined

- firm value comes from inv rather than financing

27
Q

two ways of raising equity finance?

A
  • share issue

- reinvesting residual cash flow

28
Q

examples of indirect agency costs?

A

lost opp costs

29
Q

wcm decision?

A
  • how current assets and liabilities are managed / how day-to-day financial matters should be managed
30
Q

what does working cap mgmt decision seek to do?

A

maximize value creation and avoid destroying value

31
Q

what is the role of the fin system?

A

to gather money from lender-savers and channel it to borrower-spenders and enable firms to raise cap and manage their liquidity and risk

32
Q

two ways by which funds flow through a fin sys?

A

directly (markets)

indirectly (institutions)

33
Q

what is the role of the fin system?

A

to gather money from lender-savers and channel it to borrower-spenders and enable firms to raise cap and manage their liquidity and risk

34
Q

what happens in a direct financing transaction?

A
  • funds directly through markets from LS to BS. they then sell instruments to LS in exchange for money.
35
Q

key players in direct fin markets?

A

inv banks

money centre banks

36
Q

what do inv banks do?

A
  • help companies sell new debt and equity securities and also provide broker and dealer services.
  • helps comps with origination, underwriting, distribution
37
Q

what is fin market underwriting?

A

ensures the successful sale of shares or bonds in primary markets

38
Q

what is a formal market/exchange?

A
  • organized & highly regulated markets which have a central trading location
  • specialize in a narrow range of standardized instruments and are accessible to small investors
39
Q

what is a otc markets?

A
  • for trading securities not on the formal exchange
  • no central location
  • currencies are efficiently traded over these markets
40
Q

what is a money market?

A
  • where short term debt instruments are traded
  • no central location
  • low risk, low return investments
41
Q

what is a capital market?

A

long-term

42
Q

what is a banker’s acceptance?

A

issued by companies involved in international trade but are guaranteed by banks

43
Q

what is a commercial paper?

A

issued by large comps when they want to borrow in order to manage their liquidity

44
Q

whats a public market?

A

markets where the general public can buy/sell securities through a broker (formal and capital)

45
Q

what is a private market?

A

involve a direct transaction between two parties (otc and money)

46
Q

types of SM indices

A

global, regional, national, industry

47
Q

services banks offer?

A
  • comm banking (overdraft facility, leasing, forex)

- inv banking (corporate finance, lending, public share issues (IPOs)

48
Q

services that insurance firms offer?

A
  • obtaining funds from insurance policies
  • provide funding to public companies through share purchase and bonds in direct markets
  • fund private companies through placement funding
49
Q

how is the real interest rate determined?

A
  • through the absence of inflation

- by the interaction of the RR businesses expect to earn on capital goods

50
Q

what is the nominal interest rate?

A
  • observed in the market

- real int rate and expected infl rate

2021 - Financial Mgmt (11 decks)

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