Module 1: Introduction to Corporate Finance Flashcards
What are the 6 basic areas of finance?
- Corporate Finance
- Investments
- Financial Institutions
- International Finance
- Fintech
- Personal Finance
applying technology to financial problems; ex: using an app to manage your money
Fintech
What is the goal of finance?
Relative Valuation (what do things cost?)
Things that are the same should be the same price. But, they can have different prices when they have different features (ex: Lambo vs. Camry). This is the ______ _____ _____ ______.
Law of One Price
Corporate finance focuses on what 3 questions?
- What should we invest in?
- How do we finance those investments?
- How do we manage the day-to-day operations of the firm?
What are the 2 complications that commonly occur in corporate finance situations?
- Risk
- Timing of the Cash-Flows
T or F: We assume investors are risk averse (avoid risk).
T or F: Over long periods of time, inflation makes a big difference (issue of inflation).
True; True
What is the downside of the Balance Sheet Model?
It only tells us what business has done in the past; the other two models show us what business hopes to generate in the future
T or F: The Market Value Model is pretty reliable.
True
the process of managing a firm’s long-term investment
capital budgeting
the mixture of financing types that a company uses to fund its long-term investments (how we’re financing the projects that we want to finance)
capital structure
Does capital structure matter (aka does it matter if we get the money from stocks (equity) or liabilities (debt)/ where the money comes from)?
Not if there’s an efficient market with no taxes, no bankruptcy cost, and no agency costs and asymmetric information
where one side has more information about the project than the other side (ex: bank vs. you knowing how hard you’re going to work on a project)
asymmetric information
Which describes debt and which describes equity?
1. No guarantee of any particular cash flows; more upside but less downside protection
2. Money we’ve borrowed and promise to pay back
Equity; debt
You don’t want to have too much cash on hand because those assets are not being _______. The investors that have given you money want to be able to earn a ______, so they want you to be putting that money to good use.
productive; return
where investors are buying and selling stocks, funds, etc.
financial markets
when a company is raising money directly. These are one time events for the most part.
Primary market transaction
where securities are traded after they go through the primary market
secondary market (ex: buying stock for Starbucks. Money doesn’t go directly to Starbucks, it goes to the previous investor)
Which market is good for companies that are trying to raise money because investors are willing to pay a lot more for a public company because they know that they can get out of their investment at any time?
Secondary markert
What are the 2 basic things companies can do with the cash flowing out of their firms?
- Reinvest the money back into the company
- They can pay it out to shareholders
(part of the profits will also go to government for taxes)
In the case of ____, companies are obligated to pay money out to shareholders. If it’s ______, the company doesn’t have an obligation to pay out dividends.
debt; equity
Historically, shareholders were paid with __________. Nowadays, it’s more popular for companies to pay shareholders by doing ______ ________.
dividends; share buybacks
T or F: all investors have to pay taxes on dividends and dividends are declared quarterly
True
When companies go into the open market and buy back shares. As they buy more and more shares, the value of the shares that are left start to go up. Companies like to do this rather than pay out dividends for ______ reasons.
share buybacks ; tax
Who gets paid first: debtholders or shareholders?
Debtholders
T or F: Equity is a promised stream of cash flows. Debt gets whatever is left over.
False; debt, then equity
T or F: Equity holders have no downside protection, but they also have the opportunity for an unlimited upside.
True
A business created as a distinct legal entity composed of one or more individual entities.
corporation
What is the goal of the firm?
Why is this a good goal? Bad?
- To maximize the current value per share of the existing stock.
- Good: we want owners to be happy because they risk their capital to give to the company.
- Bad: Investors could be too short-term sighted and it’s too narrow (like what abt treating employees well, focusing on the quality of the product, etc.)
What are the 2 costs of the conflicts of interest between stockholders and management?
- Direct costs
- Indirect costs
Corporate expenditures that benefit management but not shareholders.
Direct costs
building a nice, new office that makes the CEO/management team happy, but doesn’t add any value to the company is an example of a _____ _______.
direct cost
Direct costs are expenses that arise from the _______ ___ _____ management actions.
need to monitor
Lost opportunities, that managers may not pursue if there is significant risk is a _______ _______.
indirect cost
