MT 1

Question 1

What is Finance and 3 parts?

Answer 1

Finance is the study of cash flows among investors and companies and other related organizations.
-Personal Investment
-Corporate finance
-financial markets and Institutions

Question 2

What are the three questions of corporate finance?

Answer 2

-In what long-lived assets should the firm invest in?

-how can the firms raise cash for capital expenditure?

-how should short-term operating cash flows be managed?

Question 3

What is the Capital Budgeting decision?

Answer 3

A decision that decides on whether a product is going to launch or not and is decided based on, size, timing, and risk

Question 4

What are the two types of financing and what do they mean?

Answer 4

-Internal Financing, purchase the assets using the firms own funds
-External Financing, purchase assets by raising money from financial Institutions or markets

Question 5

What are some of the pros and cons of Incorporating?

Answer 5

Pros: Unlimited life, limited liability, easy transference of ownership, easy to raise capital
Cons: Costs (time and money), double taxation

Question 6

What are the pros and cons to separating ownership and management?

Answer 6

Pros: benefit from ownership in several businesses, take advantage of others expertise, easy to transfer ownership
Cons: managers may not act in the best interest of owners

Question 7

What are the 4 steps in the shareholder “map”?

Answer 7

Shareholders elect Board, Board appoints Management, they Manage the Corporation, that send profits back to shareholders

Question 8

What are the 3 goals of financial management?

Answer 8

maximize shareholder wealth
maximize share price
maximize firm value

Question 9

What are Financial Institutions?

Answer 9

they act as intermediaries between suppliers and users of funds
-Indirect finance-earn interest on the spread between loans and deposits
-Direct Finance-Service fees

Question 10

What is net working capital?

Answer 10

Current assets -Current Liabilities

Question 11

What is EAR?

Answer 11

Effective Annual Interest Rate: interest rate annualized using compound interest

Question 12

What is APR?

Answer 12

Annual Percentage Rate: interest rate annualized using simple interest

Question 13

What is a perpetuity?

Answer 13

a constant stream of cash flows that lasts forever

Question 14

What is a growing perpetuity?

Answer 14

a stream of cash that flows and grows and a constant rate forever

Question 15

What is an annuity?

Answer 15

a stream of constant cash flows that lasts for a fixed number of periods

Question 16

What is a growing annuity?

Answer 16

a stream of cash flows that grows at a constant rate for a fixed number of periods