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Foundations of Finance > Overview of Financial Management > Flashcards

Overview of Financial Management Flashcards

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1
Q

The decisions that answer the question: What assets should the firm own?

A

investment decisions

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2
Q

The decisions that answer the question: Should the company issue stock, short-term debt, long-term debt or more exotic securities to pay for assets?

A

financing decisions

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3
Q

These are the items that investment decisions deal with.

A

current assets and fixed assets

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4
Q

These are the items that financing decisions deal with.

A

current liabilities, long-term debt, and shareholder’s equity

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5
Q

What makes a current asset “current” ?

A

It is an asset that can be converted to cash within one year.

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6
Q

What makes a current liability “current” ?

A

It is a debt due within one year.

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7
Q

Accounts receivable, cash, and marketable securities are all examples of ______ _______ .

A

current assets

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8
Q

Accounts payable, accrued wages payable, and taxes payable are all examples of ________ ___________ .

A

current liabilities

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9
Q

Factories and fleet are examples of _______ _______ .

A

fixed assets

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10
Q

True or false: the goal of the firm is profit maximization.

A

FALSE !

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11
Q

Why is the goal of the firm NOT profit maximization?

A
  1. short run vs. long run profits
  2. ignores timing of cash flows (we’d rather have the money now than later)
  3. does not have a risk dimension
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12
Q

What is the goal of the firm?

A

to MAXIMIZE SHAREHOLDER WEALTH

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13
Q

What is the formula for calculating the shareholder wealth?

A

shareholder wealth =
(# of shares owned) x (stock price)

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14
Q

Agency Theory refers to the nature of the relationship between __________ and ______________ .

A

ownership (stakeholders) and management

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15
Q

What is the Agency Problem?

A

Managers generally have other motives than maximizing shareholder wealth.

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16
Q

What is perquisite consumption? Is it a problem or solution to the Agency Problem?

A

It is a PROBLEM.
Examples include:
- company needs a private jet to get quickly to conference locations, CEO jets off to Italy for vacation on the weekend
- company meeting held in Cancun versus Elkhart, IN

17
Q

What is shirking? Is it a problem or solution to the Agency Problem?

A

It is a PROBLEM.
Examples include:
- slacking
- calling out sick when you’re not

18
Q

What is project selection? Is it a problem or solution to the Agency Problem?

A

It is a PROBLEM.
Examples include:
- taking a low-risk project with less payoff than a high-risk project with higher payoff because your job and livelihood is less at risk that way

19
Q

What is management resistance to takeover bids? Is this a problem or solution to the Agency Problem?

A

It is a PROBLEM.
Examples include:
- outside company comes and offers higher $/share, managers convince the shareholders to not sell the shares to protect their jobs

20
Q

What are appropriate compensation packages? Are they a problem or solution to the Agency Problem?

A

They are a SOLUTION.
Examples include:
- board of directors puts more shares in the manager’s compensation (incentive to make share value rise)
- stock option plan (the right to buy tons of stock at a set price, incentivized to keep that original number low by raising the stock price for public)

21
Q

Is the influence of outside directors a problem or solution to the Agency Problem?

A

It is a SOLUTION.
This keeps the top mgmt in check because outside directors are more likely to blow the whistle.
Inside directors, on the other hand, maintain cozy and longstanding relationships with top mgmt.

22
Q

What is the disgorging of cash in declining industries? Is it a problem or solution to the Agency Problem?

A

It is a SOLUTION.
When there is waning interest in the product / it’s not in demand anymore, you can sell things like factory space for extra cash. If you pay the extra cash to the shareholders through a cash dividend, (ASK HIM OR A TA ABOUT THIS)

23
Q

Is the threat of management termination a problem or solution to the Agency Problem?

A

It is a SOLUTION.
The reputation of mgmt suffers substantially if they are fired, so they have a personal incentive to keep their jobs.

24
Q

What are financial markets?

A

a place where financial assets trade

25
Q

What is a financial asset?

A

a claim against some issuer

26
Q

What are the main purposes of financial markets?

A
  1. Facilitate the acquisition and investment of money -bring together those who have capital and those who need capital for trade.
  2. To establish market prices and rates of return - investors can track market values of their assets & market prices can tell mgmt how investors think mgmt is performing.
27
Q

Which type of financial market is SHORT-TERM?

A

money markets

28
Q

Which type of financial market is LONG-TERM?

A

capital markets

29
Q

Name some of the characteristics of a money market.

A
  • short maturity
  • low risk
  • liquid
30
Q

What are the three major money market instruments?

A
  1. treasury bills
  2. certificates of deposit
  3. commercial paper
31
Q

Name some characteristics of a capital market.

A
  • maturity of one year or more
  • higher risk
  • possible illiquidity
32
Q

What are some common types of capital market?

A
  • bonds
  • preferred stocks
  • common stocks
  • convertible securities
33
Q

_________ __________ are where new securities are bought and sold.

A

primary markets

34
Q

_________ __________ are where investors trade existing securities.

A

secondary markets

35
Q

What are the two types of secondary markets?

A
  1. registered exchange (physical marketplace where traders gather to exchange securities)
  2. over-the-counter (like NASDAQ, exchange without a physical building)
36
Q

True or False: Firms not listed on a registered exchange can still have their shares traded.

A

TRUE!

37
Q

Who regulates new security issues and the secondary markets?

A

the SEC (securities and exchange commission)

38
Q

An IPO of stock, or Initial Public Offering, is found in a ________ market (primary or secondary)

A

primary

Foundations of Finance (4 decks)

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