Principle of Finance Chp 1 - 3 Flashcards
1
Q
Tax
A
a certain amount of money that gets deducted
2
Q
asset
A
something a business owes
3
Q
cash flow
A
is the movement of money in and out of a household or business
4
Q
principal amount
A
is the original amount of money that is borrowed, invested or lent
5
Q
liability
A
something that the business owes
6
Q
liquidity
A
is when an asset can be converted into cash quickly
7
Q
profit
A
the money that is left over after the expenses have been deducted
8
Q
capital
A
the money used to build, run ir grow a business
9
Q
debt
A
borrowed money that is owed to a person, business or institution
10
Q
equity
A
is the total assets minus your total liabilities
11
Q
interest
A
is the return earned on an investment
12
Q
how many types of interest
A
2
13
Q
the 2 different types of interest
A
simple interes and compound interest
14
Q
simple interest
A
is the interest that is added to the principal amount one time
15
Q
compound interest
A
is interest that is added periodically and changed on both the principal amount and accured interest
16
Q
why should we learn about money and finance?
A
money and financial markets facilitate effecient economic activities, enabling commerce, investments and business creation essential for growth and resource acquistion
17
Q
was used as a form of money in China
A
cowrie shells
18
Q
what is money
A
money in anything that can be used as a medium of exchange
19
Q
money can be used in 3 ways
A
- medium of exchange
- store of value
- unit of account
20
Q
fiat money
A
money that value is established by the backing of a government
21
Q
currency
A
a physical form of money
22
Q
what is finance
A
finance allows us to borrow and lend money, invest, raise capital for a business and trade on the market
23
Q
lenders
A
anyone, from corporations to individuals that lend money
24
Q
borrowers
A
poeple who borrow money from the lenders with intention of paying it back
25
# three basic questions
whatt long term investments should the firm undertake?
capital budgeting
26
# three basic questions
how should the firms raise money to fund these investments
capital structure
27
# three basic questions
how should the firm manahge its cashflow in its day-to-day operation
working capital management
28
goal for the financial manager
- making investment decision
- making decisions on how to finance these investments
- managing funding for the company's day to day operations
29
maximising shareholder wealth
* profit
* people
* portfolio
* partners
* planet
30
5 basic principles of finance
- money has a time value
- there is a risk-return tradeoff
- cash flow is the source of value
- market prices reflect information
- individuals respond to incentives
31
what are financial markets?
are platforms where financial assets are bought and sold
32
types of financial markets
- stock markets
- forex market
- bond market
- commodities market
33
participants in financial markets
- individual investors
- investment funds
- companies and governments
- brokers and agents
- banks and financial entities
34
# risk and volatiliy
are financial markets involved in rish and volatility
yes
35
common risk
- fluctuations in asset prices
- economic and politial uncertainty
36
analysis and decision making
is essential for decision making in the markets
37
# analysis and decision making evaluate factors such as:
- company fundumentals
- historical asset performance
- economi trends
- market conditions
38
# basic structure of the financial market
3 principal sets of players that interact
- borrowers
- savers
- financial institutions
39
# basic structure of the financial market
borrowers
those who need money to finance their purchases
40
# basic structure of the financial market
savers
those who have money to invest
41
# basic structure of the financial market
financial institutions
the financial institustions and markets that help bring borrowers and savers together
42
financial intermediaries
- commercisl banks
- finance companies
- insurance companies
- investment banks
- investment companyies
43
securities markets
- debt market
- stock market
44
45
security markets
provide a link between the corporation and investors
46
# characteristics of different financial instruments
for borrowers
- good way of inexpensively rasing money for short periods of time
- rates tend to be lower than long-term rates
- can borrow money to match short-term needs
- if interest rate rise, the cost of borrowing will immediately rise accordingly
47
# basic structure of the financial market
for investors
- very liquid
- safe
- low returns
48
hedge funds
are similar to mutual funds but are less regulated, take more risk, and are generally open to high net worth investors
49
prive equity firms
is a financial intermediary that invests in equiies that are not traded on the public capital markets
50
the 2 types of prive equity firms
venture capital and leveraged buyout firms
51
venture firms
provide financing for private start-up compnies when they are first founded
52
leveraged buyout
acuire established firms that typiclly have not been performing well with the objective of making them profitable again and then selling them
53
# primary v/s secondary market
primary market
is a market in which securities are bought and sold for the first time
54
# primary v/s secondary market
secondary market
is a market for subsequent trading for previously issued securities
55
# types of securities
debt securities
- firms borrow money by selling debt securities in the dept market
56
# types of securities
dept securities is classified based on maturity period:
- less than on eyear (issued in many market)
- 1 to 10 years (called Note, issued in the capital market)
- more than 10 years (called bond, issued in the capital market)
57
# money v/s capital market
money market
markets for short-term dept instruments (such as t-bill, comercial paper)
58
# money v/s capital market
capital market
markets for long-term dept and quity instruments (such as comman stock, preferred stock, corporate bond, u.s. treasury bond)
59
chapter 2 conclusion
financial market are intricate systems where informed participation can lead to growth and financial success through understanding market operations, risks, and analysis, strategies
60
what are financial statements?
a record of a business' economic health, showing its performance, profability and finacial position
61
the three main ypes of financial statements
- income statement
- balance sheet
- cash flow statement
62
income statement
is a record that shows a company's revenue and expenses over sometime
63
balance sheet
is a record of the company's assets, liability, and equiity at a specific point in time
64
cash flow statement
is a record of cash into and out of the business
65
purpose of income statement
is to show how much money a company earned and spent during a specific period, such as quarterly or annually
66
purpose of a balance sheet
is to provide a record of a company's financial position at a specific moment in time
- assets, liabilities, equity
67
cash flow statement activities
- operating activities
- investing activities
- financing activities
68
corporate taxes
- a firms income tax liability is based on its taxable income and the tax rates on corportae income
- corporations with high profits tend to pay more taxes
69
marginal and average tax rate
- marginal tax rate is the tax rate that the company will pay on its next dollar of taxable income
- average taxe rate is total taxes paid divided by the taxable income
70
# Given test questions
what is an asset?
something the company owns
71
# Given test questions
role of a financial institution?
help people and businesses manage money, inves and access capital
72
# Given test questions
what is a financial institution?
is an institution that completes and facilitates monetary transactions, such as loans, mortages, and deposits
73
# Given test questions
the 3 forms of business
- sole propirership
- partnership
- corporation
74
dividents are payments a business pays o employess and managers.
true or false
false
dividents are money he business pays to their shareholders
75
# Given test questions
the cash flow statement includes the total liabilities and total assets in a business.
true or false
false
76
# Given test questions
is an example of a financial market:
stock exchange: a platform where business go to exchange stock
77
# Given test questions
2 most common financial statements
- balance sheet
- income statement
- cash flow satement
78
# Given test questions
3 most common financial statements
- balance sheet
- income statement
- cash flow statement
79
is credit union a financial statement
true or false
true
80
# Given test questions
examples of the 5 principles of money
- money has a time valve
- there is a trade-off between risk and return
- cash flows are the source of value
- market prices tend to incorporate all available information
- individuals respond too incentives
81
definition of the working capital
working capital is the different between a company's current assets and its current liabilities (funds the company has available for day-to-day operations)
