S2 Introduction

Question 1

Corporations invest in __ that generate __

Answer 1

• Assets

- Income

Question 2

What are examples of tangible assets?

Answer 2

• Plant

- Machinery

Question 3

What are examples of intangible assets

Answer 3

• Brand names

- Patents

Question 4

What are sources of financing investments

Answer 4

• Borrowing
• Retain & reinvest cash flow
• Selling shares

Question 5

What are two questions faced by firms?

Answer 5

• What investments should the firm make

- How should it pay for those investments

Question 6

Corporations pay for real assets by selling claims on:

Answer 6

• The real assets

- The cash flow from the assets

Question 7

What are types of firms

Answer 7

• Corporations
• Partnerships
• Sole proprietorships

Question 8

What are the three characteristics of corporations

Answer 8

• Limited liability
• Distinct entity
• Separation of ownership and management

Question 9

What are three disadvantages of corporations?

Answer 9

• Complex structure
• Double taxation problem
• Moral hazard issues due to asymmetric info

Question 10

Financial managers stand between:

Answer 10

A firm’s operations and financial markets

Question 11

What does the financial manager do?

Answer 11

• Help manage the firm’s operations (investment decisions

- Deals with investors and financial markets

Question 12

Who are some investors in a company

Answer 12

• Shareholders
• Financial insitutions
• Financial markets

Question 13

What’s the job/importance of financial institutions & financial markets

Answer 13

• Provide choice between short/long term borrowing and issuing shares
• Assist m&a activities
• Provide liquidity and risk diversification
• Provide financial managers with a source of info

Question 14

Shareholders want the financial manager to:

Answer 14

• Increase the value of the corporation
• Increase the stock price
• Maximise market value
• Maximise their wealth

Question 15

The problems with expectations of financial managers is:

Answer 15

• How to do it

- The incentives to do it

Question 16

What are the two decision options for financial managers?

Answer 16

• Invest in the project

- Pay out cash to shareholders

Question 17

Financial managers invest in the firm if the ROI:

Answer 17

Is higher than investing in financial markets

Question 18

What are the four roles of the financial manager?

Answer 18

• Valuation and investment
• Financing
• Dividend
• Risk management/hedging

Question 19

What’s the principle agent problem?

Answer 19

The agents not acting in the interest of their principals

Question 20

In the principle agent problem, who are the agents?

Answer 20

Managers

Question 21

In the principle agent problem, who are the principals?

Answer 21

Owners

Question 22

What are agency costs?

Answer 22

Owners incur costs of monitoring the behaviour and actions of management team

Question 23

What mechanisms can you use to alleviate the principle-agent problem

Answer 23

• Incentive schemes
• Managers face losing their jobs
• Governance rules

Question 24

How can a manager lose their job?

Answer 24

• Board of directors may replace them

- Takeover and replace management

Question 25

Thoughtful shareholders and financial managers:

Answer 25

• Don’t just want maximum stock price

- Want maximum honest stock price

Question 26

Corporate finance is about:

Answer 26

Maximising value

Question 27

Opportunity cost of capital:

Answer 27

Sets the standard for investment decision

Question 28

Smart investment decisions create more value than:

Answer 28

Smart financing decisions

Question 29

Good governance:

Answer 29

Matters