S2 Introduction Flashcards
Corporations invest in __ that generate __
- Assets
- Income
What are examples of tangible assets?
- Plant
- Machinery
What are examples of intangible assets
- Brand names
- Patents
What are sources of financing investments
- Borrowing
- Retain & reinvest cash flow
- Selling shares
What are two questions faced by firms?
- What investments should the firm make
- How should it pay for those investments
Corporations pay for real assets by selling claims on:
- The real assets
- The cash flow from the assets
What are types of firms
- Corporations
- Partnerships
- Sole proprietorships
What are the three characteristics of corporations
- Limited liability
- Distinct entity
- Separation of ownership and management
What are three disadvantages of corporations?
- Complex structure
- Double taxation problem
- Moral hazard issues due to asymmetric info
Financial managers stand between:
A firm’s operations and financial markets
What does the financial manager do?
- Help manage the firm’s operations (investment decisions
- Deals with investors and financial markets
Who are some investors in a company
- Shareholders
- Financial insitutions
- Financial markets
What’s the job/importance of financial institutions & financial markets
- 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
Shareholders want the financial manager to:
- Increase the value of the corporation
- Increase the stock price
- Maximise market value
- Maximise their wealth
The problems with expectations of financial managers is:
- How to do it
- The incentives to do it
What are the two decision options for financial managers?
- Invest in the project
- Pay out cash to shareholders
Financial managers invest in the firm if the ROI:
Is higher than investing in financial markets
What are the four roles of the financial manager?
- Valuation and investment
- Financing
- Dividend
- Risk management/hedging
What’s the principle agent problem?
The agents not acting in the interest of their principals
In the principle agent problem, who are the agents?
Managers
In the principle agent problem, who are the principals?
Owners
What are agency costs?
Owners incur costs of monitoring the behaviour and actions of management team
What mechanisms can you use to alleviate the principle-agent problem
- Incentive schemes
- Managers face losing their jobs
- Governance rules
How can a manager lose their job?
- Board of directors may replace them
- Takeover and replace management
Thoughtful shareholders and financial managers:
- Don’t just want maximum stock price
- Want maximum honest stock price
Corporate finance is about:
Maximising value
Opportunity cost of capital:
Sets the standard for investment decision
Smart investment decisions create more value than:
Smart financing decisions
Good governance:
Matters
