Semester Test 1 Flashcards
Define financial management
-Planning, organising, directing and controlling the financial acts of the org
What are the key objectives of financial management
-Create wealth for the business
-Generate cash
-Provide adequate ROI bearing in mind risks that the org is taking and the resources invested
What are the 3 elements to the process of financial management
-Financial Planning
-Financial Control
-Financial decision-making
Define Financial Planning
Management must ensure that enough funding is available @ all times to meet objectives (short, medium and long-term)
Define Financial control
Financial control addresses Q’s like
-Are assets being used efficiently?
-Are the business assets secure?
Define financial decision making
-Key aspects of financial decision making relate to
»Investment
»Financing
»Dividends
List and explain the three aspects that determine
the price volatility of a bond.
-Time to maturity
»the longer the outstanding term = more sensitive the bond price
-Coupon rate
»the lower the coupon rate = more sensitive the bond’s price
-Yield
»the lower the yield of a bond = more volatile the price of the bond
Provide objectives of a FM
-Ensure regular and adequate supply of funds to the concern
-Ensure optimum funds utilization
-Ensure safety of investment
What is the role of a FM
-Business management
-Goal achievement
-Management of cash
-Investment of cash
What are the forms of orgs
-CC’s
-Companies
-Partnerships
-Sole Proprietors
What is the goal of a FM
Maximize shareholder wealth
Describe the decision making process
-Step 1: Identify objectives
>Specify Co’s objectives
-Step 2: Search for alternative course of action
»Look for strats that might assist in achieving goals
-Step 3: Select appropriate alternative course of action
»Course that best responds to the objective
-Step 4: Implement decision
»Implement course of action as part of long-term planning process
-Step 5: Compare actual and planned outcomes
»Performance reports should be prepared
-Step 6: Respond to divergence from plan
Define risk
The degree of uncertainty and/or potential financial loss inherent in an investment decision
True or False
Effective int rate is always higher than nominal int rate?
True
Define critical thinking
The analysis of facts to form a judgement
Core activities of critical thinking
-Analysis
-Evaluation
A claim is justified if…
-… it can be shown beyond reasonable doubt to be true, and
-… it can be shown to have a high probability
A number is divisible by 3 if…
…when all the number in it are added up, if the ans = divisible of 3 then OG # divisble by 3
A number is divisible by 4 if…
…if the last 2 digits are divisble by 4
A number is divisible by 6 if…
…its an even number and its divisible by 3 also
A number is divisible by 7 if…
… when you double the last digit and minus from remaining digit of OG, if answer is a MULTIPLE of 7, then OG (w/ all #s) = divisible
A number is divisible by 8 if…
… last 3 digits are divisibly by 8
A number is divisible by 9 if…
… if sum of all number is divisible by 9, OG is divisible
1000g = 1kg = 1 000 000mg
1g = 0.001kg = 0.000 001mg
same w/ litres
What are the types of interest rates?
-Money market rate
-Call money rates
-Capital market rated
-LIBOR (London Interbank Offered Rate)
-Repo Rate
-Prime interest rate
Define the repo rate and provide its current %
-Its the rate @ which the central bank of a country lends money to commercial banks in the event of any shortfall of funds
-=8.25%
Define the prime int rate and provide its current %
-The lowest rate to which a clearing bank will lend to its clients on overdraft
-=9%
How are int rates in SA determined
SARB sets them in response to whats happening and whats expected to happen in the economy
Define a bond
A contract btwn lenders and a borrowing org, typically a firm/govt body
What are characteristics of bonds
-It represents borrowed funds
-bondholders receive periodic int payments
-Have no voting rights
Bonds have a fixed maturity
Calc work
1) Time to maturity =
2) Par value/Face value =
3) Market value =
4) Coupon rate =
5) Yield to maturity
1) N
2) FV
3) PV
4) PMT
5) I/Y
Define a debenture
Loan stock (corporate bonds) which are secured on some or all of the assets of the Co
What are the type of debentures
-Mortgage debentures
-Floating charge debentures
What are the investment characteristics of debentures
Risk
>Risk of default and secured assets value is not enough to cover the loan
>The rights of debenture holders are overseen by trustees (eg banks)
Return
>Carry risk and not always marketable
Marketability
>Worse than govt bonds
What are the characteristics of debentures
-Int payments are tax deductible
-Have a fixed redemption date and carry a fixed rate of int
What are the characteristics of unsecured loan stocks
-No specific security for the loan
-Ranked equally w/ other creditors of the issuing Co
What are the investment characteristics of unsecured loan stock
Risk
>No security but more secured than ordinary shares
Return
>Yields are higher than debentures and govt stocks to compensate for poorer marketability
Marketability
>Similar to debentures but worse than govt stocks
What are the investment characteristics of share capital
Risk
>Uncertainty and volatility of future income
Return
>High potential return for high risk
Marketability
>Depends on the size of the Co and future profit growth, but usually marketable
What are the investment characteristics of preference shares
Risk
>Ranked between loan capital and above OS if the Co is liquidated
>Risk is higher than holding loan stock but return is higher
Return
>For all investors, the expected return on PS is likely to be less the OSs because risk of PS is less
Marketability
>Similar to loan capital
Whats the difference btwn PS and OS
PS dividends are limited to a fixed amount
