Test 1 Flashcards
What is finance?
Finance is a field that is concerned with the allocation/investment of assets and liabilities over space and time, often under conditions of risk or uncertainty.
OR
Money management
Name 3 finance categories
And give examples
Investment/Asset pricing International finance (ex: trade between countries)
Institutional finance (ex: banks) Public finance (ex: government/bank of Canada) Personal finance (ex: your own money) Corporate finance (ex: firm)
What is the goal of the financial manager?
Maximize the value of stock/share
(Value maximisation)
Why? To benefit the shareholder (to enhance the value of the shares)
Explain the agency relationships.
Give an example.
HINT:
3 components
- The agency relationship is between the shareholders and the manager ment.
- The agency problem is the possibility of conflit of interest between those two. (If the goals are not aligned)
- The agency cost is the direct and indirect costs arising from this conflict of interest.
EXAMPLE:
- The owner of a car hire someone to sell a car.
- Possibility of conflict if the owner doesn’t give enough % of the valut of the car to the seller.
- Direct agency cost: hire come one to watch the seller, so can make him mad and lose more money on the car.
What are the three types of financial management decisions and what questions are they designed to answer?
- What investment should the business take on?
INVESTMENT DECISION - Where to invest?
THE DIVIDEND DECISION - How to manage?
THÉ FINANCE DECISION
What are agency problems and why do they exist within a corporation?
The source of agency problem is the separation of the owner’s control and management.
It exist to limit, to align the interest between management goals and shareholders goals.
True or false?
A dollar in hand today is worth more than a dollar promised at some time une the future.
True
What is compound interest?
Compound: interest on interest : interest earned on the reinvestment of previous interest payments. (Accumulated interest of previous periods)
Whereas, simple: accumulated interest. (Interest is earned each period only on the original principal)
True or false?
For a given interest rate,
The LONGER the TIME periods, the HIGHER the PRESENT VALUE?
Hint:
PV = FV/(1+i)^n
False,
The LONGER the TIME period, the LOWER the PV
True or false?
For a given time period,
The HIGHER the interest rate, the SMALLER the PRESENT VALUE?
Hint:
PV = FV/(1+i)^n
True.
In what case do you need to do discount or compound the interest?
You discount when you need to know the PRESENT value.
You compound when you need to know the FUTURE value.
What is the difference between APR and EAR?
APR stands for the Annual Percentage Rate (quoted or stated rate)
- APR = period rate * number of periods per year
Also : Period rate = APR/number of periods per year
Whereas,
EAR stands for Effective Annual Rate, used for comparison purposes
- the actual rate paid (or received) that occurs during the year
Can you divide the EAR (effective rate) by the number of PERIODS per year?
NO!!!! IT WILL NOT GIVE YOU THE PERIOD RATE
You can divide the APR by 2 to get the semi-Annual rate tho
What rate should you use to COMPARE alternative investments or loans?
EAR
What rate should you need to use in the TIME VALUE of money CALCULATIONS?
Period rate
