The Foundations Flashcards
Corporate financial decision
Any decision that involves the use of money
Decision
Every decision made in a business has financial implications
Firm
refers to any business, large or small, manufacturing or service, private or public.
Assets
The firm’s investments are generically termed assets.
Assets categorized:
- Fixed assests
- Current assets
- Financial investments
- Intangible assets
- Other assets
Fixed assests
Are long-lived real assets
Current assets
Are short-lived assets
Assets in place
The investments that a firm has already made.
Growth assets
Investments that the firms is expected to invest in the future.
Yet-to-be-made investments
A firm can get value from investments it has not made yet, high-growth firms get the bulk of their value from these yet-to-be-made investments.
How high-growth firms get the bulk of their value?
From Yet-to-be-made investments
bulk
large size, mass,
Fixed claim
Interest payments
How a firm can finance growth assets?
The firm can obtain its capital from two sources. It can rais funds from investors or financial institutions by promising investors a fixed claim on the cash flow generated by the assets, with a limited or no role in the day-to-day running of the business.
Residual claim on the cash flow
investors can get what is left over after the interest payments have been made,
Debt is …
Debt may take the form of bank loans …
Equity is …
Is the owner’s own money
Bond
It is a financial product that a firm put in the stock exchange to raise money
Financial balance sheet
Assets = Liabilities
Assets
Assets in Place + Growth Assets
Assets in place:
- existing investments
- generate cash flows today
- includes long-lived (fixed assets)
- short-lived (working capital assets)
Growth assets:
Expected value that will be created by future investments
Growth assets:
Expected value that will be created by future investments
Debt:
- fixed claim on cash flows
- little or no role in management
- fixed maturity
- tax-deductible
Equity:
- residual claim on cash flows
- significant role in management
- perpetual lives
What are the three fundamental principles that underlie corporate finance?
1- the investment principle
2- the financing principle
3- the dividend principle
What does investment principle determine?
It dertermines where businesses invest their recources.
What does financing principle govern?
It governs where the mis of funding used to fund these investments.
What does dividend principle answer?
It answers the question of how much earnings should be reinvested back into the business and how much should be returned to the owners of the business.
What are the core corporate finance principles?
1- the investment principle
2- the financing principle
3- the dividend principle
What is corporate finance?
- Every decision that a business makes has financial implications, and any decision which affects the finances of a business is a corporate finance decision.
- everything that a business does fits under the rubric of corporate finance.
Financial implications
پیامدهای مالی
Financial investments
Investments in securities & assets of other firms
Intangible assets
Assets which are not physical, like patents & trademarks
Liabilities
- Current liabilities
- Debt
- Other liabilities
- Equity
Current liabilities:
Short-term liabilities of the firm
Debt:
Debt obligation of firm
Other liabilities:
Othere long-term obligations
Equity:
Equity investment in firm
Liability:
- مسئولیت
- بدهی
Assets in Financial Balance sheet:
- what the firm has invested till now
- what the firm is going to invest
Liabilities in Financial Balance sheet:
- you can borrow the money ( Debt )
- you use your own money ( Equity)
Debt
to borrow the money
Equity
to use your own money
Equity
to use your own money
There are only 2 ways you can fund a business:
- you can borrow the money ( debt )
- you can use your own money ( equity )
who gets money frist?
when you make money each year the Debt holders get paid first !
Debt holders:
they have very little management control of the company and if the company goes bankcruptcy they get first claim on the assets !
Equity holders:
Equity gets whatever leftover, and they run the company
what does investment principle tell?
when you as a business, go out and make investments ( in projects or assets ) make sure you earn a return on those investments that exceeds some minimum acceptable hurdle rate.
The investment decision:
invest in assets that earn a return greater than the minimum acceptable hurdle rate
Hurdle rate
- minimum rate in order to get money ( growth rate )
- In capital budgeting, hurdle rate is the minimum rate that a company expects to earn when investing in a project. Hence the hurdle rate is also referred to as the company’s required rate of return or target rate. In order for a project to be accepted, its internal rate of return must equal or exceed the hurdle rate.
