Theory Flashcards
What is corporate finance?
How a business is funded, day-to-day
What are the 3 pillars of corporate finance?
Investment Finance and Liquidity
Define capital budgeting
Planning and managing a firm’s long-term investments
Define capital structure
A mixture of long—term debt + equity maintained by firm to finance it
Give 2 examples of debt finance
Bank borrowings
Bonds/debentures
Define liquidity
How much ‘cash’ is easily accessible to the business - ‘cash’ includes anything that can be converted into cash within a 3-month turnover
Define working capital management
Day by day activity that ensures the firm has sufficient resources to survive by avoiding high costs
What is the main goal of financial management?
Value creation - maximising shareholder wealth by maximising profitability
List as many goals of financial management as you can
Survival
Increased market share
Protect the environment
Increase earnings
Minimise carbon footprint
Maximise sales
What are sole traders and how is the business funded?
A business owned and ran by one person who has unlimited liability for business debt. Their funding is limited to personal wealth and life of business is limited to the owner’s life.
What are partnerships and how are they funded?
A business that requires a partnership agreement and is own and ran by both parties, with some control given to general partners. Their liability can possibly be both limited and unlimited while the business’ life limited to when a partner dies.
What is a limited corporation and how are they funded?
Owned by shareholders and ran by directors, with shareholders having limited liability. Profits are taxed at corporate rate and the life is unlimited. Funded by shareholder investment.
What are the typical characteristics on a Small-medium sized entity (SME)?
Private limited company (not listed on stock exchange)
Owned few members (family)
How are SME’s financed?
Owner financing
Equity finance
Bank loads
Trade credit
Business angel financing
Venture capital financing
Leasing
Government assistance crowdfunding
Challenges for SME’s raising finance
Lack of knowledge
Debt finance is hard to obtain
Equity finance limited to small no.of wealthy individuals
Reliant on reinvestment of retained profits for new finance (limits growth)
Why is borrowing preferred to issuing shares?
Loans are tax deductible - appealing to tax paying firms
What is a primary market?
Original sale of securities, bought directly from issuer (investment bank)
What are secondary markets?
Securities bought and sold in stock market, after original sale
What is a non-for-profit organisation?
An organisation offering provision of service or giving a social benefit, not aiming to generate profit.
What three factors are used to measure a NFP by value for money?
Effectiveness (achieving main goal)
Economy (minimising costs)
Efficiency (maximising outputs for given inputs)
What is corporate governance?
How businesses are managed with best interests of owners in mind
