Topic 1-Financial Decision Making Objective Flashcards
What is the main goal of a firm?
To maximise value of the business
Who should not be impacted in a firms financial objective?
Stakeholders
What is a business objective that is too narrow?
Focusing on increasing earnings is too narrow on accounting income and ignores importance of market value in managerial accounting
What is capital budgeting?
evaluation of the size, timing and risk of a future CF
What are the 3 types of financial decisions?
- Investment
- Financial
- Working capital management
Who is in charge of the investment decisions?
the financial manager who identifies investments worth more to the firm that the money needed to acquire
in charge of what long-term assets to purchase
What is the financial decisions?
determines the mix of non-current and current debts and equities a firm needs to finance long-term assets
What is the working capital management decision?
dealing with day to day activities to ensure sufficient resources to continue operations and avoid costs
deals with current assets and libailites
What are the 3 forms of a business?
- Sole proprietorship
- Partnership
- Corporation
Which form of a business have limited liability?
corporation and limited partnership
What form of business is easy to set up?
All three
What is 2 pros of a sole proprietorship ?
you can tax as personal income and don’t share profits
What is a sole proprietorship?
When the manager is the owner
What form of business is easy to switch owners?
corporation
What are 3 cons of a sole proprietorship?
not protected (unlimited libaility), limited access to capital and to switch owners you have to sell the whole business
What is a partnership?
Where 2 or more people are legally joined to manage a business and share profits
What is the difference between a limited and general partnership?
general- all of the partners are owners and actively manage the company
limited- has both general partners and non who do not participate in managing business
What are 2 advantages of a partnership?
increased accessibility to capital
can be taxed as personal income at first
What are 2 disadvantages of a partnership?
difficult to switch owners
profit dissolves if one of the partners dies/sells
What is a corporation?
there is a separate legal entity from the owner
What is the process of incorporation?
legal process to form a corporate entity
What are 2 pros of a corporation?
easy access to capital and limited liability
What are 3 cons of a corporation?
costly to set up, corporate tax rate and agency problems
What are ways to raise money for a firm?
debts (sells securities) and equity (receives money to invest in a new project)
What type of problems causes conflicts between principal and agency?
Agency problem
What are 3 things managers can do that aren’t great?
- make decisions that hurt the firm value
- lie to shareholders
- waste firm resources to benefit themselves
Managers get control over ___ but ______
profit making process
no share in profits
What would not align with management priorities with shareholders interests?
managers choosing salary
What is the financial markets? (4 pts)
- raise new funds (specifically corporates raise capital funding for investments)
- offer liquidity
- facilitate capital raising in the primary market
- create an investment environment for investors
The debt market is the __ market
primary
Who facilitates the transactions of the primary debt market?
investment bank
What is the action that happens in the primary market?
securities (shares/bonds) initially sold to investors for money
the secondary market is the __ market
stock
which market has more activity?
secondary
Who facilitates secondary market transactions?
brokers/dealers
The ____ is set at the secondary market and ___ is determined
share price
value of firm
What action happens in the secondary market?
Investors buy and sell securities after IPO
How does the secondary market assist companies?
by helping them obtain large amounts of capital to grow their firm
