Topic 1 - Introduction To Corporate Finance Flashcards
What is the primary goal of corporate finance?
To maximize shareholder wealth.
What is the agency problem?
A conflict of interest between managers and shareholders.
What are the three main decisions in corporate finance?
Investment decision, financing decision, and dividend decision.
What is capital budgeting?
The process of planning and managing a firm’s long-term investments.
What is the capital structure?
The mix of debt and equity that a firm uses to finance its operations.
What is working capital management?
Managing the firm’s short-term assets and liabilities to ensure sufficient liquidity.
What is the difference between primary and secondary markets?
In primary markets, new securities are sold to raise capital, while secondary markets trade existing securities.
What is the role of a financial manager?
To make decisions that increase the value of the firm to its shareholders.
What is the concept of the time value of money?
The principle that money today is worth more than the same amount in the future due to its potential earning capacity.
What is a financial intermediary?
Institutions like banks and investment funds that act as middlemen between savers and borrowers.
What are the two main forms of equity financing?
Common stock and preferred stock.
What are the main types of financial markets?
Money markets and capital markets.
What is the difference between debt and equity?
Debt must be repaid, often with interest, while equity represents ownership and does not require repayment.
What is the purpose of a stock exchange?
To facilitate the buying and selling of securities.
How does a firm add value through financial management?
By making investment and financing decisions that increase cash flows and reduce risk.
What is the cost of capital?
The return required by investors given the risk of the investment.
What is the efficient market hypothesis?
The theory that stock prices reflect all available information and are therefore accurately priced.
What is corporate governance?
The system of rules, practices, and processes by which a company is directed and controlled.
What are financial securities?
Tradable financial assets such as bonds, stocks, or derivatives.
What is the role of a board of directors in corporate finance?
To oversee management and ensure that the company acts in the best interests of shareholders.
What is the difference between a sole proprietorship and a corporation?
A sole proprietorship is owned by one person and has unlimited liability, while a corporation is a separate legal entity with limited liability for its owners.
What is the purpose of the financial system in corporate finance?
To channel funds from savers to borrowers, facilitating investment and economic growth.
What are dividends?
Payments made to shareholders from the company’s profits.
What is the agency cost?
The cost incurred to ensure managers act in the shareholders’ best interest, including monitoring expenses and suboptimal decisions.
How can companies mitigate agency problems?
Through performance-based compensation, managerial stock ownership, and the threat of takeovers.
What is capital allocation?
The process of distributing financial resources to different investments to maximize returns.
What are financial markets?
Platforms where buyers and sellers trade financial securities, such as stocks and bonds.
What is corporate social responsibility (CSR) in finance?
The idea that companies should balance profitability with actions that benefit society.
What is a leveraged buyout (LBO)?
The acquisition of a company using a significant amount of borrowed money (debt) to meet the cost of acquisition.
What is arbitrage?
The simultaneous purchase and sale of an asset to profit from a difference in price across markets.
What is a hostile takeover?
An acquisition in which the target company’s management opposes the deal.
What is a merger?
The combining of two or more companies into a single entity.
What is the role of an investment bank in corporate finance?
To assist companies in raising capital, advising on mergers and acquisitions, and underwriting new stock or bond issues.
What is market capitalization?
The total market value of a company’s outstanding shares, calculated by multiplying stock price by the number of shares.
How do interest rates affect corporate finance decisions?
Higher interest rates increase the cost of borrowing, making projects less attractive, while lower rates encourage borrowing and investment.
