Topic 1 - Introduction to Finance Flashcards
What is Finance?
- The process of acquiring the funds that an entity requires.
- How funding is managed.
What are the types of Finance?
- Corporate Finance
- Personal Finance
- Public Finance
What is Corporate Finance?
Corporate Finance looks at the financial decisions that firms make and the tools and analysis used to make those decisions.
What is a Corporation?
All large or medium sized business are organised as corporations.
What makes a corporation different to other types of businesses?
- ## Separate legal identity to shareholders.
What is agency theory?
Relationship between SHAREHOLDERS and MANAGERS.
Managers need to be properly incentivised to act in the shareholders’ best interest.
What is Information Asymmetry?
Agents have more information than the principals, therefore its hard for principals to measure the performance of the agent and hold them accountable.
What are agency costs?
The risk that the agent will ignore their responsibility, make poor decisions or act against the principal’s best interest……The cost is incurred from dealing with these problems. or setting up incentives.
Dealing with the Principal-Agent Problem
- Shape behaviour of the agents
- Reduce information symmetry
- Set mechanisms for removing agents who do not act in accordance.
Board of Directors
- Elected by the shareholders to represent them.
- Boards act when managers do not have a plan for sliding performance.
What are real assets?
A tangible asset that has intrinsic value due to its substance and physical properties. eg. Buildings, Gold, land
Capital Budgeting
Capital Budgeting is the process of comparing investments that the organisations should fund to make the most FUTURE money.
What is Capital Structure
Capital structure is the balance/combination of equity and debt in an organisation.
