Unit 1 Flashcards
Individuals and families consume goods and services for their own survivorship and welfare.
True
Individuals and families will have to _____________ in exchange for goods and services. They will have to decide how to _________ and how to ___________ that money to maximize their welfare.
pay money
obtain that money
spend
Business organizations and individual entrepreneurs produce and sell products and services.
True
Business organizations and individual entrepreneurs need money to acquire the infrastructure and to pay for the costs that are necessary to produce their goods and services.
True
Business organizations and individual entrepreneurs will get money in exchange for those goods and services. Therefore, they are also concerned about __________ and _______________.
how to get money
how to spend it
Governments and public administration entities produce products and services for the citizens.
True
Governments and public administration entities need ________ to pay for the costs of those services. They get that money mainly through _________.
money
taxes
Governments have to make decisions about ___________ and ___________.
how to get money
how to spend it
People, organizations, and governments will eventually have to take decisions on how to get money and how to spend that money.
True
Finance is the science of ___________.
managing money
Finance deals with two kinds of problems:
- how to spend money (investment decisions)
2. how to get money (financing decisions).
Investment decisions are …
decisions about how to spend money.
decisions related to how many and what types of assets a firm needs to acquire
how to allocate available funds
Financing decisions are …
decisions about how to get money
decisions on how to fund investments
how to get the money necessary to undertake the selected investments
An investment can be defined as the renouncement of a current satisfaction in exchange of the promise of future satisfactions.
True
From a financial perspective, “satisfactions” can be measured in monetary terms.
True
From a financial perspective, “satisfactions” can be measured in monetary terms. Therefore, financially speaking, an investment is …
the renouncement of a current possession of an amount of money in exchange of the promise of receiving one or various amounts of money in the future.
The two types of investment decisions are:
- To decide if a given investment opportunity is or not acceptable
- To decide which investment opportunity (or combination of investments) are preferable, when there are various opportunities.
Finance decisions are related with the procurement of funds necessary for the undertaking of the investments
True
Any entity which wants to undertake an investment project will need the money required to make the initial payment.
True
If an entity does not possess the money to undertake an investment, other people or entities can provide the necessary funds. In exchange, the entity binds itself to pay back the amounts received, plus a compensation for the money borrowed.
True
In a finance operation, the subject receives an amount of money now, in exchange of a payment or a stream of payments in the future.
True
The sign of the cash-flows of a finance operation are opposite to the expected signs of the cash-flows of an investment
True
Financing decisions consist of the selection of the most convenient financing sources. To decide if a financing source is convenient or not, we must take into account basically two key features:
- When is the money available
2. The compensation to the fund’s providers
According to the former definitions, the undertaking of an investment project begins with _____________. In exchange, the entity receives ____________. This definition is equivalent to the accounting definition of __________.
the payment of amounts of money
goods, rights or other resources that are expected to generate cash-flows in the future
Assets
Assets = Investments
True
The accounting definition of assets is ….
goods, rights or other resources that are expected to generate cash-flows in the future
To acquire assets, an entity can employ its own funds.
True
If an entity does not want to employ its own funds to acquire assets or if their funds are not enough to undertake the investment, it may have to raise money from other people or entities in exchange of a promise of future payments.
True
An investment may be financed by two types of funds:
- those belonging to the entity’s owners (equity)
2. those that have been raised in exchange of the promise of future payments (liabilities).
Equity is …
funds that belong to an entity’s owners
Liabilities are …
funds that have been raised in exchange for the promise of future payments
payment promises
Assets generate cash-flow; cash flows are used to finance new investments or pay back the fund’s providers;
True
Finance structures comprises:
- Equity
2. Liabilities
An entity’s balance sheet comprises:
- Assets
2. Finance structure (equities and liabilities)
In the particular case of businesses, stockholders and debtholders proportion the funds the company requires for its investments.
True
When a company collects the cash-flows from an investment, it must use at least a portion of that money to remunerate stockholders and debtholders for their funds, and to pay-back those funds.
True
A company receives funds from the stockholders and debtholders now, and it must pay them back in the future.
True
From the point of view of the company, a financing operation is …
When a company receives funds from the stockholders and debtholders now, and it must pay them back in the future.
Stockholders and debtholders, pay an amount of money now because they expect that the company will reward them in the future.
True
From the point of view of stockholders and debtholders, an investment is …
When stockholders and debtholders, pay an amount of money now because they expect that the company will reward them in the future.
The investments in the financial structure of an entity are called _____________. The investments in other real assets are called ____________.
financial investments
real investments
The financial system is the system that allows the transfer of money from those people or entities that have money available for investing (net savers) and those people or entities that demand money (borrowers).
True
Net savers are
those people or entities that have money available for investing
ej. Households Companies Government Non-residents
Borrowers are …
those people or entities that demand money
ej. Households Companies Government Non-residents
Financial markets and financial intermediaries facilitate the transfer of funds from net savers to borrowers
True
Borrowers transfer funds for real investments and receive real assets
True
The 3 major areas of finance are:
- Business finance
- Investments
- Financial markets and institutions
Business finance, also known as ________ or ____________, deals with decisions related to how many and what types of _______ a firm needs to acquire (investment decisions), and how ________ those investments (financing decisions).
corporate finance
financial management
assets
to fund
In the area of investments, we study the financial instruments used in the capital markets, their characteristics and their value.
True
In the area of financial markets and institutions, we study ______________ and ______________, as well as the characteristics and functions of the different financial institutions (financial intermediaries and public financial agencies).
how the financial markets work
how they are supposed to work
Financial institutions are …
financial intermediaries and public financial agencies
Although business finance concepts and techniques can be applied to individual investors and to other entities different from companies, it is most commonly applied to companies.
True
Business finance deals, in broad terms, with the decisions related to _________ (investing decisions) and ________________ (financing decisions).
how to allocate the available funds
how to get the money necessary to undertake the selected investments
In financial management, we study if an investment is worth undertaking or not, and how it should be financed.
True
To determine if an investment is worth undertaking or not, we must first establish a decision criterion.
True
A decision criterion is a rule that indicates to us if a given investment is or not acceptable, or if an investment is preferable to another.
True
A decision criterion is the goal of business finance.
True
The commonly accepted goal of business finance is ______ or, equivalent, the maximization of the market value of an owners’ equity.
wealth maximization
The commonly accepted goal of business finance is
to maximize the value that an interested buyer would pay for the equity of a company.
Value depends on two things:
- the expected cash-flows from an asset (the money we expect the asset to generate in the future).
- Risk
Expected cash-flows are …
the money we expect an asset to generate in the future.
The higher those cash-flows, the higher the value of the asset.
True
Risk can be defined as
the possibility that we receive something different from expected
In finance, we assume that the agents are __________ (that is, they do not like risk). Therefore, the __________ the risk associated to an asset, the _________ the value of that asset.
risk-averse
higher
lower
The goal of business finance is to maximize value
True
Expected cash-flows ________ value, and risk associated with future cash-flows ________ value.
increase
decrease
An investment project will be worth undertaking if, and only if, it contributes to increase the value of the company (to increase the investor’s wealth).
True
An investment project will not be worth undertaking if
it contributes to reduce the value of the company (reduce the investor’s wealth).
If we have to select one investment from a set of available opportunities, the best one will be ___________
the one that produces the highest increase in the value of the company (investor’s wealth).
Finance operations produce _________, so these operations would reduce the wealth of the investor (the value of equity). Consequently, finance operations that produce a smaller reduction in the investors’ wealth (the company’s equity) are __________ to those finance operations that produce __________.
future cash-outflows
preferable
a bigger reduction.
Finance is interrelated with all the functions in the company, because all the functions (marketing, production, R&D, etc.) requires __________, both tangible (machinery, factories, office…) and intangible (technical expertise, patents, trademarks…) to properly work, and all these assets must be paid for.
real assets
It is the responsibility of the finance manager to guarantee that the funds are optimally distributed among the different functions.
True
The major decisions a finance manager has to make are:
- Capital budgeting decisions
- Capital structure decisions
- Working capital decisions
Capital budgeting decisions are…
decisions that concern the firm’s long-term investments.
To make capital budgeting decisions, the finance manager must evaluate the size of the investment, the expected future cash-flows that the investment will produce, when those cash-flows will be produced and the risk associated to those cash-flows.
True
- size of investment
- expected future cash-flows
- when cash flows will be produce
- risk associated with cash-flows
Capital structure decisions are …
decisions about how the cash required for an investment should be raised.
The finance manager must decide the right proportion of debt and equity and to select the least expensive sources of funds for the company.
True
This is the idea behind capital structure decisions.
Working capital decisions are …
decisions that concern the short-term assets and liabilities of the company.
Working capital decisions try to give answers to questions like the amount of cash and inventories the company must keep, the credit conditions for clients, or the short-term financing.
True
- amt of $ and inventories
- credit conditions of clients
- short-term financing
The CFO is the main person responsible for the finance operations of a company. He/she controls and coordinates the activities of the treasurer and the controller.
True
The main responsibility of the treasurer is ___________. He/she must forecast the funds that will be needed for each section of the company and take the necessary actions to assure that those funds are provided.
financial planning
The controller is in charge of _________. He/she must design and implement an efficient information system that produces information about the performance and the financial situation of the company. He/she must also control the funds that are expended as planned, ensure that the investments are producing the expected cash-flows, and investigate the causes of the deviations.
the financial control of the company
