Week 1 Flashcards
How will the business finance investments
Capital Structure
The theory of _________ answers the following: What long-term investments should the business make?
Capital Budgeting
How will the business manage everyday financial activities?
Working Capital Management
Capital Budgeting is concerned with deciding____________
Long term asset investment
What three items should financial managers regard for future cash flows?
- Size (what amount will be received)
- Timing (when and how often will they be received)
- Risk (what is the likelihood that you will receive the cash flow)
What is capital structure?
The mixture of financing (debt and equity) the firm uses to finance its operations.
Large businesses often source capital structure through_______
Issuing debt and/or equity securities
What is Working Capital Management?
The capital within a business that is used for the day-to-day operations.
Includes: Cash, Accounts Receivable, Inventory, as well as, liabilities such as accounts payable.
What is opportunity cost?
The price paid for missed opportunity, that is, if you were to invest extra funds what could you have made for the cash you have on hand.
What are the 4 Main Types of Businesses?
- Sole Trader
- Partnership
- Corporation
- Trust
What are three benefits of being a sole trader?
- easy to set up
- Least regulated
- Taxed personally - not as a business aka can be a tax break
what are 3 disadvantages of being a sole trader?
- Capital is limited to owner’s wealth
- Unlimited liability
- Challenges in raising capital
What is a partnership?
A business owned by 2 or more people.
What are 3 advantages of partnerships?
- More capital
- Income taxed once as personal income
- Limited partners with limited liability
What is a corporation?
A corporation is a business that is a legal seperate entity to the owner and is governed by law.
A complex structure.
What can corporations issue both publically and privately?
Shares - which give owners limited libility
What is the main challenge that needs to be addressed in corporate governance?
That managers and directors act to maximise shareholder’s wealth.
Who wrote the “shareholder theory”?
Milton Friedman
What is the Shareholder Theory?
There is only one social responsibility of business - to use its resources and engage in activities designed to increase its profit as long as it stays within the rules of the game.
Which theory aligns with the following: There is only one responsibility of business, which is to increase profit for shareholders.
Shareholder Theory - Friedman
What is Friedman’s reasoning for his Shareholder Theory?
The corporate executive would be spending someone else’s money given to them for the business on acts of social responsibility, while reducing returns for shareholders.
Maximising Shareholder Wealth is called_______________________
Shareholder Primacy
T/F: Shareholder theory would argue that if wages can be cut to generate more of a profit they should be.
True
T/F: Shareholder theory would argue that dumping waste into a river is the better option than taking it to the dump.
True - so long as the outcome generates a higher profit for the business e.g. not having to pay for water refinement/waste disposal fees.
What is a main criticism of Friedman’s theory?
That it focuses on short-term valuations - there is no consideration to how the profits etc will continue in the future if the business operates unethically.
Who proposed Stakeholder Theory?
Edward Freeman
What is the main goal of Stakeholder Theory?
The manager’s goal should not be to maximise shareholder wealth, but rather to create value for all stakeholders.
T/F Shareholder theory focuses on the creation of wealth
False. Shareholder theory uses value as it focuses on the greater impacts than just monetary gains.
What is the responsibility principle?
One of Stakeholder Theories premises, which says that people should/want to consider how their actions impact others, and that it’s the manager’s job to create value for these relationships.
What are the five main stakeholders as per Freeman’s theory?
- Financiers
- Employees
- Suppliers
- Communities
- Customers
Who developed the Shareholder Value Myth?
Lynn Stout
What is the Shareholder Value Myth?
Stout challenges the belief that corporations exist solely to maximize shareholder value, as this focus is harmful and not supported by corporate law, economics, or evidence. She advocates for a broader approach that considers multiple stakeholders for more sustainable and ethical business practices.
What is Hart’s Shareholder Welfare Theory?
That firms should not just aim to increase wealth, but support the welfare of their stakeholders by aligning their business practices with their ideologies.
The theory that the business’s responsibility is to solely generate profit is _______________.
Shareholder Theory - Friedman
The theories that businesses have a moral right to contribute greater society include ________ , __________ & ___________.
Stakeholder theory (Freeman)
Shareholder Welfare (Hart)
Satisficing (Stout)
