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Finance Markets > Week 1-4 > Flashcards

Week 1-4 Flashcards

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1
Q

3 forms of business organisation

A

Sole proprietorship
Partnership
Corporation

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2
Q

Sole proprietorship

A

A business owned by a single individual.

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3
Q

Partnership

A

A business formed by two or more individuals or groups

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4
Q

Advantage/disadvantage of sole proprietorship

A

Owner takes all the profits but is liable to debt and the equity is limited to their personal wealth

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5
Q

Advantage/disadvantage of partnership

A

Easy and inexpensive to form and risk spread out, but amount of equity limited to partners wealth

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6
Q

Corporation

A

A business created as a distinct legal entity composed of one or more individuals or entities

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7
Q

Advantages/disadvantage of corporations

A

Easy to transfer ownership/limited liability/easy to raise capital
But pay corporation tax

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8
Q

Type I agency problem

A

A possibility of conflict of interest between shareholders and management

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9
Q

Type II agency problem

A

Possibility of interest between the controlling and minority shareholders

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10
Q

Single tier vs two tier board

A

In single tier the shareholders elect board of directors and in two tiers the supervisory board does this

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11
Q

Cumulative voting

A

A procedure in which a shareholder may cast all votes for one member of the board of directors (1/n+1 + 1 share guarantees you get a vote)

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12
Q

Straight voting

A

A shareholder may cast all votes for each member of the board of directors. Favours the larger shareholders much more.

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13
Q

Proxy voting

A

A grant of authority by a shareholder to allow another individual to vote their shares. Can pool votes together

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14
Q

Class A vs Class B shares

A

One class of shares have unequal voting rights. Some shareholders keep control over the firm

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15
Q

Shareholders, directors and manager relationship

A

Shareholders own the firm and they elect directors who can hire or fire managers.

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16
Q

Who does financial management in the firm

A

The finance director or the CFO. They coordinate activity between the treasurer and the controller

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17
Q

Treasurer

A

Responsible for managing the firms cash and credit and capital expenditures

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18
Q

Controller

A

Handles financial accounting and tax payments

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19
Q

Capital budgeting

A

Process of planning and managing a firms long term investments. (i.e investing in machinery, land, tech)

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20
Q

Capital structure

A

How the firm obtains and manages the long term financing it needs to support long term investment (mixture of long term debt and equity)

21
Q

Working capital management

A

A firms short term assets and liabilities. Making sure the firm has sufficient resources to continue operations. (Assets = inventory. Liabilities = money owed to suppliers)

22
Q

Goal of financial management

A

Maximise firms value - maximise the value of the firms equity

23
Q

Financial markets

A

Facilitate the flow of money from those who have surplus cash to those that need financing

24
Q

Nature of investment in finance markets

A

Cash flows to firm > firm invests in short/long term assets > generate profits that are reinvested or pay back shareholders

25
Q

Primary market

A

Original sale of securities by government or corporations. (Public offerings or private investment)

26
Q

Secondary market

A

Securities bought and sold after the original sale. Transfer ownership of corporate securities

27
Q

Dealers vs brokers

A

Dealers buy and sell for themselves at their own risk whilst brokers or agents match buyers and sellers and do not own the commodity

28
Q

Future value

A

The amount an investment is worth after one or more periods
Vt = Vo(1+r)^t

29
Q

Single interest

A

Interest earned only on the original principal amount

30
Q

Compound interest

A

Interest earned on both the initial principal amount and the interest reinvested from prior periods

31
Q

Compounding

A

The process of accumulating interest on an investment over time

32
Q

Present value

A

The current value of future cash flows discounted at the appropriate rate
PV = FV/(1+r)^t

33
Q

For calculating the future value of multiple cash flows

A

Compound the accumulated balance forward one year at a time

34
Q

Discount rate

A

The rate used to calculate the present value of future cash flows

35
Q

To obtain capital

A

A firm must borrow money (debt financing) or sell a portion of the firm (equity financing)

36
Q

Venture capital

A

Financing for new often high risk ventures

37
Q

Stages of venture capital financing

A

Seed money < startup < growth capital < replacement capital < buyout financing

38
Q

IPO

A

A company’s first equity issue made available to the public

39
Q

SEO

A

A seasoned equity offering is new equity issue by a company that has previously issued securities to the public

40
Q

Underwriting

A

Investment firms that act as intermediaries between a company selling securities and the investing public.

41
Q

Syndicate

A

A group of underwriters formed to share the risk and help sell an issue

42
Q

Gross spread

A

Compensation to the underwriter (difference between the underwriters buying price and the offering price)

43
Q

3 types of underwriter

A

Firm commitment - underwriter assumes full financial responsibility for unsold shares
Best effort - can return unsold shares to the issuer without financial responsibility
Dutch auction - underwriter conducts an auction

44
Q

Green shoe provision

A

Allows the underwriter the option to purchase additional shares form the issuer at the offering price

45
Q

Lock up agreement

A

Specifies how long insiders must wait after an IPO before they can sell equity

46
Q

Why shares are usually underpriced in IPO’s

A

So existing shareholders keep more control
Insurance for underwriters

47
Q

Why share prices typically decline in a seasoned offering

A

Managerial information
Debt usage

48
Q

Flotation cost

A

The cost associated with floating a new issue (direct/indirect/gross spread)

Finance Markets (2 decks)

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