Week 1 - perspectives of corporate finance Flashcards
What is a corporation
A business organised by a separate legal entity owned by stockholders
What are the key stakeholders in a business
- investors
- employees
- customers
- competitors
- suppliers
What is opportunity cost
The cost of having to give up the next best alternative
UK definition of corporate finance
Associated with transactions in which existing capital is utilized
Types of corporate finance activity
- mergers and acquisitions
- equity issuance by firms
- financing and restructuring joint ventures
- raising capital for special corporate investment funds
What do financial managers do
Responsible for the health of an organisation. Produce financial reports, direct investment activities and develop strategies and plans for longer term financial goals
What do chief financial officers do
Supervises all financial functions and sets overall strategy
What do treasurers do
Responsible for financing cash management and relationships with banks and other financial institutions
What do controllers do
Responsible for budgeting, accounting and taxes
What are the two principle financial decisions corporation face
- investment decisions
- financing decisions
Investment decisions
- purchas real assets to carry on business
- manage assets already in place
- manage and control risks of investments
Financing decisions
- sell claims on the assets and on cash flow to pay for real assets
- meet obligations to banks and stockholders that have contributed to financing
What are real assets
- determine the productive capacity and net income of the economy
Examples of real assets
- land
- buildings
- machines
What are financial assets
- claims on real assets, do not contribute directly to the productive capacity of the economy.
Examples of financial assets
- stocks
- bonds
The investment decision
- invest in assets that earn a return greater than the minimum acceptable rate of return
The hurdle rate should reflect the riskiness of the investment and the mix of debt and equity used to fund
The return should reflect the magnitude and the timing of cash flows
The financing decision
- find the right kind of debt for your firm and use the right mix of debt and equity to fund operations
The optimal mix of debt and equity maximises firm value
The dividend decision
- if you cannot find investments that make your minimum acceptable rate, return that cash to owners of your business
Investment opportunities influences how much cash you can return upon
What should all financial management decisions be
Consistent with the goal of the corporation –> to maximise the wealth of shareholders and investors
