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ACF100 > week 11 > Flashcards

week 11 Flashcards

1
Q

what are the two basic principles of finance

A

time - a dollar today is worth more than a dollar tomorrow
uncertainty - a safe dollar is worth more than a risky one

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2
Q

what is corporate finance

A

undertake financial decisions for a corporation
what long term investments should be taken on
where to get financing for long term investments
how to manage everyday finances of firm

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3
Q

what is investments

A

work with financial assets such as stocks and bonds
determine price of stocks and bonds
how to calculate risk and return
how to allocate money into different financial assets

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4
Q

what are financial institutions

A

companies that specialise in financial matters
banks and insurance companies

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5
Q

what is international finance

A

an area of specialisation in either corporate finance, investments or banking but overseas
investing in foreign securities

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6
Q

what is a sole proprietorship

A

owned by one person who is the manager
unlimited liability

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7
Q

what is a partnership

A

owned by two or more owners
ownership is combined with management
legal contract of partnership required

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8
Q

what is a corporation

A

many owners
ownership and control may be separate

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9
Q

what is unlimited liability

A

investors are personally resposible for all business debts

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10
Q

what is limited liability

A

the most an investor can lose is the amount they initially invested

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11
Q

who is an owner

A

provides funds
takes business risk
does not have any claim to pre-specified payment

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12
Q

who has a financial stake in a corporation

A

those who do not provide finance
debt-holders - entitled to principal + interest
shareholders - dividends + capital gains, residual claimants

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13
Q

what is capital budgeting

A

how to spend money

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14
Q

what is capital structure

A

how to raise money
whether to issue debt or equity

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15
Q

what is working capital management

A

how to manage day to day cash flow and raise short term cash

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16
Q

what is the goal of a corporation and its management

A

maximising shareholder value

17
Q

what is managers incentive

A

financial managers should act in the best interests of stockholders

18
Q

what is an agency relationship

A

someone hires another person to represent their interests

19
Q

what is an agency problem

A

if the agents interests are different to the principals goal, causes a conflict of interest

20
Q

how do you solve an agency problem

A

close monitoring
offer stock in company or percentage of sales price
promotion

21
Q

what is managerial compenstation

A

incentives to align management and stockholder interest
need to be carefully structured to ensure they achieve their goal

22
Q

what is corporate control

A

internal control - replace bad managers
external control - threat of takeover may result in better management, firms with poor management may be taken over

23
Q

what are financial markets

A

markets where debt and equity securities are bought and sold

24
Q

what is a primary market

A

where securities are issued for the first time
raising finance through capital markets
money goes to firms

25
Q

what is a secondary market

A

securities are traded between investors
money goes to owner of securities

26
Q

why are financial markets important

A

allow companies, govs and individuals to increase their investment choices
savers can invest in financial assets so they can defer consumption and earn a return to compensate them for doing so
borrowers have better access to the capital so that they can invest in productive assets

27
Q

what are the characteristics of financial assets

A

claims on future cash flows, they differ in: maturity, frequency of expected payments, uncertainty of cash flows, ordering of repayment in case of bankruptcy

28
Q

what are money market instruments

A

debt
short term maturity
issued by govs, financial institutions or corporations

29
Q

what are bonds

A

debt
maturity 1 year+
issued by gov or corporations
gov bonds - long term, usually fixed interest
corporate bonds - entitled to cash payments before equity holders

30
Q

what are shares

A

equity

ACF100 (26 decks)

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