week 11 Flashcards
what are the two basic principles of finance
time - a dollar today is worth more than a dollar tomorrow
uncertainty - a safe dollar is worth more than a risky one
what is corporate finance
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
what is investments
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
what are financial institutions
companies that specialise in financial matters
banks and insurance companies
what is international finance
an area of specialisation in either corporate finance, investments or banking but overseas
investing in foreign securities
what is a sole proprietorship
owned by one person who is the manager
unlimited liability
what is a partnership
owned by two or more owners
ownership is combined with management
legal contract of partnership required
what is a corporation
many owners
ownership and control may be separate
what is unlimited liability
investors are personally resposible for all business debts
what is limited liability
the most an investor can lose is the amount they initially invested
who is an owner
provides funds
takes business risk
does not have any claim to pre-specified payment
who has a financial stake in a corporation
those who do not provide finance
debt-holders - entitled to principal + interest
shareholders - dividends + capital gains, residual claimants
what is capital budgeting
how to spend money
what is capital structure
how to raise money
whether to issue debt or equity
what is working capital management
how to manage day to day cash flow and raise short term cash
what is the goal of a corporation and its management
maximising shareholder value
what is managers incentive
financial managers should act in the best interests of stockholders
what is an agency relationship
someone hires another person to represent their interests
what is an agency problem
if the agents interests are different to the principals goal, causes a conflict of interest
how do you solve an agency problem
close monitoring
offer stock in company or percentage of sales price
promotion
what is managerial compenstation
incentives to align management and stockholder interest
need to be carefully structured to ensure they achieve their goal
what is corporate control
internal control - replace bad managers
external control - threat of takeover may result in better management, firms with poor management may be taken over
what are financial markets
markets where debt and equity securities are bought and sold
what is a primary market
where securities are issued for the first time
raising finance through capital markets
money goes to firms
what is a secondary market
securities are traded between investors
money goes to owner of securities
why are financial markets important
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
what are the characteristics of financial assets
claims on future cash flows, they differ in: maturity, frequency of expected payments, uncertainty of cash flows, ordering of repayment in case of bankruptcy
what are money market instruments
debt
short term maturity
issued by govs, financial institutions or corporations
what are bonds
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
what are shares
equity
