Overview of Financial Management

Question 1

Capital Budgeting Decision

Answer 1

Decision made by the financial management department on internal investments

Question 2

Investment Decision

Answer 2

Decision made by the financial management department on external investments

Question 3

What are the two main aspects of financial managements?

Answer 3

Minimize the cost of financing, minimize the risk to cash flow

Question 4

What are the two things finance people do?

Answer 4

Rearrange/translate/exchange cash flows over time, and manage risk

Question 5

What is the main aspect of translating cash flows over time?

Answer 5

Converting today’s dollars into equivalent future value

Question 6

What is a security?

Answer 6

A way of rearranging/translating/exchanging cash flows over time; investments

Question 7

What is risk?

Answer 7

Uncertainty of future cash flows

Question 8

Assets only have positive value today if

Answer 8

it gets more valuable in the future

Question 9

Value is based on

Answer 9

future cash flows

Question 10

Risk Aversion

Answer 10

Given two securities equally priced but with different degrees of risk, the rational investor would choose the one with lower risk

Question 11

Value is also known as

Answer 11

theoretical value, fair market value, no-arbitrage price

Question 12

The price of something is

Answer 12

what the seller wants you to pay for it

Question 13

Fair market value is

Answer 13

the value of something based on theory and does not include profit

Question 14

What makes the fair market value of something change?

Answer 14

Change in expected/estimated future cash flows

Question 15

What makes the price of something change?

Answer 15

Market forces (supply & demand)

Question 16

Profit

Answer 16

Market Price - Value

Question 17

Decision Criteria

Answer 17

Basis for investing

Question 18

Holding period

Answer 18

Amount of time you own the investment

Question 19

Profit of an investment

Answer 19

Available market price at the end of the holding period - price paid at the beginning of the holding period

Question 20

Rate of Profit

Answer 20

The percentage increase in the price (or value) of a financial asset

Question 21

Rate of Growth

Answer 21

Profit/Investment

Question 22

Rate of Profit may be thought of as

Answer 22

rate of wealth creation

Question 23

Spot transaction

Answer 23

Passage of time does not matter

Question 24

Investment transaction

Answer 24

Passage of time matters

Question 25

New Price is equal to

Answer 25

Old Price(1 + Percentage of change)

Question 26

The fair market value of the security is

Answer 26

the amount of money (in today’s dollars) the company must promise to pay in the future to those who buy security

Question 27

Profit equation

Answer 27

(New Price - Old Price)/Old Price or New Price/Old Price - 1

Question 28

What do we use rate of return?

Answer 28

Investments expressed as rates of return can be compared on the same basis and without bias