CH 1 Flashcards
(24 cards)
What Does Corporate Finance Deal With?
-What should the firm invest in?
-How do we finance these investments? (Debt or owner’s equity)
-How will we manage the everyday financial activities?
What Does Capital Budgeting Deal With
-What long-term investments should we take on?
What Does Capital Structure Deal With
How should we finance assets? (Bonds, debt, or equity)
Balance Sheet Identity (Equation)
Assets = Liabilities + Stockholders Equity
Define Capital Budgeting
The process of planning & managing the firm’s long-term investments
How to Conduct Capital Budgeting
-Estimate cash flows (How much $$$)
-Estimate the cost of the cash flows (Find the interest rate)
-Discount the cash flows (compare and assess)
Do benefits outweigh the cost?
Cash flows generated by the asset must ————————————
Exceed the cost of the asset
What do Financial Managers Need to Know?
-The size (How much? 5 mil or 1mil)
-The timing (Today or 80y from now)
-The risk (Need to know the probability)
Define Capital Structure
The mix of debt/equity describes how the firm is financed
What Does Short-term cash flow management deal with?
-Networking Capital
-Cash Management
-Credit Management
What is the equation for short-term cash flow
Net-working capital = Current Assets (CA) - Current Liabilities (CL)
What does a firm mean when presenting a credit offer of: 2/10 net 30 days
2% off if paid in 10 days. Will remain the same by day 30
What are the types of markets? What do they do?
Primary- firm is involved and is the one receiving the money
Secondary- Involves receivers (Investors)
What are the two types of secondary markets?
-Dealer markets in stock and long-term debt are called over-the-counter (OTC) markets, meaning the dealers are connected electronically instead of transacting in a central location
-Auction markets differ from dealer markets in two ways:
An auction market or exchange has a physical location
Primary purpose is to match those who wish to sell with those who wish to buy (with dealers playing a limited role), whereas most of the buying and selling is done by the dealer in a dealer market
If I want to buy a bond from a dealer, What are you going to pay?
You’re going to pay the Ask
Ask-sell or
Bid-Buy
A firm has 100 dollars in debt and comes across 500 dollars. How much does the firm pay in debt and how much do the stockholders get?
Debt- 100
Stockholder- 400
What are the forms of Business Organizations
Self Proprietorship
Parternship
Corporation
What are the advantages & disadvantages of a self proprietorship?
Advantages:
-Easy
-Least Regulated
-Single own keep profits
-Taxed Once!
Disadvantages:
-Limited to one owner
-Equity Capital limits owner’s wealth
-UNLIMITED LIABILITY
-Could go after personal assets
What are the advantages & disadvantages of a partnership?
Advantages:
Two or more owners
More capital
Easy to start
Taxed once as personal income
Disadvantages:
UNLIMITED LIABILITY
Partnership dissolves if one person dies or tries to sell
What are the advantages & disadvantages of a Corporation
Advantages:
LIMITED LIABILITY
UNLIMITED LIFE
Separation of ownership and managment
Transfer of ownership
Easier to raise capital
Disadvantages:
DOUBLE TAXATION taxed as corporate and personal
What is the ultimate goal of financial management
Maximize current value of the company stock
-Brings value to company and helps communities
What is the Sarbanes- Oxley Act (i.e. Sox)?
Protects investors from corporate abuse
What is Agency Cost
The costs of the conflict of interest between stockholders and management.
-What are the major areas in finance?
-What is the capital budgeting decision?
-What do you call the specific mixture of long-term debt and equity that a firm chooses to use?
-What are the three forms of business organization?
-Why is the corporate form superior when it comes to raising cash?
-What are agency problems and how do they come about? What are agency costs?
-What is a dealer market? How do dealer and auction markets differ?
Answer
