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Flashcards in Chapter 1 Deck (23):
1

What is the first question of finance?

What long-term investments should one take on? (What buildings, machines, etc)

2

What is the second question of finance?

Where will you get the long-term financing to pay for your investments? (How do we raise capital)

3

What is the third question of finance?

How will you manage your everyday financial activities, such as collection from customers nad paying suppliers.

4

What is the answer to the first question of finance?

Capital budgeting

5

What is the answer to the second question of finance?

Capital structure

6

What is the answer to the third question of finance?

working capital

7

What is capital budgeting

The process of planning and managing a firm's long-term investments. (identifying investment opportunities that are worth more to the firm than they cost to acquire.)

8

What is capital structure

the specific mixture of long-term debt and equity the firm uses to finance its operations (Long-term debt +preferred and common stock.)

9

What is working capital

a firm's short-term assets and liabilities

10

What is a firm's net working capital?

Current assets minus current liabilities

11

What are the some questions that must be answered regarding working capital?

1. How much cash and inventory should we keep on hand?
2. Should we sell on credit to our customers
3. How will we obtain any needed short-term financing?

12

A business owned by a single individual

Sole proprietorship

13

A business formed by two or more individuals or entities

partnership

14

A business created as a distinct legal entity owned by one or more individuals or parties

corporation

15

What is a specific financial management goal

to maximize the current value per share of the existing stock (ethically and legally)

16

What is the general goal of financial management?

Increase market value of existing owners' equity

17

What is the agency problem?

The possibility of conflict of interest between the owners and management of a firm

18

Whether managers will act in the best interests of stockholders depends on two factors

1. How closely the management goals are aligned with stockholder goals
2. Can management be replaced if they do not pursue stockholder goals

19

What is a primary market?

the original sale of securities by goverment and corporations

20

The secondary market is

a market in which securities are bought and solf after the original sale

21

What are the two types of primary market transactions corporations engage in?

public offerings and private placement

22

What are the two types of secondary markets?

dealer and auction

23

What is another term for dealer market?

over-the-counter