Chapter 1: Finance Flashcards
(77 cards)
1
Q
The art and science of managing money
A
Finance
2
Q
Focuses on how resources are use to achieve corporate goals
A
Finance
3
Q
focuses on determination of value and how to make the best decisions with respect to the use of funds or financial resources
A
Finance
4
Q
The field of _________ is actually an outgrowth of economics
A
Finance
5
Q
Finance is sometimes referred to as ___________
A
financial economics
6
Q
Used to be branch of economics
A
Finance
7
Q
Factors that made the study of Finance Important
A
- Globalization
- Computerization
- Corporate Reorganization
8
Q
Field of Finance is actually an outgrowth of economics
A
Relationship to Economics
9
Q
Financial managers must understand the economic framework within which they operate in order to react or anticipate to changes in conditions.
A
True
10
Q
Primary economic priniple used by Financial Managers is ______________
A
Marginal Analysis
11
Q
Financial decisions should be implemented only when benefits exceed costs.
A
Marginal Analysis
12
Q
Also differ with respect to decision-making
A
Relationship to accounting
13
Q
the focus is on cash flows.
A
Finance
14
Q
Used to be a job that was largely mechanical
A
Evolution of Finance
15
Q
Used to be a branch of economics
A
Evolution of Finance
16
Q
Single period and a short-term. Ignores the time value of money.
A
Profit Maximization
17
Q
Long-term goal; Considers return on investment.
A
Wealth maximization
18
Q
Is the overall standards of conduct or moral judgment
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Ethics
19
Q
Key activities of Financial Manager
A
- Financing Decision
- Dividend decision
- Investment Decision
- Management of Financial Resources
- Risk Management
20
Q
end goals are the efficient allocation of funds to specific assets
A
Investment Decision
21
Q
appropriate dividend policy of a firm and its subsequent effects.
A
Dividend Decision
22
Q
Obtaing the best financing mix and ultimately determining the optimal capital structure of the firm.
A
Financing Decision
23
Q
concerned with protecting and utilizing assets with a minimum degree of risk.
A
Risk management
24
Q
Include banking, personal financial planning, investments real estate and income.
A
Career opportunities
25
Efficient utilization of the firm's funds/resources
Management of Financial Resources
26
Responsible for managing the firm's short-term investments of cash
Cash Manager
27
Advantages of Profit Maximization
1. Easy to compute
2. Provides quick term reference to firm.
28
Disadvantage of Wealth Maximization
1. Difficult to trace relationship between stock market price and financial decision
2. not easy to determine
3. needs in depth analysis
29
Disadvantages of Profit Maximization
1. Emphasis on short-term
2. Does not consider the risks and timing returns
30
Titles and Designation of finance
1. Cash Manager
2. Treasurer
3. Controller
4. CFO
31
Concerned with both inflows & Outflows funds on day-to-day basis.
Treasurer
32
Responsible for the auditing, financial reports, & Management Auditing.
Controller
33
Responsible for all the financial activities of the firm
CFO
34
responsible for managing the firm's short-term investment of cash
Cash Manager
35
Is a popular measure used by many firms to determine whether an investment - proposed or existing - positively contributes to the owners wealth.
Economic Value Added (EVA)
36
Eva is calcuated by:
subtracting the cost of funds used to finance an investment from its after-tax operating profits.
37
positive EVAs
increase shareholder wealth
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negative EVAs
reduce shareholder value
39
Can one reconcile the need of the firm for wealth maximization and the need of the firm to be _______________
Social Responsibility
40
Advantages of wealth maximization
* Puts emphasis on long term
* Considers risks and uncertainty
* Recognizes the timing of the financial performance inflows or returns
41
Formula of EPS
EPS = Net Income / Shares Outstanding
42
Primarily prepares the firm's financial plans and budgets.
Financial Analyst
43
Manages specific foreign operations and the firm's exposure to fluctuations in exchange rates
Foreign Exchange Manager
44
In large firms, arranges financing for approved asset investments.
Project Finance Manager
45
Administers the firm's credit policy by evaluating credit applications, extending credit, and monitoring and collecting accounts receivable.
Credit analyst/manager
46
In large companies, oversees or manages the assets and liabilities of the employees' pension fund.
Pension fund manager
47
Evaluates and recommends proposed asset investments.
Capital Expenditures manager
48
Frequently manages the firm's cash collection and disbursement activities and short-term investments, coordinates show-term borrowing and banking relationships.
Cash Manager
49
Other duties include financial forecasting, performing financial comparisons and working closely with accounting.
Financial Analyst
50
Coorinates consultants, investment bankers, and legal counsel.
Project Finance Manager
51
Basic Forms of Business Organizations
- Sole Proprietorship
- Partnership
- Corporation
52
Owned by one person
Sole Proprietorship
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an artificial being created by operation of law, having the right of succession and the powers, attributes, and properties expressly authorized by law or incident to its existence.
Corporation
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Two or more people pool together money and expertise, put these in a common fund and share profits later
Partnership
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Is primarily concerned with the presentation of financial data
Accounting
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Is primarily concerned with analyzing and interpreting this information for decision-making purposes
Financial Manager
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Financial Manager uses this data as a vital tool for making decisions about the financial aspcts of the firm.
Financial Statements
58
Strengths of SOle proprietorship
- Owner receives all profits (and
sustains all losses)
- Low organizational costs
- Income included and taxed on
proprietor's personal tax return
- Independence
- Secrecy
- Ease of Dissolution
59
Strenghts on Partnership
- Can raise more funds than sole
proprietorship
- Borrowing power enhanced by more owners
- More available power and managerial skill
- Income included and taxed on partner's tax returns
60
Strengths on Corporation
- Owners have limiud liability, which guarantees that they can not lose more than they invested
- Can achieve large size via sale of stock
- Ownership (Stock) is readily transferable
- Long life of Firm
- Can hire professional managers
- Has better acess to financing
- Receives certain tax advantages
61
Weaknesses of Sole Proprietorship
- Owner has unlimited liability - total wealth can be taken to satisfy debts
- Limited fund-raising power tends to inhibit growth
- Proprietor must be jack-of-all-trades
- Difficult to give employees long-run career opportunities
- Lacks continuity when proprietor dies
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Weaknesses of Partnership
- Owners have unlimited and may have to cover debts of other partners
- Partnership is dissolved when a partner dies
- Difficult to liquidate or transfer partnerihip
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Weaknesses of Corporation
- Taxes generally higher, because corporate income is taxed, and dividends paid to owners are also taxed
- More expensive to organize than other business forms
- Subject to heater government regulation
- Lacks secrecy, because stock- holders must receive financial reports
64
primarily responsible for the flow of funds from the lender to the borrower
Financial System
65
Have a surplus of money that they probably want to generate more money with individuals and companies
Savers
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Another way a business can raise money or capital is through selling _____________
EQUITY
67
Do not have enough money and therefore may need to borrow money individuals, companies, governments.
Borrowers
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is also known as shares or stocks and it represents ownership.
Equity
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The third way savers and borrowers are linked in the financial markets is through the issue of ________.
BONDS
70
A ________ is a loan that is represented
by an IOU (I owe you).
BOND
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These _______ are issued directly to investors, missing out the banks.
IOUs
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are interest bearing securities which entitle holders to annual interest and repayment at maturity.
Bonds
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Sell bonds to investors.
Companies and governments
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They receive the loan in return for paying interest payments and making full repayment on a fixed future date
Companies and governments
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Buy corporate and government bonds in return for interest payments and full repayment of the loan on a fixed future date
INVESTORS
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10 basic Principles of Financial Management
1. Risk-Return Trade-Off
2. The time value of Money
3. Cash-not Profits- is the King
4.Incremental Cash Flows
5. Competitive Markets
6. Efficient capital Markets
7. The Agency Problem
8. Taxes Bias Business Decisions
9. All Risk Is not Equal
10. Ethical Behavior means doing the Right thing
77
Advantages of Wealth Maximization
- Puts emphasis on long term
- Considers risks and uncertainty
- Recognizes the timing of the financial performance inflows or returns
- Recognizes the timing of the financial performance
