Chapter 1: Foundations of Financial Management Flashcards

1
Q

incremental cash flows

A

The additional operating cash flow that an organization receives from taking on a new project.

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2
Q

5 Principles

A
  1. Cash Flow is What Matters
  2. Money Has a time value
  3. Risk Requires a Reward
  4. market prices are generally right
  5. Conflicts of Interest Cause Agency Problems
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3
Q

opportunity cost

A

the highest valued alternative that you had to give up when you made the choice

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4
Q

investors require…(2)

A
  1. a return for delaying consumption

2. an additional return for taking on risk

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5
Q

efficient market

A

one where the prices of the assets traded in that market fully reflect all available information at any instant in time

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6
Q

agency problem

A

problems and conflicts resulting from the separation of the management and ownership of the firm

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7
Q

what is finance?

A

the study of how people and businesses evaluate investments and raise capital to fund them

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8
Q

3 basic types of issues:

A
  1. Capital Budgeting
  2. Capital Structure decisions
  3. Working capital management
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9
Q

capital budgeting

A

the decision-making process with respect to investment in fixed assets (what long-term investments to undertake)

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10
Q

Capital Structure decisions

A

how the firm will raise this money

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11
Q

Working capital management

A

how the firm can best manage its cash flows

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12
Q

financial markets

A

institutions and procedures that facilitate financial transactions

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13
Q

sole proprietorships

A
  • business owned by an individual

- responsible generally without limitation for liabilities

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14
Q

Partnerships

A
  • more than one owner

general or limited

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15
Q

general partnerships

A

each partner is fully responsible for the l liabilities inured by the partnership

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16
Q

Limited Partnerships:

A

limited liability restricted to the amount of capital he or she invest in the partnership (for investors not involved in the management of the firm)

17
Q

corporations

A
  • entity that legally functions separate and apart from its owners
  • ownership is reflected in common stock certificates
  • shareholders liability is confined to the amount of the investment in the company
18
Q

double taxation

A

paying taxes on profits and then shareholders paying personal income taxes on those dividends

19
Q

s-corporation

A

taxes as though it were a partnership

20
Q

Limited Liability company (LLC)

A

cross between a partnership and a corporation, owners retain limited liability but the company is run and is taxed like a partnership