Chapter 1: Foundations of Financial Management Flashcards Preview

Finance > Chapter 1: Foundations of Financial Management > Flashcards

Flashcards in Chapter 1: Foundations of Financial Management Deck (20):
1

incremental cash flows

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

2

5 Principles

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

3

opportunity cost

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

4

investors require...(2)

1. a return for delaying consumption
2. an additional return for taking on risk

5

efficient market

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

6

agency problem

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

7

what is finance?

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

8

3 basic types of issues:

1. Capital Budgeting
2. Capital Structure decisions
3. Working capital management

9

capital budgeting

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

10

Capital Structure decisions

how the firm will raise this money

11

Working capital management

how the firm can best manage its cash flows

12

financial markets

institutions and procedures that facilitate financial transactions

13

sole proprietorships

- business owned by an individual
- responsible generally without limitation for liabilities

14

Partnerships

- more than one owner
general or limited

15

general partnerships

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

16

Limited Partnerships:

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

corporations

- 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

double taxation

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

19

s-corporation

taxes as though it were a partnership

20

Limited Liability company (LLC)

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