Chapter 15 Flashcards by Sarah Amaidia

What are the 4 keys a financial manager follows

Determine firm’s LT invest. goals
Obtain funds to pay for invest.
Conduct firm’s everyday financial activities
Help manage risks firm takes

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What is the financial manager responsible for

Planning, overseeing financial ressources of a firm ex: cash-flow management, financial planning and controlling

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Define cash flow management

Managing pattern of cash inflows (rev) and outflows (dept payments)
Investing funds not needed to service debt
Use funds either to maintain firm, earn interest, but NOT sit idle

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Define financial control

Check performance against strategic plans
Make adjustments
Prep budgets to ensure there is sufficient cash on hand to meet operational/debt-service needs

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Define financial planning

Plan to achieve desired financial status
ex: project revenue flows, source/planned use for funds ST/LT, time when funds are required

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Define ST expenses

Operating expenses
Accounts receivable (credit policy)
Inventory (raw materials, WIP)

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Define LT expenses

Capital expenses
Funding fixed assets with long life/lasting value (land, building, machine)
Not normally sold/converted to cash
Acquistion requires large investment, tying up firm’s ressources

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Define a ST fund

Allows a firm to cover op expenses and implement ST plans such as
Trade credits
Secured loans
Unsecured loans
Factoring accounts receivable

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Define trade credit

Granting credit by selling firm to buy firm
Ex open book credit, promissory note, trade draft

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Define a secured ST loan

Borrower required to put up collateral, interest rates lower than unsecured, appeals to firms whose credit is not sufficient to qualify for unsecured

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Give examples of an unsecured ST loan

Line of credit, revolving credit agreement, commercial paper

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What are 4 sources of LT funds

Debt financing
Equity financing
Hybrid financing
Risk-return relationship

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Define debt financing

LT loans: borrow money for 3-10 years at fixed or floating rate
Corp bond: promise by borrower to pay lender amt of money at maturity date

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Give examples of bond types

Secure
Unsecured (debenture)
Registered
Bearer (coupon)
Callable
Serial
Convertible

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Define callable bonds

may be called at anytime, or after a minimum period of time, and paid off for a specified call price

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Define serial bonds

redemption rates are staggered so that the bond is paid off gradually over time

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Define convertible bonds

option of receiving common stock instead of cash

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Define common stock

Firm selling ownership rights by issuing shared, and investors purchase hoping they appreciate in value

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Define retained earnings

Financing by retaining profits in firm and NOT paying dividends to shareholders

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Define market value (stocks)

Current price of share on secondary secuirities marktes

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Define book value (stocks)

Shareholders’ equity divided by # of shares outstanding

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Define par value (stocks)

Arbitrary value set by company’s board of directors and stated on stock certificates

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Define preffered stock

Form of hybrid financing
Required fixed payments
No maturity date
No voting rights, affecting firm’s control

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Define capital structure

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Mix of debt vs equity

What is the difference between debt and equity financing

Debt: cheaper, but comapny may not be able to service it Equity: more expensive, but company has no obligations to shareholders

Define primary securities market

Sale, purchase of newly issued stocks/bonds

Define secondary securities market

Sale, purchase of previously issued stocks/bonds

Define the stock exchange

Setting where members buy/sell stock in accordance with rules of the exchange

Define the TSX

Large exchange in Canada with 110 members Securities of most major Canadian companies listed

Define the 2 major foreign exchanges

New York, London stock exchange

Define the OTC Market

Numerous dealers trading amongst themselves for smaller firms not listed on exchanges, trade all fixed-income securities

Define the NASDAQ

National association of securities dealers automated quotation First electronic stock market

Define a market index

Summarizes trends in stock market and specific industires ex S&P

Bear vs bull market

Bear: stock prices drop Bull: stop prices rise

Define market order

Buy, sell at current price

Define limit order

Buy only at certain price

Define stop order

Sell stock if it falls to certain $

Define round lot

Buying shares in multiples of 100

Define odd lot

Fractions of round lots

Define margin traiding

Investor makes down payment of portion of price with rest financed by a broker, broker then borrows amt from bank secured by stock and charges investor a higher interest rate than the bank

Define short sale

Investor borrows share from broker and sells, then must repurchase equal number of shares and return them to original broker in hopes of making more money himself (same principle as stock borrowing on wealthsimple)

Define a mutual fund

Company pooling ressources of many investors and purchasing various types of securities with them, professionally managed, all with difference goals and risk levels

Define ethical funds

Socially responsible investing in companies producing safe, useful products and emphasizing employee relations, environmental practices, human rights

Define an ETF

Bundle of stocks/bonds in index tracking overall movement of market, low operating expenses

Define hedge funds

Private money pools looking for positive returns regardless of stock market performance, sold to wealthy/knowledgeable investors, principle-protected notes

Define principle-protected notes

Orginial principal returned, but no guarantee of extra return

Define a commodity

Undifferentiated products, futures contract (agreement of purchasing specific amount at certain price on set future date)

Call vs put option

Call: buy stock at certain price until set date Pull: sell stock at certain price until set date

Are securities legislations federal or provincial

Provincial

Define the blue sky law

Regulates how firms back up securities

Define prospectus

Detailed registration statement about new stock filed with provincial securities exchange

What are 3 things small businesses can do as responsible financial management

Establish bank/trade credit Plan for cash flow Venture capital approach

Define risk management

Conserving a firm’s financial power or assets by minimizing the financial effect of accidental losses

Define risk

Uncertainty about future events

Define speculative risk

Change for gain or loss

Define pure risk

Only chance of loss

Define the risk management process

1. identify risk and potential losses 2. measure frequency, severity of losses and impact 3. evalute alts and choose techniques that can best handle losses 4. implement program 5. monitor results

Define risk management alts

Avoidance, control, transfer, retention

Chapter 15 Flashcards

(58 cards)