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MOS 1023 Part 2 > Chapter 6 > Flashcards

Chapter 6 Flashcards

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1
Q

What is finance?

A

The science or study of management of funds.

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2
Q

What is the goal of a firm?

A

Goal is to create value for the firm’s shareholders.

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3
Q

What will good financial decisions do to stock price?

A

Increase it

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4
Q

What will poor financial decisions do to stock price?

A

Decrease it

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5
Q

What is the role of management?

A

To serve as an arbitrator and moderator between conflicting interest groups or stakeholders and objectives.

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6
Q

Who holds contractual claims against the company?

A

Creditors, managers, employees, and customers

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7
Q

Who have residual claims against the company?

A

Shareholders

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8
Q

What are residual claims? Contractual claims?

A

Residual Claims are right to the profit of the company (equity claims). Contractual Claims are amounts that must be paid periodically.

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9
Q

What are the three basic issues addressed by the study of finance?

A
  1. What long-term investments should the firm undertake? 2. How should the firm raise money to fund these investments? 3. How to managecash flows arising from day-to-day operations?
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10
Q

What is a capital budgeting decision?

A

What kind of asset should I be buying?

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11
Q

What is a capital structure decision?

A

Could either borrow, finance through debt, increase share distribution (company equity) or mortgage which one?

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12
Q

What is an operating decision?

A

How much should be allocated to inventory?

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13
Q

Are accounting profits equal to cash flows?

A

No, they aren’t

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14
Q

What drives the value of the business?

A

Cash Flows

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15
Q

What is the objective of financing?

A

To acquire cash and allow cash flows to create returns in relation to investment

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16
Q

What does it mean to say that money has time value?

A

A dollar received today is worth more than a dollar received in the future.

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17
Q

What are the two ways an investment can be viewed?

A

its future value or its present value

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18
Q

What is the discounting process?

A

This process calculates the present value and applies it later

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19
Q

What is the compounding process?

A

Calculates the future value and applies it today.

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20
Q

What are the three steps in determing the net present value?

A
  1. Calculate the present value of cash inflows 2. calculate the present value of cash outflows 3. subtract the present value of the outflows from the present value of the inflows
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21
Q

What are the general decisions following the various results of the net present value?

A

Positive = acceptable, zero = acceptable, negative = unnacceptable

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22
Q

What are the typical cash outflows?

A
  1. Repairs and Maintenance 2. Working Capital 3. Intitial Investment 4. Incremental Operating Costs
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23
Q

What are the typical cash inflows?

A
  1. Salvage Value 2. Release of working capital 3. Reduction of costs 4. Incremental revenues
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24
Q

What is the firm’s cost of capital?

A

The cost of capital is the average rate of return the company must pay to its long term creditors and stockholders for the use of their funds. THE MINIMUM RATE OF RETURN

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25
Define risk in the context of finance.
Risk is the uncertainty about the outcome or payoff of an investment in the future.
26
Why would rational investors choose a riskier investment?
If the expected return is high enough to justify the greater risk.
27
Name two types of diversifications of investments
Firm Specific (Unsystematic) and Market (systematic)
28
When is a financial market information efficient?
If the prices of securities reflect all information available to the public.
29
What do information efficient markets provide?
Liquidity and Fair Prices
30
What happens to prices when new information becomes available?
They change
31
Inefficiencies in the market that distort market prices are often caused by what?
Behavioural biases
32
What creates the agency problem?
The seperation of management and ownership
33
What is the principle agency problem?
Managers are known as principles, they have different objectives than shareholders and may not act in the best interest of the shareholders
34
What is a dispersed share corporation?
No one has a major controlling share
35
How is principle agency conflict reduced?
through monitoring (i.e. annual reports and compensation plans (i.e. stock options)
36
What are the 6 corporate governance functions? What do they stem from?
Managerial, Compliance, Monitoring, External Audits, Advisory and Internal Audits All stemming from overseeing management (known as oversight)
37
What is oversight?
Board of directors to oversee management
38
What is managerial Corporate Governance Function?
Running the company
39
What is the Compliance Corporate Governance Function?
Laws, regulations, standards
40
What is the Internal Audit Corporate Governance Function?
Assurance and consulting activity
41
What is the Legal and Advisory Coporate Governance Function?
Advice
42
What is the External Audit Corporate Governance Function?
Lend Credibility
43
What is the Monitoring Corporate Governance Function?
Elect or remove directors and management
44
What is the Proxy Corporate Governance Function?
Someone votes in your place
45
What does the term Dump the stock mean?
Shareholders are not innocent
46
Are ethics important to success in business?
Yes
47
What are real assets?
Tangible things owned by persons and businesses
48
What are financial assets?
These are what one individual has lent to another
49
List 3 types of financial assets.
1. Consumer Credit 2. Loans 3. Mortgages
50
What is a medium of exchange?
Something that is generally acceptable in exchange for goods and services. In this function money removes the need for double coincidence of wants by separating sellers from buyers
51
What is a standard of value?
How the value of goods and services are denominated.
52
What is the Store of Value?
How the value of goods and services are maintained in monetary terms, the ability of money to command purchasing power in the future
53
Name 4 financial intermediaries
Banks, Insurance Companies, Pension Funds, Mutual Funds
54
Name the two types of Intermediaries
Financial Intermidiaries and Market Intermediaries
55
What markets are fed by the financial markets?
Primary (and secondary) Markets, Money (and Capital) Markets and Organized Exchanges (and trade on Stock Market)
56
List 3 types of debt instruments issued by Coporations
1. Commercial Paper 2.Bankers Acceptance 3.Corporate Bonds
57
List 6 types of Corporate Bonds
Debentures, Secured Debt, Subordinated Debt, Senior Debt, Zero Coupon, Junk Bond
58
What are debentures?
Unsecured debt backed only by the general assets of the issuing corporation
59
What is Secured Debt?
Mortgage debt secured by specific assets
60
Subordinated Debt
In default, holders get payments only after other debtholders get their full payment
61
Senior Debt
In default holders get paument before other debtholders
62
Zero Coupon
Pay face value at maturity only, sold at discount, not paid at interest rate return
63
Junk Bonds
Bonds with below investment grade rating
64
What are 4 types of bond features and what do they do?
Retractable (You can retract ownership), Convertible (You can convert securities into ther securities), Extendable (You can extend the contract), Callable (You can cash the bonds whenever)
65
Four traits of common stock?
1. Owners of corporation's equity 2.Voting rights 3. No specified maturity date and the firm is not obliged to pay dividends to shareholders 4. Returns come from dividends and capital gains
66
Four possible features of preferred stock?
Cumulative (get paid over years), Non-Cumulative (get paid in the year or they don't get paid at all), Participating (get common dividends), Non-Participating (don't get common dividends)
67
If dividend payment is not made what might preferred shareholders get?
Voting rights
68
What are derivative securities?
Securities whose value is derived from the vlaue of some underlying asset
69
What is a stock option?
Gives employees equity in a company, overrides principle agent problem
70
What are prices of financial instruments determined by? What do they infer?
Demand and Supply forces, they infer market expectations regarding the future based on current information

MOS 1023 Part 2 (3 decks)

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