Lecture 1:

Question 1

What is finance

Answer 1

Concerned with decisions involving the valuation of future cashflows

Question 2

What impacts cashflow values?

Answer 2

• Money
• Time
• Uncertainty
• Information
• Taxation

Question 3

What are the three perspectives on finance?

Answer 3

• Corporate Financing
• Financial Intermediaries
• Financial Markets

Question 4

What is Corporate financing?

Answer 4

Solves issues on questions regarding what long term investments to make, where to get long term financing for payments and how will you manage your everyday financial activities

Question 5

What is Capital Budgeting?

Answer 5

The process of planning and budgeting and managing a firm’s long-term investments. Financial Manager identifies investment opportunities that are worth more to the firm than the cost to the firm

Question 6

What is capital structure?

Answer 6

Ways in which a financial manager chooses to finance investments. Can choose between a mixture of long-term debt (borrowing from loans, bonds, debentures etc) and equity (money raised by the firm through shareholder investment)

Question 7

What is working capital management?

Answer 7

Management of a firm’s short term assets (e.g. inventory and short-term liabilities) to ensure company has enough resources to continue operations

Question 8

Give examples of financial intermediaries

Answer 8

• Banks
• Building Societies
• Pension Funds
• Unit Trusts

Question 9

What are financial markets?

Answer 9

They inform management of the performance of competitors, suppliers, customers and economy as a whole and allow investors to buy and sell financial claims (securities) to facilitate this exchange

Question 10

What are primary markets?

Answer 10

Companies raise new equity finance through issuing new securities

Question 11

What are secondary markets?

Answer 11

Investors buy and sell existing shares based on information and liquidity

Question 12

Give examples on primary markets

Answer 12

IPO: Stands for Initial Public Offerings which is when a private company first sells shares of a stock to the public making it a public company

Rights Issues: Way for a company to raise capital through offering existing shareholders the opportunity to buy shares at a discounted price

Question 13

Give examples of a secondary market:

Answer 13

Big Bang 27th Oct 1986: Where the LSE (London Stock Exchange) was deregulated and became a PLC and SEAQ (Stock Exchange Automatic Quotation System) was introduced

Question 14

What was around pre-big bang

Answer 14

Single Capacity

Stock Jobbers: Specialists on LSE who bought and sold stocks on their own account without direct contact with the public

Stock Brokers: Professionals who buy and sell stocks, shares etc on behalf of their clients

Question 15

What were the issues of pre-big bang era

Answer 15

• LSE membership restricted
• Jobbers were undercapitalised

Question 16

What is around post big-bang?

Answer 16

• Stockbrokers / dealers: Financial institutions / Individuals who provide liquidity to financial markets by buying and selling

SEAQ vs Trading Floor

Question 17

What is the status of finance?

Answer 17

Uses theoretical research which uses models of theories to explain financial phenomena or to value securities

Question 18

What is a sole trader?

Answer 18

Business owned by one person

Question 19

What is a partnership?

Answer 19

Business owned by two or more people

Question 20

Are sole traders and partnerships incorporated or unincorporated?

Answer 20

Both are unincorporated which means that the business doesn’ have a separate legal identity from it’s owners

Question 21

What are strengths of Sole Traders and Partnerships?

Answer 21

• They keep all profit
• Cheap and easy to establish
• Full ownership and control
• No requirement to publish accounts

Question 22

What are limitations of Sole Traders and Partnerships?

Answer 22

• Unlimited Liability: Creditors can use personal assets to pay for debts
• No distinction between business and personal income so all income = taxed as personal income
• Difficult to raise funds
• Difficult to sell because entire business needs to be transferred from one owner to the next

Question 23

What is a PLC?

Answer 23

Stands for Public Limited Company

• Established by shareholders
• Financed by share and debt capital
• Share capital (Money a company raises from selling shares) = permanent
• Debt capital (Money borrowed for fixed period)
• Shareholders = Residual Owners (They receive what’s left after all other claims on a company’s income and assets have been satisfied)
• Limited Liability
• Shareholders elect Board of Directors who select managers

Question 24

What are the strengths of a PLC?

Answer 24

• Ownership can be transferred through selling shares (Infinite Life)
• Business = Legally separte from it’s owners (Limited liability)
• Funds can be raised publically through equity

Question 25

What are the weaknesses of a PLC?

Answer 25

- Difficult and expensive to establish - Management is separate from owners - Requirement to publish accounts

Question 26

What is a single-tiered board and which countries use it?

Answer 26

Single tiered board is where shareholders elect the board of directors who then select managers (UK, Ireland, Sweden)

Question 27

What is a two-tiered board and which countries use it?

Answer 27

Has an executive board and a supervisory board (Denmark, Germany, The Netherlands)