Flashcards in Lecture 1 Deck (28):

1

## Main difference between finance and accounting

### Finance looks to the future (prediction) whereas accounting looks at the past (record)

2

## Firm is run mainly for

### Shareholders

3

## Why are shareholders important from a finance perspective?

### Provide capital

4

## Assumed objective for finance

### To make investment and financing decisions with the aim of maximising long-term shareholder wealth

5

## Reasonable to assume shareholders should get a dividend/ capital gain because...

### They put money into businesses at high risk with no guarantee of a return

6

## Shareholder value =

### No. of shares x price

7

## 3 roles of financial managers

### Investment, financing and dividend decisions

8

## Investment decisions =

### Investing in assets that earn a greater return than the minimum acceptable hurdle rate

9

## Financing decisions =

### Finding the right mix of debt and equity to fund operations

10

## Dividend decisions =

### Decide whether to pay them or not

11

## Agency problem =

### Cost resulting from conflict between shareholders and managers

12

## Ways to deal with agency problem (3)

###
- Managerial compensation/ incentivisation

- Corporate control (audits)

- Takeovers (threat of this may result in better management performance)

13

## Why is time value of money different today than tomorrow? (3)

###
- Inflation

- Risk

- Time (impatience to consume)

14

## Present value is when?

### At time 0

15

## PV =

### F / (1 + i)^n

16

## F =

### future value

17

## i =

### interest/ discount/ coupon rate

18

## n =

### number of years

19

## Future values (FV) =

### P(1 + r)^n

20

## If you have the table for FV....

### PV x no. in table = FV

21

## Discount factor =

### 1 / (1 + r)^n

22

## Annuity =

### Equally spaced level stream of cash streams for a limited period of time

23

## Discounted cash flow model (DCF) =

### Used for multiple PVs

24

## Two methods to calculate annuities

###
1) Use DCF model

2) Value x PV on annuity table

25

## Perpetuity =

### Stream of cash payments that never end (assuming no end in time)

26

## Perpetuity formula =

### Cash payment / discount rate (r)

27

## Constant growth perpetuity =

### Where cash payments grow each period

28