Lecture 1 Flashcards Preview

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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

Constant growth perpetuity formula =

cash payment in p1 / (discount rate - growth rate)