Module 1

Question 1

role of the financial manager

Answer 1

to use a blend of tools and analyses to make financial decisions that will create firm value for the owners

Question 2

the value of an asset

Answer 2

determined by the future cf it will generate thru use or sale

Question 3

three fundamental decisions

Answer 3

• investing
• financing
• wcm

Question 4

investing decision

Answer 4

capital budgeting/expenditure decision

• deciding what productive assets to buy
• most important decision bc = generates most inflows, long-term, involve huge cash outlays

Question 5

sole proprietor adv & disadv

Answer 5

• easy and cheap to form, less regulated, single taxing

- no perp succ, unlimited liability, capital limited to one owner

Question 6

partnership adv & disadv

Answer 6

• adv: single taxation, can raise more capital, can share duties and expertise
• no perp succ, partners jointly liable for debts, possible disputes

Question 7

company adv & disadv

Answer 7

incorporated legal entity seperate from owners. governed by companies act.

• limited liability, perp succ, more capital can be raised, easy to sell ownership interest
• owner & mgmt separate = principle agent problem, double tax, more regulated

Question 8

the BOD

Answer 8

elected at the annual governance meeting and represent the SH and appoint a CEO

Question 9

CEO

Answer 9

• CFO reports to them

- resp for day-to-day company mgmt and reports to the board

Question 10

audit committee

Answer 10

oversees both int and ext auditors and AFS prep

Question 11

CFO

Answer 11

• reports to CEO

- responsible for managing the financial function (treasury, risk mgmt and acc)

Question 12

problems with profit maximization

Answer 12

• manipulation of acc profits
• does not reflect cash flows / when they are to be rec
• ignores uncertainty / risk associated with cf (ignores tvm)

Question 13

how firm share value is determined

Answer 13

by examining future cash flows (size, timing, riskiness)

Question 14

appropriate goals

Answer 14

for unlisted = maximizing the current value of OE

for listed = maximizing share price

Question 15

agency relationship

Answer 15

• shareholders (principle) hire managers (agent) to run the company and represent their interests

Question 16

internal mechanisms to minimize agency problem

Answer 16

• aligning interests by tying mgmt compensation to company performance / share options schemes
• cash bonuses
• performance shares

Question 17

corporate governance mechanisms

Answer 17

(BOD)

• board chair should be independent from CEO = ned
• board should have majority NEDs to ensure effective monitoring of exec directors
• developing / enforcing corp ethics code
• audit committees

Question 18

external mechanisms to minimize agency problem

Answer 18

• corporate raiders takeover

- managerial labour market (bad firms can’t hire good managers, good firms won’t hire bad managers)

Question 19

executive directors

Answer 19

involved in d2d bus activities, are part of the board

Question 20

two parts of the financial system

Answer 20

• fin markets

- fin institutions

Question 21

financial markets

Answer 21

securities are traded, bonds, shares, comm paper

Question 22

what do fin institutions do?

Answer 22

gather small amts of money and loan it / inv in shares or bonds (banks ins firms pension funds)

Question 23

what is the capex/capital budgeting decision?

Answer 23

involves deciding what productive assets to buy

Question 24

what is the decision rule?

Answer 24

if future cash inflows > outflows, accept the project

Question 25

why is the capex decision considered the most important?

Answer 25

- productive assets generate most of the firm's inflows (firm value) - capex decisions are long-term (if you make a mistake, stuck with it for long) - decisions involve huge cash outlays

Question 26

what is the financing capstructure decision?

Answer 26

- determines how productive assets are defined | - firm value comes from inv rather than financing

Question 27

two ways of raising equity finance?

Answer 27

- share issue | - reinvesting residual cash flow

Question 28

examples of indirect agency costs?

Answer 28

lost opp costs

Question 29

wcm decision?

Answer 29

- how current assets and liabilities are managed / how day-to-day financial matters should be managed

Question 30

what does working cap mgmt decision seek to do?

Answer 30

maximize value creation and avoid destroying value

Question 31

what is the role of the fin system?

Answer 31

to gather money from lender-savers and channel it to borrower-spenders and enable firms to raise cap and manage their liquidity and risk

Question 32

two ways by which funds flow through a fin sys?

Answer 32

directly (markets) | indirectly (institutions)

Question 33

what is the role of the fin system?

Answer 33

to gather money from lender-savers and channel it to borrower-spenders and enable firms to raise cap and manage their liquidity and risk

Question 34

what happens in a direct financing transaction?

Answer 34

- funds directly through markets from LS to BS. they then sell instruments to LS in exchange for money.

Question 35

key players in direct fin markets?

Answer 35

inv banks | money centre banks

Question 36

what do inv banks do?

Answer 36

- help companies sell new debt and equity securities and also provide broker and dealer services. - helps comps with origination, underwriting, distribution

Question 37

what is fin market underwriting?

Answer 37

ensures the successful sale of shares or bonds in primary markets

Question 38

what is a formal market/exchange?

Answer 38

- organized & highly regulated markets which have a central trading location - specialize in a narrow range of standardized instruments and are accessible to small investors

Question 39

what is a otc markets?

Answer 39

- for trading securities not on the formal exchange - no central location - currencies are efficiently traded over these markets

Question 40

what is a money market?

Answer 40

- where short term debt instruments are traded - no central location - low risk, low return investments

Question 41

what is a capital market?

Answer 41

long-term

Question 42

what is a banker's acceptance?

Answer 42

issued by companies involved in international trade but are guaranteed by banks

Question 43

what is a commercial paper?

Answer 43

issued by large comps when they want to borrow in order to manage their liquidity

Question 44

whats a public market?

Answer 44

markets where the general public can buy/sell securities through a broker (formal and capital)

Question 45

what is a private market?

Answer 45

involve a direct transaction between two parties (otc and money)

Question 46

types of SM indices

Answer 46

global, regional, national, industry

Question 47

services banks offer?

Answer 47

- comm banking (overdraft facility, leasing, forex) | - inv banking (corporate finance, lending, public share issues (IPOs)

Question 48

services that insurance firms offer?

Answer 48

- obtaining funds from insurance policies - provide funding to public companies through share purchase and bonds in direct markets - fund private companies through placement funding

Question 49

how is the real interest rate determined?

Answer 49

- through the absence of inflation | - by the interaction of the RR businesses expect to earn on capital goods

Question 50

what is the nominal interest rate?

Answer 50

- observed in the market | - real int rate and expected infl rate