Scope and nature of corporate finance Flashcards
(16 cards)
Capital Structure
What are the two main components of capital structure mentioned?
Who are the stakeholders involved in Debt (Borrowing)? (3)
Who are the stakeholders involved in Equity? (2)
What are the characteristics of Debt (Borrowing) listed? (3)
What are the two main components of capital structure mentioned?
The two main components of capital structure are Debt (Borrowing) and Equity.
Who are the stakeholders involved in Debt (Borrowing)?
The stakeholders involved in Debt (Borrowing) are Creditors, Bondholders, and Debtholders.
Who are the stakeholders involved in Equity?
The stakeholders involved in Equity are Shareholders and Equity Holders.
What are the characteristics of Debt (Borrowing) listed?
The characteristics of Debt (Borrowing) include:
- Legal contract/collateral
- Tax shield
- Risk for two parties (likely referring to both the borrower and the lender).
Equities/ Shares
- Owned by _____________
- _________________ elect ____________
- _________ elect __________________
- If ____________ can ____ shares/_____ on ownership.
- ______________ (paid quarterly, semi-annually or annually) are paid from _____ _________ ______ _____.
- Owned by Shareholders
- Stockholders elect directors
- Directors elect management
- If unhappy can sell shares/pass on ownership.
- Dividends (paid quarterly, semi-annually or annually) are paid from Net Profit after Tax.
Enterprise value (EV) =
Enterprise value (EV) = Value of Bonds + Value of Shares
Which company has more risk, more tax shield and more financial constraint?
A is more risky than B because it has more debt and will pay higher interest rate
A will have better tax shield because it has less equity and more bonds
Financial constraint is the ability of the company to raise money from the external market (credit score).
A is more financially constrained because it has higher debt
Thomas Cook
The Role of Finance and the Financial Manager
3 topics (2 each)
Investment
- Choose best projects because we have limited resources (human, financial etc)
- Capital Budgeting aka Investment Appraisal techniques
Financing
- Choose source of financing for investment
- Capital Structure
Liquidity
- Ensure you have enough cash and inventory
- Short-Term Financial Planning
Show the accounting vs cash flow
The Financial Manager (7 roles)
- Responsible for Investment Decisions
- Responsible for Financing Decisions
- Responsible for Short-Term Financial Planning
- Oversee Accounting and Audit Function in Firm - make sure financial statements are meeting accounting standards
- Ensure the Financial Welfare of the Firm
- Divident Decision - How much of a firm’s funds should be reinvested in the business and how much should be returned to the owners?
- Risk management
The Goal of corporation or Financial Management (8)
- Survive
- Maximise Profits
- High growth
- Minimise Costs
- Manage Risk
- Maximise Sales or Market Share
- Avoid Financial Distress
All leads to the main objective of:
Maximise Value of Owner’s Equity
Why should the financial manager operate in the best interests of shareholders?
- The financial manager will have their own _______________- maximising their _________________, _____, ____ ____________ etc.
- The conflict of managerial objectives with shareholder objectives is referred to as - __________ ___________
- Managerial objectives can be ‘aligned’ with ______________ ______________ through _______________ ______________ and _______________
- The financial manager will have their own objectives - maximising their renumeration, perks, job security etc.
- The conflict of managerial objectives with shareholder objectives is referred to as - agency theory
- Managerial objectives can be ‘aligned’ with shareholder objectives through corporate governance and incentives
Corporate Governance
The corporate governance structure _____________ the _______________ __ ________ and _________________ among ____________ ________________ in the corporation, such as the ________, ___________, __________________ and other ________________, and spells out the ________ and ______________ for making decisions on corporate affairs.
The corporate governance structure specifies the distribution of rights and responsibilities among different participants in the corporation, such as the board, managers, shareholders and other stakeholders, and spells out the rules and procedures for making decisions on corporate affairs.
The Structure of Corporate Governance
What does Corporate Governance represent?
Internal (2) and external (4)?
Corporate Governance represents the relationship among stakeholders that is used to determine and control the strategic direction and performance of the organisation
The Corporation - Internal
Board of Directors
- Chairman of the Board and member are accountable for the organisation
Management
- Chief Executive Officer and his team run the company
The Marketplace - External
Equity Markets
- Analysts and other market agent evaluate the performance of the firm on a daily basis
Debt Markets
- Ratings agencies and other analysts review the ability of the firm to service debt
Auditors and Legal Advisors
- Provide an external opinion as to the legality and fairness of presentation and conformity to standards of financial statements
Regulators
- SEC, the NYSE, or other regulatory bodies by country
What is Corporate transparency?
How is it gauged in PLCs
Describes the extent to which a corporation’s actions are observable by outsiders.
In publicly traded companies, Corporate transparency is the gauged by the amount of financial and corporate information to which the public has access. (less insider information)
What is agency theory?
Who studied this?
What mechanisms can help align these interests (5)
Agency theory really digs into the potential conflicts that can arise when managers and stockholders have different goals. Fama & Jensen (1983) shed light on several mechanisms that can help align these interests:
Stock compensation:
- Aligns managers’ incentives with those of shareholders by giving managers a stake in the company’s success.
Board of Directors (BOD):
- Can step in and replace managers if they’re not performing in shareholders’ best interests.
Selling shares and takeover threats:
- Keeps managers on their toes, knowing poor performance could lead to a takeover bid.
Threat of insolvency:
- Managers must operate efficiently to avoid financial trouble.
Labour market reputation:
- Managers care about their reputations, which can be affected by how well they perform.
Corporate Governance
Which company has set global principles
5 headings?
The OECD (The Organization for Economic Cooperation and Development) has established a set of global principles under five headings:
- The rights of shareholders:
- Ensuring shareholders have the ability to influence the company through voting and other rights.
- The responsibilities of shareholders:
- Encouraging active and informed participation in corporate governance.
- The rights of stakeholders:
- Acknowledging the importance of employees, suppliers, and others who have an interest in the company’s success.
- Disclosure and transparency:
- Promoting openness about the company’s operations and financial status.
- The role and structure of the board:
- Defining how the board should function to effectively oversee management and protect shareholders’ interests.
Financial markets
- refer broadly to any ______________ where the ____________ of ______________ occurs, including the ________ market, ______ market, ________ market, and ________________ market, among others. Financial markets are _______ to the ____________ ____________ of ______________ _______________.
- refer broadly to any marketplace where the trading of securities occurs, including the stock market, bond market, forex market, and derivatives market, among others. Financial markets are vital to the smooth operation of capitalist economies.
Market Indices
What is a market index?
What is the initial value of an index?
How are the constituents and their weightings decided?
How are constituent returns calculated?
How is the overall return for the index determined?
Can you provide an example of an index value change?
What is a market index?
- A market index provides summary information about the performance of the constituent shares.
What is the initial value of an index?
- The index has a starting value (e.g., 1000 for the FTSE100 when it was created in 1984).
How are the constituents and their weightings decided?
- Constituents are determined, and their weightings are specified, either equally or based on market capitalization (where larger companies have greater influence).
How are constituent returns calculated?
- Each time the index is calculated, the returns on the constituents are determined from their share prices.
How is the overall return for the index determined?
- The constituent returns are averaged (for equal weighting) or weighted (e.g., by market capitalization) to calculate the overall increase or decrease in the index.
Can you provide an example of an index value change?
- For example, if the index value is 1000 and the constituent returns over a day are +5%, the new index value would be 1050.
