Theory Flashcards Preview

Business Finance > Theory > Flashcards

Flashcards in Theory Deck (12):

Why would payout policy not affect firm value in ideal world

If we hold company’s investment and capital structure constant, then payout policy is a trade off between cash dividends and the issue or repurchase of common stock. In an ideal world, the choice would hAve no effect on market value - MM Debt Irrelevance proposition


How might difference in tax treatment of dividends and capital gains affect dividend policy?

Instead of paying dividends cKmpanies can repurchase stock. The capital gains is the only thing that’s taxed. If dividend income is seriously tax disadvantaged cKmpanies should use the cash to repurchase shares or to reduce the amount of shares issued.


How are repurchases used to distribute cash to shareholders

It makes major one off changes to firms capital structure. They can be like bumper dividends they cause large amounts of cash to be paid to investors when the firm buys back their shares


Capita budgeting and capital structure

Both are long term financial decisions but capital budgeting is long term investment while capital structure is long financing

Cap budgeting I loves identifying and assessing investment oppurtuntss

Capital structure decisions involve section between equity financing and long term debt financing


Use of opportunity cost of capital

Fininacial managers refer to opportunity cost of capital because corporations increase value for their shareholders by accepting all investment projects that earn more than this rate


Opportunity cost of capital is the rate of return available from investments in the financial markets at ten same level of risks



Mutual funds

Mutual funds pool savings from many individuals and then invest in a diversified portfolio of securities. Each individual investors then owns a proportionate sure of the mutual funds portfolio



Insurance companies are financial intermediaries - they sell policies and then invest part of the proceeds in corporate bonds and stocks on direct loans to corporations. The returns from these investments helps pay for losses incurred by policyholders



Liquidity is importance because investors want to be able to convert their investments into cash quickly and easily when it becomes necessary or desirable to do so. If they want to sell, they want to do it quickly without much reduction.

Liquidity is important to mutual funds. When the mutual fund shareholders want to redeem their shares, the mutual fund is often forces to sell its securities. In order to maintain liquidity for its shareholders, the mutual fund requires liquid securities


Liquidity with banks

Key to banks ability to provide liquidity to depositors is the banks ability to pool relatively small deposits from many investors into large, illiquid loans to corporate borrowers. A withdraw by any one depositor can be satisfied ffrkm any of a number of sources, including new deposits, repayments bank reserves etc


Mutual funds

Mutual funds collect money from small investors and invest the money in corporate stock or bonds, thus channeling savings from investors to corporations.

They intermediae there for the flow of funds from investors to corporations. For individuals the advantage of mutual funds are low cost diversification and professional investment management


Major functions of financial markets and institutions in moder financial system

Channelling savings to real investment

Transporting cash across time

Risk transfer and diversification


Payment mechanism

Information provided by financial markets