Week 1 Flashcards
(14 cards)
What is a sole trader?
The sole trader is in business on his own.
What is a partnership?
Two or more people link together in a fairly
permanent arrangement to run a business.
What is a private limited company?
- The private limited company is a legal entity in its own right and the business is separated
from its owners.
◦ Shareholders cannot sell their shares, or can only sell them to other shareholders.
◦ It cannot attract pure investors
What is a public limited company?
- Those companies which actively offer their shares for sale on the Stock Market. The business is usually relatively large.
◦ Shareholders can sell their shares to whomever they please.
◦ It is attractive to pure investors who do not want to be involved in running the company.
To create value what should a financial manager do?
❖To create value, a financial manager should:
oTry to make smart investment decisions
- To buy assets that generate more cash than they cost.
oTry to make smart financing decisions
- To sell bonds and stocks and other financial instruments that raise more cash than they cost
What are primary markets?
When a corporation issues securities, cash
flows are from investors to the firm.
What are secondary markets?
◦Involve the sale of ‘used’ securities from one
investor to another
What is value creation?
- Value creation means that firm must create more cash flow than it uses
- Make good investment decision and financing decision
What three things must be down to make value creation?
◦Identification of cash flow: cash generation is different from profit generation.
◦ Timing of cash flow: time value of money.
◦ Risk of cash flows: most investors have an aversion to risk; high risk is expected to be compensated by high return
What is the time value of money?
◦The difference in value between money today and money in the future is due to the time value of money
What is interest rate?
An interest rate is the percentage charged for borrowing money or the return on a savings account. It’s usually expressed as a yearly percentage.
What is Risk–Free Interest Rate (Discount Rate), rf ?
The interest rate at which money can be borrowed or lent without risk
What is a timeline?
A timeline is a linear representation of the timing of potential cash flows.
What are two different types of cash flows?
◦ Inflows are positive cash flows.
◦ Outflows are negative cash flows, which are indicated with a – (minus) sign.
