FIN 3020

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Cards (54)

What is financial manager?
Works to determine the answers to 2 fundamental decisions: financing and investing.
What is financing?
A decision on the sources and amounts of financing. This is mix of the long-term debt and equity financing. Sell ownership or issue bonds Where do we get our money?
What is investing?
Aka capital budgeting or capex. A decision on whether to invest in real assets or financial assets. Where do we spend out money?
What is capital structure?
The mix of long-term debt and equity financing
What is equity?
Ownership, issue additional common stock. Issue a series of preferred stock
What is debt?
Borrowing, issue secured bonds. Issue convertible debentures.
What is real assets?
Items used to produce the firm's goods and services.
What is tangible assets?
Physical assets: machines, equipment, and vehicles facilities, furniture, and inventory.
What is intangible assets?
Non physical: Patents, trademarks, and copyrights. Licensing and Trade Secrets.
Intel decides to spend 7 billion to develop a new microprocessor. F or I?
Investing
BMW borrows 350 million from deutsche bank. F or I?
Financing
Royal dutch shell constructs a pipeline to bring natural gas onshore from a production platform in australia. F or I?
Investing
Avon spends 200 million to launch a new range of cosmetics in European Markets. F or I?
Investing
Pfizer issues new shares to buy a small biotech company. F or I?
Can both be financing or investing.
Why do we care about business organizations?
Ownerships and control, operating freedom, access to funds, taxes, and liability
What is Sole proprietorship?
An individual that operates as a business
What are the pros of Sole proprietorship?
No formal business Entity.
Easy and cheap to setup and operate
Owner has title to all assets and profits
Taxed personally on earning
What are the cons of Sole proprietorship?
Cannot use business debt financing
Termination occurs upon death
Exposed to unlimited liability
No separate business entity
What is general partnership?
Two or more people operating a business together. Established and run like a sole proprietorship. A partnership agreement outlines expectations and roles of each of the partners.
What is limited partnership?
Provides limited liability for one or more passive partners (requires at least one general partner).
What is corporation?
A separate legal entity apart from its owners. Living and breathing operations.
What are the three types of corporate types?
S Corp
C Corp
LLC
What is S corp?
Small, closely held companies
What is C Corp?
Large, public companies
What is LLC?
Limited liability company
What are the pros of C Corp?
Ease of raising debt and equity capital
Owner liability is limited to the amount of investment
Perpetual life due to separation of ownership and control
International ownership is allowed
Unlimited shareholders and simple transfer of ownership
What are the con of C Corp?
Formal business reequipments, reporting, and compliance
Earning are double taxed
What are shareholders?
Stockholders.
The owners of the corporation that determine the direction of the company by:
Electing the board of direction
Voting on important matters at an annual meeting of the shareholders
Having the right to inspect the books and records of the corporation
What is stakeholders?
Anybody's that involves with money. Any party with an economic interest in the corporation:
Owners/Managers/Employees
Banks
Suppliers
Local Community
What is the goal of the corporation?
Maximize the shareholder wealth. Increased stocked price and value and wealth for shareholders.
Investing in employees
Being a good cooperate citizen
Concern for environment
Risk Minimizations
Net Income Maximization
Possible means to the end but not the end itself. These belong in a vision or mission statement
Why not profit maximization?
Subject to manipulation.
Short term profitability may jeopardized long-term viability
Short-term losses may increase long-term profitability
What are shareholder needs?
If we do not take care of the shareholders (like deliver the required return they demand) they will invest somewhere else
What are the company needs?
If we do not invest properly in our operations, we cannot make the required return demand by shareholders
What is the opportunity cost of capital?
The expected return that is forgone by investing in a project rather than in alternate but comparable financial securities.
The minimum return by demanded by investors
Alternate projects must share a similar risk profile.
OC: Return on foregone option-return on chosen option
What is the agency problem?
A conflict of interest between company management and its shareholders.
Examples: Managers act in their own interests rather than maximizing shareholders wealth
What is agency cost?
Shareholder value lost from agency problems or from the cost of mitigating agency problems
What is corporate governance?
Laws, regulations, institutions, and corporate practices that protect shareholders
What is internal corporate governance?
Has to tell you everything. Board of directors, transparency and information for shareholders, executive compensation
What is external corporate governance?
Government Security. Securities and exchange commision. Institutional and Activist Investor. Corporate Raiders and Takeovers
What is interest?
The cost of using money