c1: overview to finance

    Cards (29)

    • The 2 main goals of all successful companies are:
      1. Having products/services that are highly valued by customers
      2. Selling products/services at prices high enough to cover costs and reward investors
    • advantages of starting up as a proprietorship:
      • Ease of formation
      • Subject to few regulations
      • No corporate income taxes
    • Disadvantages of starting up as a proprietorship:
      • Difficult to raise capital to support growth
      • Unlimited liability
      • Limited life span
    • A partnership involves 2 or more entities with various privileges and responsibilities with about the same advantages and disadvantages as a sole proprietorship. the 2 types of partnerships are General versus limited partner and Limited liability partnership (LLP)
    • A corporation is a legal entity that is separate from its owners and managers
    • advantages of a corporation:
      • Unlimited life
      • Easy transfer of ownership
      • limited liability
      • Easy to raise capital
    • disadvantages of a corporation:
      • Double taxation
      • Higher setup cost
      • Endless report filing
    • the primary objective of a corporation is to maximize shareholder wealth through managerial actions
    • managers maximize shareholder wealth now and in the future by focusing on generating cash flows
    • FCF are cash flows available or free for distribution to all investors (stockholders and creditors).
    • weighted average cost of capital (wacc) is the average rate of return required by all of the company’s investors. its another factor in determining a firm’s value and its long-term stock price.
    • A company goes public when it sells shares to the public in an initial public offering. As the firm grows, it might issue additional shares or debt.
    • an agency problem occurs when the managers of the firm act in their own self-interests and not in the interests of the shareholders.
    • Corporate governance is the set of rules that control a company’s behaviour towards its directors, managers, employees, shareholders, creditors, customers, competitors, and community.
    • maximizing wealth not only focuses on The current market price but also maximizing the intrinsic share price
    • the separation theorem shows that all investors are best off if the company’s investment decisions are separate from the owners’ preferences.
    • a financial security are pieces of paper with contractual provisions entitling their owners to specific rights and claims on specific cash flows or values.
    • financial securities can be classified as Time until maturity and, Debt or equity
    • supply and demand for funds determine the cost/price of money
    • interest rate is called the price/cost of debt and equity capital
    • factors that affect the cost of money:
      • production opportunities
      • expected inflation
      • risk
      • time preferences for consumption
    • a Physical (aka tangible/real) asset markets include Products like wheat and real estate. Financial asset markets consist of Primitive securities (ie. stocks, bonds, mortgages, etc.) and derivative securities.
    • Spot (aka cash) markets are where Assets are bought or sold for “on-the-spot” delivery and Futures markets are where Assets are bought or sold for delivery at a future date
    • Money markets are meant For short-term, highly liquid debt securities while Capital markets are meant For intermediate or long-term debt and corporate stocks
    • Primary markets are where Issuers receive the proceeds from the sale an a Secondary market is when an Existing owner sells to another party; the Issuing firm doesn’t receive proceeds and isn't directly involved.
    • Private markets include Transactions are worked out directly between two parties, with little liquidity. Public markets consist of Standardized contracts which are traded on organized exchanges. much more liquid.
    • A manager’s primary job is to increase the firm’s intrinsic value
    • Intrinsic value is the present value of the firm’s expected free cash flows (FCF), discounted at WACC.
    • 2 ways a firm can increase its intrinsic value by improving FCF and/or Reducing WACC
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