Term
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Definition
An area of finance dealing with financial decisions that corporation
makes |
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Term
| Financial Management gives the tools to make these decisions: (3) |
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Definition
1) What real assets should the firm invest in?
2) How should the firm raise the capital for these investments?
3) Should the firm pay dividends to the shareholders? |
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Term
| What kind of business has an individual owner that bears all the cost and keeps all the profit; also has unlimited liability |
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Definition
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Term
| What kind of business has more associates who pool their money and expertise, with each parter having unlimited liability for all the debt, and partners pay personal taxes on their share of profit |
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Definition
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Term
| This is a firm that is legally distinct from its owner |
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Definition
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Term
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Definition
A legal entity created by a state that provides a nexus of contracts binding
together owners, managers, employees, creditors, suppliers, customers, etc. |
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Term
| Characteristics of a corporation: (5) |
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Definition
1) Unlimited Life
2) Investor Ownership
3) Transferable Shares
4) Separation of Ownership and Control
5) Limited Liability |
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Term
| What are the advantages and disadvantages of a corporation? |
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Definition
| A corporation has its advantages: It's limited liability reduces risk for investors, which makes it easier to attract capital, and it also has liquidity. However a corporation has its disadvantages: A corporation has double taxation and can have agency of conflict between shareholders and managers; shareholders and debtholders; transparency of financial reporting (Sarbanes-Oxley Act of 2002). A corporation also has a disadvantage in investor ownership via the free rider problem (importance of institutional investors) |
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Term
| What is the goal of a corporation? |
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Definition
| To maximize shareholders wealth |
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Term
| Why is a corporation the best? (3) |
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Definition
1) Benefits to the customers
2) Benefits to employees
3) Stockholders are people |
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Term
| Are societal considerations needed in a corporation? |
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Definition
Example
The case of BP: The relation between the oil companies and society is
rather tense. Society demands the products - heat, light, mobility but
worries about environmental impact. The reputation of environmental
sensitivity is extremely important. It has impact on the value of the
company. It has impact on the shareholders value. |
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Term
| What determines the firm's value? |
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Definition
Generating Cash Flow, Timing Cash Flow, and Risk
Value = (FCF1/(1+WACC )^1) + (FCF2(1+WACC )^2) + (FCF3(1+WACC )^3) + ... + (FCFn(1+WACC )^n) |
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Term
| What are basic assumptions in finance? (2) |
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Definition
1) Investors prefer more to less: Everything being equal, investors prefer assets with higher expected return
2) Investors are risk averse: Investors require higher expected return for an investment with higher perceived risk |
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Term
| How do you find the expected return? |
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Definition
| It is the sum of the probabilities multiplied by the rates of return |
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Term
| On a graph, if the probability distribution is tight and peaked, it means what? |
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Definition
If the probability distribution is tighter and more peaked, the more likely the actual outcome is close to the expected outcome(value) and less likely that it will fall below (or above) the expected outcome (value).
Therefore the tighter the probalitily distribution, the lower the risk |
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Term
| How do you find the variance? |
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Definition
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Term
| How do you find the standard deviation? |
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Definition
| you take the square root of the variance |
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Term
| What measures the degree to which a linear relation between two variables exists? |
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Definition
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Term
| Explain covariance and how it can be positive or negative and what that means? |
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Definition
| If covariance is positive then variables tend to move together, while if it is negative they tend to move away from each other. A negative correlation means good diversivication |
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Term
| What does it mean that a correlation coefficient is normalized? |
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Definition
| It means that it is always between -1 and 1 |
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Term
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Definition
| that part of a security's stand-alone risk that cannot be eliminated by diversification |
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Term
| What is diversifiable risk? |
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Definition
| it is also known as firm specific risk; it is that part of security's stand alone risk that can be eliminated by diversification |
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