Chapter 1 Flash Cards POF + Analogies

What’s investment like?

Picking which toys will be fun later (buying a Lego set or building a factory).

What’s financing like?

Deciding how to pay for toys (borrowing money or using allowance).

What is investment (capital budgeting)?

Choosing what projects/assets the firm should invest in.

What is financing (capital structure)?

Choosing how to pay for investments (debt vs. equity).

What’s a real asset?

Stuff you can touch that makes things (machines, trucks).

What’s a financial asset?

IOUs like stocks or bonds that give money from real stuff.

What are real assets?

Physical assets that generate goods/services.

What are financial assets?

Claims on income from real assets.

What’s a corporation like?

A robot company that’s its own person, owned by stockholders.

What protects owners if the robot messes up?

Limited liability.

What is a corporation?

A legal entity separate from owners; owners have limited liability.

Who’s the CFO like?

The coach of the money team.

Who’s the treasurer like?

The one who collects/borrows money.

Who’s the controller like?

The scorekeeper who tracks every penny.

Role of CFO?

Oversees financial management of the firm.

Role of treasurer?

Handles financing and cash management.

Role of controller?

Handles accounting and reporting.

What’s the main goal of a corporation?

Make owners richer.

What’s the “piggy bank rule”?

You must earn more than what you’d get by just saving (opportunity cost of capital).

What is the primary goal of a corporation?

Maximize shareholder wealth (firm value).

What is the opportunity cost of capital?

The minimum acceptable return required by investors.

What’s the agency problem like?

Parents hire babysitters, but babysitters might sneak cookies instead of giving them to the kids.

What’s an agency cost?

The lost cookies (or money) from babysitters not doing what parents want.

What is the agency problem?

Conflict of interest between managers and shareholders.

What is an agency cost?

Value lost when managers don’t act in shareholders’ best interests.

What’s corporate governance like?

Rules and referees that keep babysitters (managers) honest.

What is corporate governance?

Systems that direct and control management to act in shareholders’ interests.

Why are ethics important?

Because cheating (like stealing candy) breaks trust.

Why are ethics important in finance?

Ethical lapses destroy trust and firm value.