Business Finance Flashcards

Flashcards for Business Finance Review

Finance

The science and art of managing money.

Finance according to Webster

Means management of money (as a noun) and to provide capital for a person or enterprise (as a verb).

Finance according to Shetty, et al (1995)

The operational or practical side of economics; the practical science of the production and distribution of wealth.

Finance according to Saldana

The efficient allocation of scarce resources; concerned with identifying, evaluating, and managing sources and use of cash to increase the value of the business.

Finance according to Medina (2007)

The study of the acquisition and investment of cash for the purpose of enhancing value and wealth.

Function of Finance

Allocating available funds, acquiring needed funds, and utilizing these funds to achieve set goals.

Corporate/ Business Finance

Deals with financing business firms or commercial use, the goal which is to make profit.

Investments

Work with financial assets such as stocks and bonds, Value of financial assets, risk versus return, and asset allocation.

Financial Institutions

Companies that specialize in financial matters; Banks, credit unions, savings and loans, insurance companies, brokerage firms

International Finance

Needs to be familiar with exchange rates and political risks, needs to understand the customs of other countries.

Business Finance

The art and science of managing the financial resources of a business.

Allocation of financial resources

Projects or activities and operations are carefully planned, evaluated based on certain criteria, and subsequently ranked for the allocation of financial resources.

Procurement of funds

Capital must be available at the least cost when it is needed. The procurement function requires awareness of the different sources of funds and the costs involved.

Efficient utilization of financial resources

Refers to the economical use of financial resources.

Effective utilization of financial resources

Refers to the use of financial resources towards the attainment of the predetermined objectives.

Financial Management

Deals with the decisions that are supposed to maximize the value of shareholders’ wealth.

Shareholders

Elect the Board of Directors (BOD).

Board of Directors

Highest policy making body in a corporation; ensures that the corporation is operating to serve the best interest of the stockholders.

President (Chief Executive Officer)

Oversees the operations of a company and ensuring that the strategies are approved by the board are implemented as planned.

Vice-President for Marketing

Formulating marketing strategies and plans; directing and coordinating company sales.

Vice-President for Production

Ensuring production meets customers’ demand; identifying production technology/process that minimizes production cost and make the company’s costs competitive.

Vice-President for Administration

Coordinating the functions of administration, finance and marketing departments; assisting other departments in hiring employees.

Vice-President for Finance - Financing

Determine the appropriate capital structure of the company.

Vice-President for Finance - Investing Short Term

Planning for expected excess in cash using financial planning tools such as budgeting and forecasting.

Vice-President for Finance - Investing Long Term

Prepare a capital budgeting analysis to determine if the long term investment will be profitable.

Vice-President for Finance - Operating Decision

Deal with the daily operations of the company; determines how to finance working capital accounts such as accounts receivable and inventories.

Vice-President for Finance - Dividend Policies

Determine when the company should declare cash dividends.

Financial Planning and Analysis

Takes part in corporate, strategic and operational planning; make projections based on accumulated data.

Managing the Firm’s Asset

Determine the mix and type of assets that a business must have and see to it that they are duly accounted for.

Managing the Firm’s Liabilities and Owner’s Equity

Determine the mix of short-term and long-term financing, what particular source is best at a given point in time, and the level at which the debt/equity ratio should be maintained.

Goal of a Financial Manager - Acquisition of Funds

Acquisition of funds with the least cost from the right sources at the right time.

Goal of a Financial Manager - Effective cash management

Needs a detailed cash flow budget so that the sources and uses of funds can be carefully planned.

Goal of a Financial Manager - Effective working capital management

Managing current assets and liabilities and maintaining the right combination allows the company to enjoy a good working capital position.

Goal of a Financial Manager - Effective inventory management

Inventories are need to be managed effectively. Overstocking is undesirable. Understocking, likewise, is undesirable because the firm misses sales opportunities

Goal of a Financial Manager - Effective investment decision

Determining where to invest funds to create additional income is making an investment decision.

Goal of a Financial Manager - Proper asset collection

Selecting the right machinery and equipment needed by a company in its operation is important to attain its production goal that create sales.

Goal of a Financial Manager - Proper risk management

Is a task so important to the firm to weigh risks associated with certain business decision.

Financial Instruments

Can be real or virtual documents representing a legal agreement involving any kind of monetary value.

Debt Instruments

Have fixed returns due to fixed interest rates. An example is a bond.

Treasury Bonds/Treasury Bills

Are issued by the national government and dominated in local currency.

Corporate Bonds

Are issued by large firms who usually have established an outstanding track record in public.

Foreign Bonds

Are issued by foreign governments and firm dominated by a different currency.

Par value

It is also known as face value. It is the amount stated in the bond to be used by the bond issuer in calculating the interest to be paid to the bond holder once it matures.

Dividend

Is the amount of interest.

Dividend Rate

Is the interest rate the bond issuer will be used in computing the interest payment, usually expressed in percent.

Coupon Dates

Are interval dates, usually annual or semi- annual, on which the bond issuer will make interest payments.

Maturity date

Is the date which the last payment will be paid. It is the date the bond will mature.

Maturity value

Is the amount which will be paid to the bond holder on the coupon date.

Coupon rate

Is the rate of interest that the issuer has committed to pay over the life of the bond.

Yield to Maturity

In contrast to coupon rate, it is another rate of interest critical to a bonds value. It measures the return earned on the bond until maturity.

Equity Instruments

Refers to a document which serves as a legally applicable evidence of the ownership right in a firm.

Common Stock

Most common type of stock issued to the public which gives the holder the right to vote on corporate matters during shareholder’s meeting also known as ordinary shares.

Preferred Stock

Owners are guaranteed a fixed dividend for as long as they own a stock also known as preference shares.

Derivative Instruments

instruments whose worth we derive from the value and the characteristics of at least one underlying entity

Cash Instruments

instruments that the market values directly. Securities which are readily transferable.