Finance Coperations and principles

What is the principle of finance concerning the time value of money?

A dollar received today is worth more than a dollar received in a year.

What is capital budgeting?

A firm's investing decision.

What type of company is a corporation?

A company owned by shareholders.

How do corporations raise funds through debt?

By using bank loans = Debt financing

By selling shares = Equity financing

What is the principle of risk-return trade-off?

The principle that greater risk is associated with greater potential returns.

What are cash flows in a business context?

The amount of cash that can actually be taken out of the business.

What does finance study?

Money related transactions and the performance of decisions made by consumers, businesses, and governments.

What is a key characteristic of corporations?

They are a legal entity, separated from their owners.

Can be public or private

Limited liability

Potentially unlimited life span

Financing not limited to owners resources

What is corporate governance?

The system of rules, practices, and processes by which companies are directed and controlled.

Why is corporate governance important?

It ensures appropriate decision-making processes and controls to balance the interests of all stakeholders.

What is agency theory?

The theory that addresses the relationship between principals (shareholders) and agents (managers), focusing on aligning their interests.

What is a financial system?

A set of actors that maintain transactions and permit the exchange of funds.

What is the purpose of the discount rate in finance?

To calculate the present value of future cash flows.

What is the hurdle rate?

The minimum acceptable rate of return on investments for shareholders.

What does the formula FV = Co * (1+R)^t represent?

The future value (FV) of an investment based on the cash flow today (Co) and the rate of return (R) over time (t).

What is the role of the financial system?

The financial system facilitates the flow of funds between savers and borrowers, enabling investments, consumption, and the efficient allocation of resources in the economy.

Role of a Financial Manager

Includes financing decision (ensuring enough cash for day-to-day operations), capital budgeting decision (choosing which projects to invest in), and reinvesting additional funds.

Financial Asset

Claims held by investors, representing ownership of value, such as stocks and bonds.

Why Might One Expect Managers to Act in Shareholders' Interest?

Legal duty, compensation tied to company performance, fear of reputational damage, potential termination by the Board of Directors, and risk of shareholders selling shares leading to a takeover.

Managers Reacting to New Takeover Defenses

Managers insulated from takeovers may be more prone to agency problems and act in their own interest, which can lead to a decline in share value if the takeover defenses make the firm appear weak.