Chapter One Slides

What are the key decisions a financial manager must make?

Investment (Capital Budgeting), Financing (Capital Structure), and Working Capital decisions.

Which of the three key financial decisions are long-term and which are short-term

Capital budgeting and capital structure are long, and working capital is short-term.

What does capital budgeting mean

Techniques that help identify investment opportunities that make more than they cost

What does capital structure mean

How you get the money to buy your capital usually paid through debt or equity 

What does working capital mean

Short term cash flows like accepting credit

Where do the three key decisions go on the balance sheet

Investing decisions- Long-term assets

Financial decisions- Long-term liability and owners’ equity 

Working Capital decisions- Short-term assets and liabilities

What does residual claims mean

if all assets were sold and creditors were paid, the residual claim is what is left over for the shareholders.

What is a sole proprietorship

Business owned by one person

pros: simple, less regulation, taxed at a personal income rate

cons: unlimited liability for debts, limited life, equity is limited to personal wealth 

What is a partnership

A business formed by two or more individuals/entities

What is a corporation

A business created as a distinct legal entity composed of one or more individuals or entities

pros: limited liability, easy transfer of ownership, unlimited life, easy to get cash

cons: double taxation and more regulation 

What is the simplified goal of the financial manager

maximize shareholder wealth

How is a financial manager able to increase the stock price

1) Buy assets that generate more than what they cost (value-creating projects)

2) Sell financial instruments that raise more cash than what they cost (smart financial decisions)

3) Effectively manage working capital 

What impacts cash flows

amount, timing, and risk

what are two other words for current stock price

Value of the firm (piece of ownership) / Current and future cash flows