unit 1 FMN

What is corporate finance?

Corporate finance refers to the financial function and its management within a corporation, dealing with the procurement and application of financial capital.

What are the three main types of financial management decisions?

1. Capital budgeting decisions (long-term investments), 2. Capital structure decisions (financing), 3. Working capital management decisions (day-to-day financial activities).

What is the primary goal of financial management?

To increase the wealth of shareholders by maximizing the current share price.

Define the agency problem.

The agency problem arises when managers (agents) do not act in the best interests of the shareholders (principals) due to differing goals.

List the main forms of business ownership in South Africa.

1. Sole proprietorships, 2. Partnerships, 3. Companies.

What are agency costs?

Costs incurred by shareholders as a result of the agency problem, including direct costs from manager behavior and indirect costs from missed opportunities.

What is the role of financial managers?

To manage the financial activities of an entity, including financial planning, capital budgeting, managing cash flow, and ensuring compliance.

How can financial managers ensure ethical practices in their decisions?

By designing compensation packages that align their incentives with those of the shareholders and following corporate governance principles.

What is shareholder wealth maximization?

A financial management goal focusing on increasing the value of shareholders' equity in the company.

Explain the importance of ethics and ESG considerations in financial management.

They influence decision-making and can enhance value creation by aligning the interests of a company with those of its stakeholders, fostering long-term sustainability.

What is capital budgeting?

The process of planning and managing a firm's long-term investments and assets.

What are the primary and secondary markets?

Primary markets are where securities are created, and secondary markets are where existing securities are traded.

Define financial institutions.

Organizations that provide financial services and act as intermediaries between savers and borrowers.

What is the role of financial markets?

To facilitate the flow of funds between borrowers and lenders, thereby enabling economic units with excess funds to transact with those in need of funds.

Why is the inflation rate important to financial managers?

It influences the cost of resources, affects pricing strategies, and impacts overall profitability.

Define the term 'working capital management'.

The management of short-term assets and liabilities to ensure efficient operation and liquidity of the business.

What is the function of the Johannesburg Stock Exchange?

To serve as a capital market where long-term debt securities and equities of listed companies are bought and sold.

How is shareholder wealth assessed?

By considering the number of shares owned and the current market price of those shares.

What does a company’s capital structure refer to?

The mix of debt and equity used to finance a company's operations and investments.

Identify two types of direct agency costs.

1. Excessive personal spending by managers on luxury items, 2. Monetary costs incurred to monitor managerial performance.

What is King IV™?

A report on corporate governance in South Africa emphasizing ethical leadership and stakeholder inclusivity.

What is risk management in corporate finance?

The process of identifying, assessing, and prioritizing risks followed by coordinated application of resources to minimize, monitor, and control the probability of unfortunate events.

Define liquidity risk.

The risk that a firm will not be able to meet its short-term financial obligations due to an imbalance between its liquid assets and liabilities.

What is capital structure optimization?

The strategy of finding the ideal mix of debt and equity financing to minimize the cost of capital and maximize the company's value.

What is meant by financial leverage?

The use of borrowed funds to increase the potential return on investment, which increases risk and potential for loss.

Explain the concept of dividend policy.

A company's approach to distributing earnings back to shareholders, which can affect stock price and investor satisfaction.

What are financial ratios?

Quantitative measures that are used to assess a company's financial performance and health by comparing various financial metrics.

What is the primary objective of financial forecasting?

To predict future financial performance based on historical data and assumptions about future conditions.

Define systematic risk.

The risk inherent to the entire market or market segment, which cannot be eliminated through diversification.

What is the difference between secured and unsecured debt?

Secured debt is backed by collateral, while unsecured debt is not and relies solely on the borrower's creditworthiness.

What are the advantages of using equity financing?

It does not require repayment and can financially support growth without increasing debt burden.