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16 Cards in this Set
- Front
- Back
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What are the major responsibilities of Financial Managers? |
-Investment Decisions(Capital Budgeting) -Financials Decisions ->Long Term (Capital Structure) ->Short Term (Working Capital Management) -Distribution Decisions (Dividend/Repurchase) |
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What is Capital Budgeting? |
-The planning process used to determine whether an organization's long term investments such as new machinery, replacement of machinery, new plants, new products, and research development projects are worth the funding of cash through the firm's capitalization structure. |
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What is Capital Structure? |
-How a firm finances its overall operations and growth by using different sources of funds. -Debt comes in the form of bond issues or long-term notes payable, while equity is classified as common stock, preferred stock or retained earnings. |
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What is Net Working Capital? |
-The aggregate amount of all current assets and current liabilities. -It is used to measure the short-term liquidity of a business, and can also be used to obtain a general impression of the ability of company management to utilize assets in an efficient manner. |
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What should be the Objective of a Firm? |
-Sales Maximization -Profit Maximization -Maximizing Stockholder's wealth |
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Why does maximizing Profit NOT necessarily mean maximizing Shareholder's wealth? |
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What is the best measure of Shareholder's Wealth? |
-Stock Value (Intrinsic Value) |
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What determines the Intrinsic Value of any Asset? |
-The intrinsic value is the actual value of a company or an asset based on an underlying perception of its true value including all aspects of the business, in terms of both tangible and intangible factors. |
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What's the difference between Intrinsic Value and Stock Price? |
-Intrinsic Value is determined by a firm's fundamentals (CF, Timing of CF, and Risk) -Stock Price is observed in the market; changes whenever a transaction takes place; determined by the marginal investors. |
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When is a Stock Overvalued? |
-Overvalued when it has a current price that is not justified by its earnings outlook or price/earnings (P/E) ratio, so it is expected to drop in price. -Selling Pressure |
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When is a Stock Fairly Valued? |
-Fairly Valued when a stock whose perceived value is equal to its current market value. -Also known as Equilibrium |
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When is a Stock Undervalued? |
-Undervalued when a stock that is selling at a price significantly below what is assumed to be its intrinsic value. -Buying Pressure |
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What are the reasons there are conflicts of interest between Shareholders and Management? |
-Managers are naturally inclined to act in their own best interests at the expense of shareholders' interest. |
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What are the Consequences of the conflicts of interest between Shareholders and Management? |
-Lack of incentive to perform -Unethical & Value decreasing decisions |
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What are the Solutions for the conflicts of interest between Shareholders and Management? |
-Managerial Compensation Plans -> Pay-for-Performance ->Stock Options -Direct Intervention by Shareholders -Threat of Firing -Threat of Takeover |
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What is the Nature of the conflict of interests between Shareholders and Bondholders? |
-Bondholders->Fixed Claims -Stockholders->Residual Claims -Stockholders may try to transfer wealth from debt holder to themselves by taking risky projects because if the projects a success, the shareholders get more of the gains. |
