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20 Cards in this Set
- Front
- Back
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What are the two main financial decisions being made?
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1. Investment decisions: What investments a corporation should make. (Spend $) 2. Financing decisions: How the corporation should pay for the investments?. (Raise $) |
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The goal of a Financial Manager is:
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To maximise the value of the company and in turn shareholder wealth.
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Corporations finance their investments by:
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Borrowing, Retaining & Reinvesting CF, and by selling additional shares to shareholders. |
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Corporations invest in real assets, which generate income. These assests come in two broad forms: |
2. Intangible: i.e. Brand name & Patents |
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Financial Managers increase value when...
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The firm can earn a higher return than shareholders can earn for themselves. This is called the Opportunity Cost of Capital (Op. COC). |
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The Opportunity Cost of Capital is...
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This is also the minimum return a firm must deliver in order to increase value and shareholder wealth (SHW). |
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Good governance rules and procedures with appropriate incentives are necessary to...
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Align the goals of managers and their employees with those of the shareholders, and also to guide ethical practice and legal value increases in share prices.
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1. Corporate finance is all about... |
Maximising value. |
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2. The Opportunity Cost of Capital sets...
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The standard for investment decisions.
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3. A safe dollar...
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Is worth more than a risky dollar. |
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4. Smart investment decisions...
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Create more value than smart financing decisions. |
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5. Good ____________ matters. |
Governance
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Shareholders who own the firm want its managers to... |
Maximise its overall value and the current price of its shares. |
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How do Financial Managers increase the value of the firm? |
By making good investment decisions. Profitability of corporate investments separates high-value firms from the rest. Investing decisions create more value than financing decisions. |
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When a firm makes investment decisions, what trade-offs occur?
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The firm chooses between either retaining and reinvesting cash, or returning it to their shareholders in the form of dividends. |
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When a firm invests cash rather than paying it out to shareholders, what happens?
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This is the Opportunity Cost of Capital. |
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If the firm's investments can earn a higher return than the Opportunity Cost of Capital...
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The value of the company, and therefore share price increases. |
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If the firm's investment returns are lower than the Opportunity Cost of Capital...
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The value of the company, and therefore share price decreases.
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Firm's investment returns > Op. COC |
Share $ Increases |
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Firm's investment returns < Op. COC
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Share $ Decreases
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