What does the uncertainty of returns imply for profit maximization?
It suggests that a profit of 2M in the first year does not guarantee the same in the second year.
p.7
Primary vs. Secondary Markets
What is the primary market?
A market in which new issues of a security are sold to initial buyers.
p.15
Financial Markets Overview
What characterizes efficient capital markets?
Speedy information dissemination.
p.15
Financial Markets Overview
What does it mean if the price of assets is correct in efficient markets?
It indicates that the stock price accurately reflects the firm's value.
What is the formula to calculate the future value of money?
Future Value = Present Value × (1 + interest rate).
p.19
Agency Problem in Finance
What role does corporate governance play in ethical dilemmas?
It establishes frameworks to guide ethical decision-making and accountability.
Is all risk considered equal in finance?
No, all risk is not equal.
p.6
Financial Markets Overview
What are secondary markets?
Markets where investors buy and sell securities that have already been issued.
p.13
Financial Management Axioms
What is incremental cash flow?
The additional cash flow generated from a specific decision or project.
If you win $1 million from a lottery, which is more valuable: $1 million now or $1 million one year from now?
$1 million now is more valuable.
p.19
Agency Problem in Finance
What is an ethical dilemma?
A situation in which a difficult choice must be made between two or more conflicting ethical principles.
What does the time value of money imply?
A dollar today is worth more than a dollar in the future.
What is the primary goal of finance?
Creating wealth and maintaining it.
p.16
Agency Problem in Finance
What is a key issue in the agency problem?
Conflict of interest between managers and owners.
p.16
Agency Problem in Finance
What happens as the conflict of interest increases?
The agency problem becomes bigger.
p.6
Financial Markets Overview
What are government securities?
Debt instruments issued by the government to finance its operations.
How does the Time Value of Money apply to investment decisions?
It helps compare the value of money received at different times.
p.18
Risk-Return Trade-Off
What is the key concept behind diversification in finance?
A strategy used to minimize risk without reducing return.
p.13
Financial Management Axioms
Why is it important to consider only relevant cash flows?
To make informed financial decisions based on actual changes in cash flow.
What is the primary goal of the firm in finance?
Shareholder Wealth Maximization.
p.8
Initial Public Offering (IPO)
What is an Initial Public Offering (IPO)?
The first time a firm's stock is sold to the general public.
p.8
Initial Public Offering (IPO)
What is a seasoned new issue?
A new stock offering by a firm that already has stock traded in the secondary market.
What is the primary goal of a firm?
Maximize shareholders' wealth.
p.5
Shareholder Wealth Maximization
How is Shareholder Wealth calculated in this example?
Shareholder Wealth = Stock Price.
p.17
Financial Management Axioms
What is a BOI industrialize zone?
A designated area to promote industrial development through tax incentives.
p.13
Financial Management Axioms
What is the focus when analyzing incremental cash flow?
Only the changes that matter to the decision.
p.13
Financial Management Axioms
In the context of a menu, what is being compared?
Chicken Rice only vs. Chicken Rice and Chicken Noodle Soup.
p.9
Financial Management Axioms
What is considered more important in financial management, cash or profits?
Cash, not profits, is king.
What is one problem associated with profit maximization?
Timing of returns: whether to prioritize profit now or later.
p.9
Financial Management Axioms
What is a common issue faced in finance regarding ethics?
Ethical dilemmas are everywhere in finance.
p.10
Risk-Return Trade-Off
What should investors consider when taking additional risks?
They should only take additional risk if rewarded with additional return.
p.17
Financial Management Axioms
How do taxes influence business decisions?
Taxes bias business decisions.
p.15
Financial Markets Overview
What do stock prices reflect in efficient capital markets?
They include all available information.
How can corporations reinvest their earnings?
By using cash flow to fund new projects or expand operations.
p.19
Agency Problem in Finance
How can ethical dilemmas impact decision-making in finance?
They can lead to conflicts between personal gain and the best interests of stakeholders.
p.9
Financial Management Axioms
What type of cash flows should be considered in financial decisions?
Incremental cash flows count.
p.16
Agency Problem in Finance
What is the role of a manager in the context of the agency problem?
The manager acts as the agent for the owners.
p.16
Agency Problem in Finance
How can a manager's actions affect the firm?
Managers may work for their own benefit, which can hurt firm value.
p.6
Financial Management Axioms
What is the role of cash flow in a corporation?
Cash flow is essential for reinvestment, paying dividends, and covering taxes.
What does the Time Value of Money concept imply?
$1 now is worth more than $1 tomorrow.
p.6
Shareholder Wealth Maximization
What do investors seek in financial markets?
Investors seek returns through dividends, interest, and capital gains.
p.12
Financial Management Axioms
What does cash enable a business to do?
Pay employees and creditors.
What is the relationship between risk and return in financial management?
There is a trade-off between risk and return.
p.9
Financial Management Axioms
What are efficient capital markets?
Markets where prices reflect all available information.
How is Shareholder Wealth Maximization often expressed?
As maximizing firm value.
What is one way finance can be used in business expansion?
Launching a new product line.
What must firms always identify in a competitive market?
Good profitable (value creating) projects.
p.12
Financial Management Axioms
Why is cash considered more important than profit?
Cash pays employees and creditors, while profit does not.
p.19
Agency Problem in Finance
What are common examples of ethical dilemmas in business?
Conflicts of interest, insider trading, and issues of transparency.
p.19
Agency Problem in Finance
Why is it important to address ethical dilemmas in finance?
To maintain trust, integrity, and long-term sustainability in financial markets.
p.9
Agency Problem in Finance
What is the agency problem in finance?
The conflict of interest between management and shareholders.
p.10
Risk-Return Trade-Off
What is the relationship between risk and return?
Higher risk is associated with higher potential return.
What is a common challenge in a competitive market?
The emergence of new competitors.
p.7
Primary vs. Secondary Markets
What is the secondary market?
A market in which previously issued securities are traded.
What strategies can firms use to compete in a competitive market?
Differentiate, achieve cost advantage, etc.
p.17
Financial Management Axioms
What is the purpose of an investment tax credit?
To encourage investment by reducing tax liability.
p.18
Risk-Return Trade-Off
Can all risk be eliminated through diversification?
No, some risk can be diversified away, but not all.
p.18
Risk-Return Trade-Off
Why is it important not to look at a project in isolation?
Because risks associated with a project can be influenced by other investments.
p.15
Financial Markets Overview
How is a firm's value related to its stock price in efficient capital markets?
If the stock price is right, then the firm's value must also be correct.
p.17
Financial Management Axioms
How does the government use tax incentives?
To help increase investment.
p.9
Financial Management Axioms
What is the curse of competitive markets?
It can lead to reduced profits and increased risk.
p.9
Financial Management Axioms
How do taxes influence business decisions?
Taxes can bias business decisions.
