fin chapter 1

  1. 5 principles
    • 1. cash flow is what matters
    • 2. money has a time value
    • 3. risk requires reward
    • 4. market prices are generally right
    • 5. conflicts of interest cause agency problems
  2. accounting profits are not equal to
    cash flows
  3. it is possible for a firm to generate accounting profits but not
    have cash (vice versa)
  4. when making financial decisions we must
    determine incremental cash flows
  5. incremental cash flow is the difference
    between projected cash flows if the project is selected vs what they will be if the project isn't selected
  6. it is better to receive money
    earlier than later
  7. we wont take on additional risk unless
    we expect to be compensated with additional reward or return
  8. stock prices are a useful indicator of
    the value of the firm
  9. agency problems
    separation of management and the ownership of the firm
  10. managers make make decisions that aren't
    consistent with the goal of max shareholder wealth
  11. three broad issues addressed by the study of finance
    where to invest? - capital budgeting

    how to raise money to fund the investment? (capital structure)

    how to manage cash flows from daily operations (working capital)
  12. sole proprietorship (4)
    • business owned by an individual
    • unlimited liability
    • owner maintains title to assets/profits
    • termination occurs at death or choice
  13. partnerships
    two or more persons come together as co-owners
  14. general partnerships
    all partners are fully responsible for liabilities incurred by the partnership
  15. limited partnerships
    one or more partners can have limited liability, restricted to the amount of capital invested in the partnership- must have 1 general partner with unlimited liability

    limited partners can't participate in management of the business and their names can't appear in the name of the firm
  16. corporation (5)
    • legally functions separate and apart from its owners
    • owners dictate direction/policies of corporations
    • owners liability is restricted to amount invested in company
    • life of corporation doesn't depend on owners
    • taxed separately
  17. benefits of corporations (3)
    • limited liability,
    • easy transfer of ownership
    • unlimited life
  18. drawbacks of corporations
    • no secrecy of info
    • maybe delays in decisions making
    • greater regulation
    • double taxation
  19. two types of hybrid organizations
    • s-type corporation
    • limited liability companies
  20. s-type
    • benefits: limited liability and no double taxation
    • limitations: owners must be people so can't be used for joint ventures between 2 corporations
  21. LLC
    advantages: same as s-type

    drawbacks: qualifications vary from state to state, can't appear like a corporation otherwise it will be taxed twice
  22. go abroad (4)
    • increase revenue
    • reduce expenses
    • lower government regulation standards
    • increase global exposure
  23. risks going abroad (3)
    • country risk
    • currency risk
    • culture risk
Card Set
fin chapter 1
finance chapter 145 p