Finance Chapter 1 – Flashcards
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The financial manager is responsible
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for making decisions that are in the best interests of the firm's owners.
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The financial manager should make decisions that
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maximize the value of the owners' stock.
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Maximizing the value of the owners' stock helps
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maximize the owners' wealth
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Wealth is the
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economic value of the assets the owner possesses
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A stakeholder is someone
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other than an owner who has a claim on the cash flows of the firm
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To produce its products or services
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a new firm needs to acquire a variety of assets
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Long-term assets are also known as
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productive assets
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Productive assets can be
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tangible assets, such as equipment, machinery, or a manufacturing facility, or intangible assets, such as patents, trademarks, technical expertise, or other types of intellectual capital.
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Regardless of the type of asset, the firm tries to
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select assets that will generate the greatest cash flows for the firm's owners
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. The decision-making process through which the firm purchases productive assets is called
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capital budgeting
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Capital budget is
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one of the most important decision processes in a firm.
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Financing decisions determine
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the ways in which firms obtain and manage long-term financing to acquire and support their productive assets.
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There are two basic sources of funds:
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debt and equity
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Every firm has some equity because
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equity represents ownership in the firm.
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Equity consists of
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capital contributions by the owners plus cash flows that have been reinvested in the firm.
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After the productive assets have been purchased and the business is operating, the managers of the firm will try to
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produce products at the lowest possible cost while maintaining quality
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Day-to-day finances must be managed so that the firm
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will have sufficient cash on hand to pay salaries, purchase supplies, maintain inventories, pay taxes, and cover the myriad of other expenses necessary to run a business
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The management of current assets, such as money owed by customers who purchase on credit, inventory, and current liabilities, such as money owed to suppliers, is called
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working capital management.
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A firm is successful when these cash inflows exceed the cash outflows, the managers of the firm can pay the remaining cash, called residual cash flows , to
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the owners as a cash dividend, or reinvest the cash in the business.
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The reinvestment of cash flows (earnings) is
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the most fundamental way that businesses grow in size
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A firm is unprofitable when it
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fails to generate sufficient cash inflows to pay operating expenses, creditors, and taxes.
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Three Fundamental Decisions in Financial Management
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1. Capital budgeting decisions 2. Financing decisions 3. Working capital management decisions
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Capital budgeting decisions
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identify the productive assets the firm should buy
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Financing decisions
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determine how the firm should finance or pay for assets
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Working capital management decisions
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Determine how day-to-day financial matters should be managed so that the firm can pay its bills, and how surplus cash should be invested.
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A firm's capital budget is
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a list of the productive (capital) assets that management wants to purchase over a budget cycle, typically one year.
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The capital budgeting decision process addresses
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which productive assets the firm should purchase and how much money the firm can afford to spend.
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The fundamental question in capital budgeting is
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Which productive assets should the firm purchase?
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Productive assets, which are long term in nature, are financed by
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long-term borrowing, equity investment, or both.
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A major advantage of debt financing is that
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debt payments are tax deductible for many corporations.
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Equity has no
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maturity
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The mix of debt and equity on the balance sheet is known as
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a firm's capital structure .
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The dollar difference between a firm's total current assets and its total current liabilities is called its
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net working capital
