FIN 3101 - Chapter 1 (2) All Answers Correct

FIN 3101 - Chapter 1 (2) All Answers Correct What are the 3 financial management decision-making? 1. Capital Budgeting 2. Capital Structure 3. Working Capital Management Financial Decision Making Examples: Capital Budgeting deciding whether to expand a manufacturing plant Financial Decision Making Examples: Capital Structure deciding whether to issue new equity and use the proceeds to retire outstanding debt Financial Decision Making Examples: Working Capital Management modifying the firm's credit collection policy with its customers What is Capital Budgeting? the process of planning, evaluating, comparing, and selecting the long-term operating projects for the company. What is Capital Structure? The means by which a company finances its business activities; for public companies, usually a mix of bonds (debt) and stocks (equity) sold to investors and owners. What is Working Capital Management? The process of managing the day-to-day operating needs of the company through its current assets and current liabilities. What question does Capital Budgeting answer? What business should we be in over the long term? What question does Capital Structure answer? Where do we raise the money to conduct our business activities? What question does Working Capital Management answer? How will we manage our day-to-day business needs? What are the 3 Equivalent ways of describing the overriding goals of corporate financial management? 1. Maximize the wealth of shareholders 2. Maximize the price of common stock 3. Maximize the market value of company equity How do 3 key determinants affect stock prices? 1. Expected Future Cash Flows (Higher Better) 2. Timing of Future Cash Flows (Sooner Better) 3. Riskiness of Future Cash Flows (Less Better) What are the 4 forms in which the corporation can send cash to its investors? 1. Interest Payments 2. Principal Payments 3. Dividends 4. Tax Advantages What is an Auction Market? A market in which assets are sold to the highest bidder