Fundamentals of Finance Midterm Summary
Chapter 1 Introduction to Corporate finance
Market Value: Determined by the present value of future cash flows.
Financial Markets=
• Classification by Asset Maturity
o Money Market: Assets mature within 1 year.
o Capital Market: Assets mature over more
than 1 year.
• Classification by Asset Ownership
o Primary Market: The first sale of securities,
where corporations raise funds through
equity (ownership shares) or debt
(borrowing).
o Secondary Market: Trading of securities
between investors.
Types of Primary Markets=
• Public Offerings: Selling securities to the public.
• Private Placement: Selling securities directly to a specific buyer.
Types of Secondary Markets=
• Auction Market: Dealers trade assets at their own risk.
• Dealer Market: Brokers connect buyers and sellers without owning the asset (often called
the OTC, or over-the-counter market).
Corporate finance: making decisions regarding what assets to buy/sell and when to buy/sell
those assets
! goal for financial management -> maximise the market value
Capital Budgeting: Planning and managing long-term investments.
Capital Structure: Balancing long-term debt and equity.
Working Capital Management: Managing short-term assets and liabilities
➔ Net working capital (NWC)=current assets + current liabilities
Financial managers evaluate the following points in future cash flow=
● Size
● Timing
● Risk
Goals of financial management=
1. Profitability
2. Controlling risk
, Cash Flow Components=
• Operating Activities: Cash from daily operations.
• Investing Activities: Cash from investment in assets.
• Financing Activities: Cash from borrowing and equity.
Operating Cash Flow (OCF) Calculations=
• OCF = Net Income + Depreciation + Interest Expense - Change in Net Working Capital
• OCF = EBIT + Depreciation - Taxes - Change in Net Working Capital
! Depreciation is added back because it’s a non-cash expense; interest is excluded
because it’s a financing cost.
Triple Bottom Line: Corporate objectives should address society, environment, and profit
equally.
Listing: Securities trade on an organized exchange; firms must meet specific requirements.
Macroeconomic Policy: concerned with the government decisions that impact the economic
environment
Government Economic Tools=
o Fiscal Policy: Government spending and taxes.
o Monetary Policy: Interest rates and money supply.
o Exchange Rate Policy: Managing currency rates to improve trade.
o Foreign Trade Policy: Trade barriers and import controls.
European Monetary Union Components=
• The Euro
• European Central Bank (ECB)
• Centralized monetary policy
Chapter 2 Corporate Governance
Corporate Governance: Refers to how companies are managed and how their performance
is monitored by stakeholders.
Business Structures=
• Sole Trader: A business owned by a single person (also called a micro-company).
• Partnership: A business formed by two or more individuals or entities.
o General Partnership: All partners share in gains, losses, and are fully liable for debts.
o Limited Partnership: Includes at least one general partner (fully liable) and one limited
partner (liability limited to their investment).
Main Disadvantages of Sole Traders and Partnerships=
1. Unlimited liability for business debts.
2. Limited lifespan of the business.
3. Difficulty in transferring ownership.
Chapter 1 Introduction to Corporate finance
Market Value: Determined by the present value of future cash flows.
Financial Markets=
• Classification by Asset Maturity
o Money Market: Assets mature within 1 year.
o Capital Market: Assets mature over more
than 1 year.
• Classification by Asset Ownership
o Primary Market: The first sale of securities,
where corporations raise funds through
equity (ownership shares) or debt
(borrowing).
o Secondary Market: Trading of securities
between investors.
Types of Primary Markets=
• Public Offerings: Selling securities to the public.
• Private Placement: Selling securities directly to a specific buyer.
Types of Secondary Markets=
• Auction Market: Dealers trade assets at their own risk.
• Dealer Market: Brokers connect buyers and sellers without owning the asset (often called
the OTC, or over-the-counter market).
Corporate finance: making decisions regarding what assets to buy/sell and when to buy/sell
those assets
! goal for financial management -> maximise the market value
Capital Budgeting: Planning and managing long-term investments.
Capital Structure: Balancing long-term debt and equity.
Working Capital Management: Managing short-term assets and liabilities
➔ Net working capital (NWC)=current assets + current liabilities
Financial managers evaluate the following points in future cash flow=
● Size
● Timing
● Risk
Goals of financial management=
1. Profitability
2. Controlling risk
, Cash Flow Components=
• Operating Activities: Cash from daily operations.
• Investing Activities: Cash from investment in assets.
• Financing Activities: Cash from borrowing and equity.
Operating Cash Flow (OCF) Calculations=
• OCF = Net Income + Depreciation + Interest Expense - Change in Net Working Capital
• OCF = EBIT + Depreciation - Taxes - Change in Net Working Capital
! Depreciation is added back because it’s a non-cash expense; interest is excluded
because it’s a financing cost.
Triple Bottom Line: Corporate objectives should address society, environment, and profit
equally.
Listing: Securities trade on an organized exchange; firms must meet specific requirements.
Macroeconomic Policy: concerned with the government decisions that impact the economic
environment
Government Economic Tools=
o Fiscal Policy: Government spending and taxes.
o Monetary Policy: Interest rates and money supply.
o Exchange Rate Policy: Managing currency rates to improve trade.
o Foreign Trade Policy: Trade barriers and import controls.
European Monetary Union Components=
• The Euro
• European Central Bank (ECB)
• Centralized monetary policy
Chapter 2 Corporate Governance
Corporate Governance: Refers to how companies are managed and how their performance
is monitored by stakeholders.
Business Structures=
• Sole Trader: A business owned by a single person (also called a micro-company).
• Partnership: A business formed by two or more individuals or entities.
o General Partnership: All partners share in gains, losses, and are fully liable for debts.
o Limited Partnership: Includes at least one general partner (fully liable) and one limited
partner (liability limited to their investment).
Main Disadvantages of Sole Traders and Partnerships=
1. Unlimited liability for business debts.
2. Limited lifespan of the business.
3. Difficulty in transferring ownership.
