Corporate Financial Management: Introduction & Time Value of Money
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Questions and Answers

Types of firms

Sole Proprietorships, Partnerships, Corporations

Objective of corporation

maximize profit, or maximize shareholders wealth

Agency problems and related agency costs

Corporate governance and sustainable business

The time value of money

<p>The concept that money available today is worth more than the same amount in the future due to its potential earning capacity</p> Signup and view all the answers

FEATURES OF CORPORATIONS

<p>Limited Liability, Corporate tax on profits + Personal tax on dividends</p> Signup and view all the answers

ROLE OF FINANCIAL MANAGER

<p>Right investment decisions, Proper financial decisions</p> Signup and view all the answers

Present Value

<p>Value today of a future cash flow</p> Signup and view all the answers

Discount Rate

<p>Interest rate used to compute present values of future cash flows</p> Signup and view all the answers

Future Value

<p>Amount to which an investment will grow after earning interest</p> Signup and view all the answers

Discount Factor

<p>Present value of a £1 future payment</p> Signup and view all the answers

Discount Factor Equation

<p>$\frac{1}{(1+r)}$</p> Signup and view all the answers

Perpetuity Equation

<p>$PV_0 = \frac{C_1}{r}$</p> Signup and view all the answers

Growing Perpetuity Equation

<p>$PV_0 = \frac{C_1}{r-g}$</p> Signup and view all the answers

Annuity

<p>A stream of constant cash flows that lasts for a fixed number of T years</p> Signup and view all the answers

Annuity Equation

<p>$PV \text{ of annuity} = C \times \frac{1-(1+r)^{-t}}{r}$</p> Signup and view all the answers

Bond Valuation Equation

<p>$P_0 = \frac{F}{(1+r)^T}$</p> Signup and view all the answers

Study Notes

Types of Firms

  • There are different types of firms, each with unique characteristics and objectives.

Objectives of Corporation

  • The primary objective of a corporation is to maximize shareholder wealth.
  • This objective is often achieved by maximizing profits.
  • Agency problems arise when there is a conflict of interest between shareholders and managers.
  • Agency costs are the costs incurred by the corporation due to agency problems.

Time Value of Money

  • The time value of money refers to the concept that a dollar today is worth more than a dollar in the future.
  • This is because money received today can be invested to earn interest or returns.

Features of Corporations

  • Corporations are legal entities separate from their owners.
  • They have limited liability, which means shareholders are not personally liable for corporate debts.
  • Corporations are taxed separately from their owners.
  • They have perpetual existence, meaning they can continue to exist even if owners change.

Role of Financial Manager

  • The financial manager is responsible for making financial decisions that maximize shareholder wealth.
  • These decisions include investment, financing, and dividend decisions.

Time Value of Money Concepts

  • Present Value: The current value of a future cash flow.
  • Discount Rate: The rate used to calculate present value.
  • Future Value: The value of a cash flow at a future date.
  • Discount Factor: A factor used to calculate present value.
  • Discount Factor Equation: Discount Factor = 1 / (1 + Discount Rate)^Number of Periods.

Perpetuity and Annuity

  • Perpetuity: A cash flow that occurs indefinitely.
  • Perpetuity Equation: Present Value = Cash Flow / Discount Rate.
  • Growing Perpetuity: A perpetuity with a growth rate.
  • Growing Perpetuity Equation: Present Value = Cash Flow / (Discount Rate - Growth Rate).
  • Annuity: A series of equal cash flows for a fixed number of periods.
  • Annuity Equation: Present Value = Cash Flow * [(1 - (1 + Discount Rate)^(-Number of Periods)) / Discount Rate].

Bond Valuation

  • Bond Valuation Equation: Present Value = Face Value / (1 + Discount Rate)^Number of Periods.

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Description

Test your knowledge of corporate financial management with a focus on the introduction, types of business organizations, features of corporations, and the time value of money. This quiz covers topics from BMA chapters 1 and 2.

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