Topic 8 – Capital Markets: Corporations and Investors in the Share Markets Flashcards Preview

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Flashcards in Topic 8 – Capital Markets: Corporations and Investors in the Share Markets Deck (71)
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1

The objective of financial management is to

maximize shareholder value

2

Four main aspects of financial management are

Investment decision (capital budgeting)
Financing decision (capital structure)
Liquidity (working capital) management
Dividend policy decision

3

Investment decision (capital budgeting)

What assets to obtain or invest in.

4

Financing decision (capital structure)

How to fund the purchase of these assets.

5

Liquidity (working capital) management

How to best manage working capital – liquidity.

6

Dividend policy decision

What proportion of profits should be distributed/retained.

7

The financing decision

the capital structure used to fund the firm’s business activities.

8

The financial objective of a corporation

maximise return, subject to an acceptable level of risk.

9

Two sources of risk

Business Risk
Financial Risk

10

Business Risk

Exposure to factors that have an impact on a firm's activities and operations

11

Financial Risk

Exposure to factors that affect value of assets, liabilities and cash flows

12

Business risk is affected by

- Sectoral growth rates
- Market share
- Aggressiveness of competitors
- Competence of management and workforce

13

Categories of financial risk

Interest Rate Risk
Foreign Exchange Risk
Liquidity Risk
Credit Risk
Capital Risk
Country Risk

14

Interest Rate Risk

Risk of adverse movements in interest rates

15

Foreign Exchange Risk

Risk of adverse movements in exchange rates

16

Liquidity Risk

Risk of insufficient cash in the short term

17

Credit Risk

Risk of default or untimely payments by debtors

18

Capital Risk

Risk of insufficient shareholder funds to meet capital growth needs or absorb abnormal losses

19

Country Risk

Risk of financial loss due to currency devaluation or inconvertability

20

debt to equity ratio (D/E)

indicates the risk of being unable to meet interest due and principal repayments associated with the use of debt, i.e. risk of insolvency

21

Although there is no agreed ideal D/E ratio, factors influencing the D/E ratio in practice are:

- Industry norms
- Historic levels of firm’s ratio
- Limit imposed by lenders through loan covenants, i.e. restrictions placed on a borrower specified in a loan contract
- Management’s assessment of the firm’s capacity to service debt

22

Initial Public Offering (IPO)

an offer to investors of ordinary shares in a newly listed company on a stock exchange.

23

Underwriters

A contactual undertaking to purchase securities that are not subscribed to by investors

24

An IPO is described as

Flotation of a business

25

Flotation of a business

the public listing and quotation of a corporation on a stock exchange

26

Underwriters will provide advice on

- Structure of issue
- Debt to Equity Ratio
- Pricing of issue
- Timing of the issue
- marketing of issue
- allocation of securities

27

Prospectus lodged with ASIC

Document prepared by a company stating the terms and conditions of an issue of securities to the public

28

Out-clause

Specific conditions precluding full enforcement of an underwriting agreement

29

Publicly listed corporation

Has its shares listed and quoted on a stock exchange

30

2 common types of corporate structures

A limited liability company
A no liability company