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| Question | Answer |
| Ten Principles | form the foundation of financial management |
| 1) The Risk-Return Trade off | won't take additional risk unless we expect to be compensated with additional return |
| 2) The Time-Value of Money | a dollar received today is worth more than a dollar received in the future |
| 3) Cash (not profits) is King | In measuring value we will use cash flows rather than accounting profits because it is only cash flows that the firm receives and is able to reinvest |
| 4) Incremental Cash Flows | it is only what changes that counts. In making business decisions we will concern ourselves only with what happens as a result of that decision |
| 5) The curse of competitive markets | why it is hard to find extremely profitable projects. In competitive markets extremely large profits cannot exist for long because of competition |
| 6) Efficient capital markets | the markets are quick and the prices are right |
| 7) The Agency Problem | managers will not work for owners unless it's in their best interest. The agency problem is a result of the separation of the decision makers and the owners of the firm |
| 8) Taxes bias business decisions | that's all! |
| 9) All risk is not equal | some risk can be diversified away and some cannot. The process of diversification can reduce risk; measuring a project's or asset's risk is very difficult |
| 10) Ethical behaviour is doing the right thing, and ethical dilemmas are everywhere in finance | Difficult to clarify exactly what we mean by 'ethical' - both what IS and what is NOT ethical. |
| Investment Banker | An individual who works in a financial institution that is in the business primarily of raising capital for companies, governments and other entities, or who works in a large bank's division that is involved with these activities, often called an investment bank |
| Underwriting | (of a bank or other financial institution) engage to buy all the unsold shares in (an issue of new shares). OR sign and accept liability under (an insurance policy), thus guaranteeing payment in case loss or damage occurs. |
| Liquidity | the availability of liquid assets to a market or company. "the banks closed, causing serious liquidity problems for smaller companies" liquid assets; cash. |
| Average Collection Period | the average number of days between 1) the date that a credit sale is made, and 2) the date that the money is received from the customer. The average collection period is also referred to as the days' sales in accounts receivable. |
| Sustainable Rate of Growth | The sustainable growth rate (SGR) is a company's maximum growth rate in sales using internal financial resources and without having to increase debt or issue new equity. |
| Future Value | The value of an asset or cash at a specified date in the future that is equivalent in value to a specified sum today. |
| Subordinated Debentures | An unsecured bond that ranks after secured debt, after debenture bonds, and often after some general creditors in its claim on assets and earnings. |
| Mortgage Bonds | A bond secured by a mortgage on one or more assets. These bonds are typically backed by real estate holdings and/or real property such as equipment. In a default situation, mortgage bondholders have a claim to the underlying property and could sell it off to compensate for the default. |
| Junk Bonds | a high-yielding high-risk security, typically issued by a company seeking to raise capital quickly in order to finance a takeover. |
| Preferred Stock aka Preferred Share | a share which entitles the holder to a fixed dividend, whose payment takes priority over that of ordinary share dividends. |
| Diversifiable Risk | 'Unsystematic Risk' Company- or industry-specific hazard that is inherent in each investment. Unsystematic risk, also known as “nonsystematic risk,” "specific risk," "diversifiable risk" or "residual risk," can be reduced through diversification. |
| Market Risk | the risk that the value of an investment will decrease due to moves in market factors. Volatility frequently refers to the standard deviation of the change in value of a financial instrument with a specific time horizon. |
| Payback Period | the length of time required for an investment to recover its initial outlay in terms of profits or savings. |
| Current Assets | cash and other assets that are expected to be converted to cash within a year. |
| Working Capital | the capital of a business which is used in its day-to-day trading operations, calculated as the current assets minus the current liabilities. |
| Dividend | a sum of money paid regularly (typically annually) by a company to its shareholders out of its profits (or reserves). |
| Primary Market | the part of the capital market that deals with issuing of new security finance securities. Companies, governments or public sector institutions can obtain funds through the sale of a new stock or bond issues through primary market. |
| Annuity | a form of insurance or investment entitling the investor to a series of annual sums. "loans secured on an older person's home which are used to purchase a life annuity" "a fixed sum of money paid to someone each year, typically for the rest of their life. "he left her an annuity of £1,000 in his will:" |
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