Business Finance 1 Dersi 1. Ünite Sorularla Öğrenelim

What are the components of a financial system?

Five core components of a financial system are ultimate borrowers, ultimate lenders, financial intermediaries, financial instruments, and legal and administrative rules.

What is a financial intermediary?

Financial intermediary is an institution in a financial system that acts as a middleman between borrowers and lenders.

What is the difference between a financial company and a non-financial company?

A financial company can be described as a company with a main business activity in financial areas. A financial company may be a bank, an insurance company, a pension fund, etc. It may serve as a financial intermediary with a main job of bringing borrowers and lenders together so that funds can be exchanged trustingly. A non-financial company on the other hand, has main business activities of producing goods and services in areas other than finance. Machinery manufacturers, equipment manufacturers, catering service providers, and hotels are just a few of examples. 

What is a security in a financial system?

In the financial system, lending and borrowing is made through securities. Security is a kind of negotiable paper, showing claims on future cash flows of the issuer of the security.

What does Supply and demand for loanable funds theory of interest argue?

Supply and demand for loanable funds theory of interest argues that interest rate presents the equilibrium in the market, where demand for and supply of loanable funds meet. Liquidity preference theory of interest argues that interest rate presents the equilibrium in the market, where demand for and supply of money meet.

What is production and customer value?

Production value tells how much effort is required in order to produce goods and services. For example, if a company spends 100 TL for raw materials and spends extra 80 TL for labor in order to produce a product, then the production value is 180 TL. Customer value is how much a customer thinks a product is worth. Let’s think a customer pays 200 TL for the product. So, the company earns 200-180 = 20 TL by selling a product to a customer. 

What do profit and net income of a company mean?

Businesses (except non-profit-oriented organizations) arrange their operations in a way to create customer values, which are greater than the production value, so that there will be a generation of profit. Profit is, in simple terms, the difference between revenues and expenses. We can find profit information at the bottom line of income statement of a company, as “net income”. In accounting terms, net income is the net increase in the owners’ equity that results from a company’s operations.

What are a financial manager's tasks in business organizations?

A financial manager has two different tasks in business organizations: (1) treasury and (2) control. Treasury and control tasks are intended for internal and external users of financial information about the company. Tasks about treasury include cash management, credit management, management of bank relationships, management of investor relationships, and management of security issues. Tasks about control include controlling whether or not funds are being used efficiently and effectively. It includes preparation of financial statements, internal auditing, budgeting, and tax management. 

Who is Chief Financial Officer (CFO) of a business organization?

Chief Financial Officer (CFO) is a supervisory position in organizations, who is reported by changing number of employees in her/his team; and at the same time who generally directly reports to Chief Executive Officer (CEO), who is the general manager at the top.

What is cost-benefit analysis?

Cost-benefit analysis is a technique used in decision-making that takes into account the estimated costs to be incurred by a proposed decision and the estimated benefits likely to arise from it.

What is opportunity cost?

Opportunity cost is the economic cost of an action measured in terms of the benefit foregone by not pursuing the best alternative course of action.

What is an asset? and what types of assets are there in a financial system?

Assets are items of value owned by a company. A real asset is a physical asset whose value is coming from its substance and properties, while financial assets are non-physical assets whose value comes contractual claim. Bonds, stocks, derivatives etc. Tangible asset is an asset with a physical substance. Examples include cash, equipments, and plants. Intangible asset is an identifiable non-monetary asset without physical substance. Examples of intangible assets include computer software, licences, trademarks, patents, films, copyrights and goodwill.

Assets are also grouped as current assets and non-current (fixed) assets. Current assets are the assets that a company expects to convert to cash or use within one year. Non-current (fixed) assets are the assets that a company expects to convert to cash or use later or longer than one year

What are capital expenditures and capital budget?

Expenditures made to buy new fixed assets or to increase the value of company’s existing fixed assets are called as Capital expenditures (Capex). Process of making long-term decisions on fixed asset investments is called as capital budgeting. Capital budgeting concerns with the amount of, risk of, and timing of expected cash flows from a long-term investing opportunity.

What does capital structure of a company mean?

For long term financing, a company may raise funds by borrowing, or issuing debt-based or equity-based securities. If it issues a debt-based security, then it will be debt financing. If it issues an equity-based security, then it will be equity financing. The mixture of debt financing and equity financing maintained by a firm is called Capital structure (financial structure).

What is the difference between primary market and secondary market?

Basic form of equity financing by issuing equity-based security includes raising fund from potential investors by selling some of its shares (stocks) to potential investors in the primary market. Primary market is a financial market where new securities are issued and traded for the first time. The total amount funded by selling new securities in primary market inflows directly to firm. The secondary market is where investors buy and sell securities they already own. The national exchanges, such as the Borsa İstanbul (BİST), New York Stock Exchange (NYSE) and the NASDAQ, are secondary markets.

What is dividend?

Dividend is the distribution of part of the profits of a company to its shareholders.

What are limited and unlimited liabilities?

Limited liability refers to a situation where shareholders are liable for all of company debts with only all of the company assets but not with their personal assets.

Unlimited liability refers to a situation where shareholders are liable for all of company debts with all of the company assets and their personal assets.

What is the main difference between cash and fund?

The main difference between cash and fund is that cash is a short-term asset, whereas fund is a short-term or long-term liability for a company.

What are cash flow and free cash flow?

Cash flow refers to an inflow or outflow of cash related to operating activities, investing activities, or financing activities.

Free cash flow is the total of cash flow to creditors and cash flow to stockholders, consisting of the following: operating cash flow, capital spending, and changes in net working capital.

What is shareholder value?

Shareholder value is the financial markets’ expression of shareholder wealth. Shareholder value can be expressed using three concepts: (1) book value, (2) market value, and (3) intrinsic value. Book value tells the worth of a company based on its financial statements. That is, net assets (total assets adjusted for depreciation and amortization). If we base our understanding of shareholder value on book value, then the shareholder value would be net assets minus liabilities. Market value is the price that buyers and sellers trade company shares in an open market place. If we base our understanding of shareholder value on market value, then the shareholder value would be market price of company’s shares. Intrinsic value is the estimated value, which is calculated by present value of future cash flows that company expects to generate. If we base our understanding of shareholder value on intrinsic value, then the shareholder value would be value of expected future cash flows adjusted for time and risk.