INTRODUCTİON TO BUSİNESS - Deneme Sınavı - 1

Financial markets can be classified as: Money markets - markets where short-term securities like commercial paper and treasury bills are traded and Capital markets - markets where long-term securities like bonds and stocks are traded.

Companies need to plan for the future to predict futurefinancing requirements and prepare for future needs. Proforma financial statements (mainly balance sheet and income statement) are prepared for this purpose. Pro forma income statement exhibits forecasted revenues and expenses for a future period. Pro forma balance sheet displays forecasted assets and total financing provided by debt and equity financing at a future date.

Banks usually assess the credit worthiness of companies to establish a credit relationship with companies by in view of 5 C’s of credit. These are: character, capacity, capital, collateral and conditions.

Credit risk (Default risk) is the risk that a company or individual will not be able to pay the contractual interest or principal on its debt obligations.

Activities of planning and evaluating investment projects is called capital budgeting. The capital budgeting process involves economic analysis and selection of projects according to some criteria determined by the management of the company.

Enterprise Risk Management (ERM) approach has emerged to provide the means to recognize and mitigate risks with a holistic approach. Enterprise Risk Management (ERM) is an integrated risk management approach, which considers risks in the context of business strategy and manages them with a portfolio perspective through well-defined risk responsibilities and strong risk monitoring processes. In ERM, there is a senior level position usually called Chief Risk Officer (CRO) who has the highest responsibility for overseeing the centralized risk management function.

CFROI metric is rooted on the discounted cash flow valuation. Thus: more cash is preferred to less, cash has a time value, sooner is preferred to late, less uncertainty is better. The following formula is used to calculate CFROI:CFROI = Cash Flow / Market Value of Capital Employed.

Capital Markets Board of Turkey’s Corporate Governance Principles consist of four main sections, namely shareholders, disclosure and transparency, stakeholders and board of directors.

Business finance decisions are related to the resources of a business and they can be grouped as investment decisions, financing decisions and operating decisions.

• Investment decisions
Making sound investment choices in line with business strategies and economic analysis.

• Financing decisions
Selecting the optimum mix of internal and external funds to finance the investments of the business.

• Operating decisions
Employing the resources of the business to efficiently generate profits.

Investment decisions mainly include decisions related to current assets, which can be converted into cash in a relatively short period, namely within one year; fixed assets, which can be converted into cash in a longer time of period, that is to say, in more than a year. In fact current assets are more liquid assets.

The best mix of debt financing and equity financing depends on the type of the industry in which the company operates and general economic conditions as well. Moreover, it depends on the following factors:

The combination of internal funds and external funds creates the financing structure, in other words the capital structure of the company.

Level of risk that management can be assumed in case of unpredicted events.

Level of earnings to cover the interest payments associated with debt financing and dividend payments associated with equity financing.

Level of control that management seeks
to maintain as issuing new shares of stock brings new shareholders to the company who have voting rights as owners of the company.

Costs of debt financing and equity financ- ing at the time of capital structure decisions.

Conditions in the financial markets.

Financial markets can be classified as;

Money markets: Markets where short-term securi- ties like commercial paper and treasury bills are traded.

Capital markets: Markets where long-term securities like bonds and stocks are traded.

Stocks are traded in the capital markets since they have no maturity.

They can also be classified as:

Primary markets: Markets in which securities are offered for the first time.

Secondary markets: Markets in which currently outstanding securities are traded.

Working capital can be financed by:

Accrued wages and salaries,

Accrued taxes,

Short-term loans provided from commercial banks, finance compa-

nies or factors,

Issuing commercial papers

Pro forma balance sheet displays forecasted assets and total financing provided by debt and equity financing at a future date.

Capital refers to the value of your assets less your liabilities. In simple terms, capital reflects to how much you own (for example, car, real estate, cash, and investments) minus how much you owe.

Collateral refers to any asset of a borrower a lender can use to pay the debt if the bor- rower is unable pay back the loan.

Investment decisions can be grouped as:

Assessing the profitability of a single in- vestment project.

Assessing the relative profitability of com- peting investment projects.

Selecting the best investment projects in a portfolio of projects with a limited budget.

Although there are many types of risk classes, basic types of risk for a business can be classified as:

• Credit risk (Default risk)
The risk that a company or individual will not be able to pay the contractual interest or principal on its debt obligations.

• Market risk
The risk that the value of an investment to fluctuate due to general market conditions

Political risk
The risk that a country’s government will suddenly change its policies.

• Operational risk
Various risks that can arise from a company’s ordinary business