Finance

Finance the system that includes the circulation of money, granting of credit, making of investments, and provision of banking facilities
Intrinsic Value True investor cash flow + true risk
Market Price Perceived investor cash flow + perceived risk
Primary goal of management Shareholder wealth maximization
Corporation this business organization is owned by shareholders and managed by professional managers
Treasurer this position and title is held by the individual responsible for planning and managing how the firm is financed, when its funds are raised, and how its risks are managed
Limited liability an investor’s personal responsibility for the business’s liabilities can never be less than zero or more than the amount invested in the firm’s common shares
Business Ethics the code of behavior specifies how the firm and its employees will treat employees and stakeholders.
Limited partner this partner is not allowed to participate in the day to day management of the partnership
Double taxation of dividends the US IRS taxes the taxable income of corporations as well as the taxable investment income of the firm’s shareholders
shareholder wealth maximization this primary goal of financial management is evaluated by the effect of a decision or an action on the value of the firm
value this is the present worth of the future cash flowers generated by an asset or firm, discounted at a rate appropriate for the riskiness of the cash flows
CFO responsibilities accounting, treasury, credit, legal, capital budgeting, investor relations
According to finance theory, a business should attempt to (minimize/maximize) the long-term price of the firm’s (common/preferred) stock. Maximize; common
Marginal investor would buy more stock if the price fell slightly, would sell stock if the price rose slightly, and would maintain her current holding unless something were to change
Instrinsic Value>Actual Stock Price Undervalued
Intrinsic Value<Actual Stock Price Overvalued
Emphasized in business ethics community involvement, marketing and selling practices, labor policy
Sarbanes-Oxley Act major provision CEO and CFO must both individually sign and certify the accuracy of the firm’s financial statements before these statements are submitted to the SEC
Areas of Finance Financial management, capital markets, and investments
Initial Public Offering (IPO) When a company issues stock in the public market for the first time
Highly inefficient Small companies not followed by many analysts. Not much contact with investors
Highly efficient Large companies followed by many analysts. Good communications with investors
Physical asset markets products that are tangible
financial asset markets deal with stocks, bonds, notes, morgtages, deritivatives securities
Spot markets assets are bought or sold for on the spot delivery
Future markets participants agree today to buy or sell an asset at some future date; can hedge risks
money markets short-term, highly liquid debt securities
capital markets intermediate or LT debt and corporate stocks
Primary markets markets in which corporations raise new capital
Secondary markets markets in which existing, already outstanding securities are traded among investors
Private markets transactions are negotiated directly between two parties (bank loans and private debt placement)
Public markets standardized contracts are traded on organized exchanges (common stock and corporate bonds)
Investment banks help companies raise capital; help corporations design securities with features that are currently attractive to investors, buy these securities from the corporation, and resell them to savers
Commercial Banks department stores of finance because they serve a variety of savers and borrowers (BOA, Citibank, Wells Fargo, Chase, JP Morgan)
Financial Services corporations large conglomerates that combine many dif fin inst within a single corp
credit unions cooperative associations whose members are supposed to have a common bond such as being employees of the same firm
pension funds retirement plans funded by corp or govt agencies
life insurance companies take savings in the form of annual premiums and invest these funds in stocks, bonds, real estate, and mortgages; make payments to beneficiaries of the insured parties
Mutual funds corporations that accept money from savers and use them to buy stocks, LT bonds, or ST debt instruments issued by businesses or govt units; pool funds and thus reduce risks by diversification
Exchange traded funds (ETFs) similar to regular mutual funds and are often operated by mutual fund comps
hedge funds similar to mutual funds because they accept money from savers and use the funds to buy various securities but are largely unregulated & have large minimum investments (1 mil) & are mktd to inst and ind with high net worth
private equity companies orgs that operate much like hedge funds but rather than purchasing some of the stock of a firm, PE players buy and then manage entire firms
Operating Activities depreciation and amortization, accounts payable, accruals, accounts receivable, inventories
LT Investing Activities Additions to property, plant, and equipment
Financing Activities Notes Payable, LT debt, cash dividends

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