Finance Test #1

What is finance? Any forward looking decision involving money (saving for retirement, whether to build new factory, protecting against risks)
What can you do with money? Investment decisions, financial decisions, employee bonuses, and charity
Investment Decisions Pertain to real assets used to conduct business or generate cash flow (securities, acquire firm, produce new product)
Financial Decisions Pertain to financial assets which are claims, common stock, debt, preferred stock and how they’re financed
Responsibilities for Financial Managers Investment/financial decisions, forecasting & planning, risk management, working capital management, relationships with capital markets
Working Capital Cash, inventory, receivables
Treasurer Oversees working capital management, capital budgeting process (evaluates), explores long-term financing options, make sure everything’s legal with investors
Controller Deals with financial and managerial accounting, taxes, and data processing
CFO Oversees controller and treasurer, reports to board of directors
Board of Directors Has overall responsibility for corporation, hires managers, makes financial decisions regarding major new investments, payments, issuing new securities
Firm A legal entity that serves as a hub for legal contracts
Proprietorship 1 owner, identity of firm/owner are closely linker, business income is taxed as personal income, uniformed liability, easy to form, little regulation, and most numerous
Partnership 2 or more owners, business income is divided among partners and taxed as personal income, general-unlimited liability, limited-limited liability
Corporation Jointly owner by shareholders, separate legal entity, ownership can be transferred, limited liability, double taxation, separation of ownership and control
Separation of Ownership & Control Shareholders hire managers to manage the firm on their behalf
Shareholder vs. other stakeholders Misleading customers, violating environmental standards, needlessly endangering employees
Managers vs. shareholders Managers might try to put their own priorities first because of salary/perks, horizon, job security, risk aversion, empire building
What keeps managers focused on shareholder’s welfare? Value of reputation, compensation, legal liability, corporate control contests
Objective of the Corporation To maximize the value of the shareholders’ stake in the firm
Why is finances important? To help with inter-temporal trade-offs, risk-return trade-off, measurement of profit
Managers maximize value by making decisions about: Cash flow, risk, and timing
What managers can’t control: Economy, government regulations, competition, currency exchange, cultural norms, political risks, & trade barriers
Bid price What a dealer is willing to pay for stock
Ask price Price at which a dealer is willing to sell
“Long” position in stock Buy stock expecting the price to rise
“Short” position in stock Sell borrowed shares expecting the price to fall
Market order Buy or sell @ market price
Limit Order Specify max/min price you will pay/accept
Stop-loss order sell if price falls to certain level, buy if price rises to certain level
Primary market transaction Securities are created and sold
Secondary market transaction Existing securities are traded
Money market securities Short-term debt, lending money to other company’s reserves
Capital market securities Medium-long term debt and equity, exists until company dies, gets the best interest rate
Investment banks Helps business raise money, designs securities, often buy/resell securities, primary market
Financial Intermediaries Repackage financial assets, create new financial products, accumulate small amounts, provide liquidity, diversification (commercial banks, life insurance expertise, pension funds, mutual funds)
Organized exchanges Physical location, members come to buy/sell stock, auction market, specialist system, NYSE
NASDAQ Dealer market, network dealers connected by computer, “over the counter”
Nominal Rates In terms of currency
Real Rates In terms of purchasing power
Why do interest rates vary across loans? Default risk, liquidity, & maturity

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