Intro to Finance- Chapter One

Finance It deals with obtaining the right amount of money from the right sources at the right time, where “right” is determined by how the amounts, sources, and times affect the value of the individual or organization.
Corporation This state-created entity is authorized to conduct business and offer its owners an investment with an unlimited life.
Treasurer In larger organizations, this officeholder supervises the firm’s credit and inventory managers, as well as the director of capital budgeting, and reports to the firm’s chief financial officer.
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 This is a company’s attitude and standards of conduct toward its stakeholders, including its customers, stockholders, creditors, employees, suppliers, management, and the community.
Limited partner This member of a partnership has the privilege of not having personal assets at risk in the event of the failure of the partnership.
Double taxation of dividends This is a disadvantage of the corporate organization since it requires taxes to be levied on both the income of the firm and the dividend income earned by its shareholders.
Shareholder wealth maximization This goal of financial management is superior to other possible goals, since it considers the timing and risks associated with the cash flows expected from management’s decisions.
Stakeholder This general term is given to an individual of a group that has an interest in, or is affected by, a business
Value This is the worth of a good or service as established by the discounted and current value of the item’s cash flows.
The chief financial officer in a company is responsible for what departments? The accounting department, treasury department, credit department, capital budgeting department, and investor relations.
According to finance theory, firms should attempt to ___________ the long-term price of the firm’s _______________. The benefit to this objective is that is provides the best financial outcome for the firm’s shareholders. 1) maximize2) common stock
Financial management (corporate finance) Focuses on decisions relating to how much and what types of assets to acquire, how to raise the capital needed to purchase assets, and how to run the firm so as to maximize its value.
Capital markets relate to the markets where interest rates, stock, and bond prices are determined. Banks, investment banks, stockbrokers, mutual funds, and insurance companies are studied as capital markets. Governmental organizations like the Federal Reserve System and the Securities and Exchange Commission, are also considered as a part of capital markets.
Investments relate to decisions concerning stock and bonds and include: 1) Security analysis deals with finding the proper values of individual securities. 2) Portfolio theory deals with the best way to structure portfolios, or “baskets,” of stocks and bonds. 3) Market analysis deals with the issue of whether stock and bond markets at any given time are “too high,” “too low,” or “about right.” Included in market analysis is behavioral finance, where investor psychology is examined in an effort to determine whether stock prices have been bid up to unreasonable heights or driven down to unreasonable lows.
Josh and Sean run a law firm in downtown Phoenix. The firm has debt $100,000, but Josh and Sean will not be held personally liable for the firm’s debts. This is an example of: A limited liability partnership/limited liability company
How would you describe a marginal investor? A 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.
Sarbanes-Oxley Act A law passed by Congress that requires the CEO and CFO to certify that their firm’s financial statements are accurate.
Proprietorship An unincorporated business owned by one individual
Partnership An unincorporated business owned by two or more persons
S corporation A special designation that allows small businesses that meet qualifications to be taxed as if they were a proprietorship or a partnership rather than a corporation yet retains limited liability and other benefits of the corporate form of organization.
Limited liability company (LLC) A popular type of organization that is a hybrid between a partnership and a corporation.
Limited liability partnership (LLP) Similar to an LLC but used for professional firms in the fields of accounting, law, and architecture. It provides personal asset protections from business debts and liabilities but is taxed as a partnership.
Intrinsic value an estimated of a stock’s “true” value based on accurate risk and return data. The intrinsic value can be estimated, but not measured precisely.
Market price The stock value based on perceived but possibly incorrect info as seen by the marginal investor. It’s the price at which a stock sells in the market.
Marginal investor A representative investor whose actions reflect the beliefs of those people who are currently trading stock. It is the marginal investor whose views determine the actual stock price.
Equilibrium The situation in which the actual market price equals the intrinsic value, so investors are indifferent between buying and selling a stock.
Corporate raider Individuals who target corporations for takeover because they are undervalued.
Hostile takeover The acquisition of a company over the opposition of its management.

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