1 - Intro to Financial Management Flashcards
System that includes the circulation of money, granting of credit, making of investments, and provision of banking facilities.
Finance
Areas of finance
- Financial management
- Capital markets
- Investments
Focuses on decision to how much and what type of assets to acquire and how to maximize the firm’s value
Financial management
Also called Corporate Finance
Financial management
Relate to the markets where interest rates & stock and bond prices are determined
Capital markets
Studies also the financial institution that supply capital to the business
Capital markets
Banks, investment banks, stockbrokers, etc. bring together ____ who have money to invest & entities who need capital
‘savers’
(Federal Reserve System) Regulates banks & control the supply of money
Government organizations
Decisions concerning stocks & bonds
Investments
Number of activities in Investment:
- Security Analysis
- Portfolio theory
- Market analysis
Finding proper values of individual securities (stocks & bonds)
Security analysis
Best way to structure portfolios of stocks & bonds; and very important because investors want to hold diversified portfolios
Portfolio theory
Portfolios are also known as
‘Baskets’
Issue of whether stock and bond markets at any given time are too high, too low, or about right.
Market analysis
Investor psychology is examined to determine whether stock prices have been bid up to unreasonable heights
Behavioral finance
What is the hierarchy of organizational chart?
BOD - CEO - COO - CFO
Top governing body, chairperson, highest-ranking individual
Board of Directors (BOD)
Next to BOD (but BOD often serves as the CEO - Sole proprietorship)
Chief Executive Officer (CEO)
Firm’s president
Chief Operating Officer (COO)
Senior VP; 3rd-ranking officer
Chief Financial Officer (CFO)
What does COO do?
Marketing
Production
HR
& Other Operating Departments
What does CFO do?
Accounting
Treasury
Credit Legal
Capital Budgeting
Investor Relations
If firm is publicly owned ____ and ____ must certify to the SEC that the annual report are accurate
CEO and CFO
If proven that inaccurate, the CEO and CFO may be
fined or even jailed
Passed by Congress that requires CEO and CFO to certify that their firm’s financial statements are accurate
Sarbanes-Oxley Act of 2002
An unincorporated business owned by 1 individual; easy & inexpensive and subject to lower income taxes than corporations. But also subject to unlimited personal liability.
Proprietorship
An unincorporated business owned by 2 or more persons; income is allocated on a pro rata basis as well as taxes. If a partner is unable to fulfill his share of the liability, the other partner will be held responsible.
Partnership
Legal entity created by a state distinct from its owners and have unlimited life, easy transferability of ownership.
Corporation
Corporation’s earnings are taxed, and then when its after-tax earnings are paid out as dividends, those earnings are taxed again as personal income to stockholders.
Double taxation
Allows small businesses that meet qualifications to be taxed as if they were a proprietorship/partnership rather than corporation
S Corporations
S Corporations can have no more than how many stockholders
100 stockholders
Larger corporations are called?
C Corporations
Popular type of organization that is hybrid between a partnership and a corporation
Limited Liability Company (LLC)
Similar to an LLC but
used for professional
firms in the fields of
accounting, law, and
architecture and taxed as a partnership
Limited Liability Partnership (LLP)
What is the main financial goal
Create value for investors
Represent individuals and organizations who have chosen to invest their hard-earned cash into the company for a return on investment
Company’s stockholders
Investors like higher expected cash flows but dislike
risk
The larger the expected cash flow, lower perceived risk,
higher the stock’s price
Cash flows & risk that investors would expect if they had all of the information that existed about a company.
“True”
What investors expect, given the limited information they have
“Perceived”
Estimate of a stock’s ‘true’ value based on accurate risk & return data
Intrinsic value
Intrinsic value can be estimated, but not measured
precisely.
Stock value based on perceived but possible incorrect information
Market price
Investor whose views determine the actual stock price
Marginal investor
Actual market price equals the intrinsic value; no pressure for a change in the stock’s price.
Equilibrium
Easy to determine - can be found on the Internet and published in newspapers every day
Actual stock prices
Have the best information about the firm’s future prospects
Firm’s managers
Establishment of rules & practices by BOD to ensure that managers act in shareholders’ interest while balancing need of other key constituencies
Corporate Governance
Requires holding managers accountable for poor performance
Effective governance
Motivate managers to act in their stockholders’ best interest
Effective executive compensation plans
Effective executive compensation plans consists of:
- reasonable compensation packages
- firing managers who don’t perform well
- threat of hostile takeovers
Sufficient to attract and retain able managers but should not go beyond what is needed. Structured so managers are rewarded on basis of stock’s performance over the long run, not stock’s price on an option exercise date.
Compensation packages
Individuals who target corporations for takeover because they are undervalued
Corporate Raiders
Acquisition of a company over the opposition of its management
Hostile Takeover
Primary financial goal for managers of publicly owned companies; implies that decisions should be made to maximize long-run value of firm’s common stock
Shareholder Wealth Maximization
Business ethics was coined by
former New York Attorney General & former Governor Elliot Spitzer
To prevent reckless actions that would cause another financial crisis
Dodd-Frank Act
“Standards of conduct or moral behavior”
Ethics
Company’s attitude and conduct toward its employees, customers, community,
and stockholders.
Business Ethics
