Ch. 1 Flashcards
Capital structure
The specific mix of short-term debt, long-term debt and equity used to finance operations
How much should a firm borrow? How to raise money?
Capital budgeting
Planning and managing a firm’s long-term investment
Ex. Deciding whether or not to open a new store
Working capital management
Managing short-term assets and short-term liabilities
How much cash to keep at hand? Sell on credit? Purchase on credit or pay cash?
Money markets
Markets (dealer market) for short-term debt and equity securities
Eg. GICs, treasury bills
Safe and liquid <1 year
Capital market
Markets for long-term debt (bonds) and equity securities (stocks)
Broker: acts on behalf of customer
Dealer: acts on behalf of themselves
Indirect finance
Financial institutions grant loans at a high interest rate than that paid on the deposit they hold
Direct finance/securitization
Corps seeking short-term debt can borrow directly from another Corp with the use of a bankers acceptance
OTC Market / Dealer markets
No physical location
Trades done electronically
Less transparent
Globalization
International linkage of money markets and capital markets
Financial engineering
Innovation of new securities or financial processes with the purpose to reduce/control risk and minimize taxes, along with reducing costs of issuing securities and compliance requirements
Derivative securities
Options, futures, and other securities, whose value is derives from the price of another underlying asset
Financial leverage
The use of debt to find investments
The more debt, the higher it’s leverage, which negatively affect the firm’s bottom-line
Future value
The amount an investment is worth after a certain period of time
Present value
The current value of future cash flows obtained by discounting the appropriate discount rate
