Chapter 1 Vocabulary Flashcards
Involves the management of money
Finance
Involves how companies raise and invest money and manage their financial resources
Corporate finance
Examines the structure of capital markets, the role of financial institutions, the process of financial intermediation, and how money flows in the economy
Capital markets and financial institutions
Focuses on valuation techniques and how to value alternative investment opportunities that are provided primarily through financial markets and institutions
Investments and Valuation
The three primary areas of finance
Corporate finance (businesses)
Institutions and markets (financial)
Investments and valuation (investors)
The financial markets where issuers and investors buy and sell debt and equity securities (long term financial instruments)
Capital markets
Represents an obligation to repay borrowed money
Debt
Represents ownership in a company
Stock
Higher returns require
Taking more risk
Efficient capital markets are
Tough to beat
What kind of relationship is there between risk and return
Positive
The prices of stocks and bonds in the capital markets react very
Quickly to incorporate new information
Rational investors are
Risk averse (prefer less risk to more)
What drives asset prices in the short run (security prices)
Supply and demand
Corporate managers should make decision that
Maximize shareholder value
The goal of management should be to
Maximize the value of the firm’s common stock
Transaction costs, taxes and inflation are
Your enemies
Time and the value of money are
Inversely related
A dollar today is worth
MORE than a dollar tomorrow
You asset call allocation is a very
Important decision (critical in determining your range of expected returns)
Asset diversification will
Reduce your risk (spread your money around—don’t put all your eggs in one basket)
Value equals (the value of any financial investment)
The sum of expected cash flows discounted for time and risk
This decision talks about how corporate managers should allocate funds of the company to buy or build projects and investments that will be worth more than they cost (investing the funds of the company in working capital, tangible and intangible assets)
The investment decision
This decision focuses on how corporate managers should raise money from institutional and individual investors through the sale of debt and equity claims for the company to finance the investment projects of the firm
The financing decision