Chapter 2 + 3 Flashcards
Explain the flow of savings to corporations.
On one side we have large, public companies and on the other worldwide investors. In between are several steps that bring the money from one investor to the company. An investor can choose to directly invest in the company through the financial market, or he can invest his money in financial institutions or intermediaries that will invest his money for him.
What is a Financial market?
A financial market is where financial assets (securities) are traded.
It includes stock market, fixed-income market, capital markets and money markets.
What are financial intermediairies?
Financial intermediairies:
- raise money from investors and
- provides financing for individuals, corporations or other organisations and
- invests in financial assets.
Some examples are Mutual funds, Hedge funds and Pension funds.
What are financial institutions?
Banks and insurance companies that pool and transform assets and liabilities.
Examples: commercial banks, investment banks and insurance companies.
Why are financial markets and institutions important?
They play a crucial role in the economy by facilitating the flow of funds between savers and borrowers, which is essential for economic growth and stability.
What are other functions of financial markets and intermediaires?
1) Transporting cash-flow across time
2) Risk transfer and diversification
3) Provide liquidity
4) Payment mechanism
5) Provide information
6) Channel savings to investments in real assets
What is a balance sheet?
It’s a financial statement that shows the value of the firm’s assets and liabilities at a particular time.
Also called Statement of financial position.
What is the difference between Book value and Market value?
Book values are values of assets and liabilities according to the balance sheet, like historic costs, they’re past costs.
Market values are values of assets and liabilities if they were to be resold in a market. So they correspond to the current market value.
Which mean that MV is often higher than BV because of depreciation and the fact that managers aim to add to shareholders’ value.
What is an income statement?
It’s a financial statement that shows the revenues, expenses and net income of a firm over a period of time. Also called Profit & Loss statement.
What is a chashflow statement?
It shows the firm’s cash that is goining in and out, so its cash inflow and outflow from operating, investing and financing activities.
Why can a firm’s cashflow be different than its net income?
There are mostly 2 reasons:
- The income statement doesn’t recognize capital expenditures as expenses in the year that the capital good are paid for.
- The income statement uses the accrual accounting method.
