Finance Mid-Term Flashcards
Agency Problem
Prevent managers from acting in their own best interests, rather than in the best interest of owners
Prevent managers from acting in their own best interests, rather than in the best interest of owners
Agency Problem
Separation Theory
Investors are best off if the company’s investment decisions are separate from the investors’ preferences
Four factors that determine the cost of capital in an economy
- Production opportunities
- Time preference for consumption
- Risk
- Inflation
Money Markets
Where short-term debt securities are bought and sold primarily by dealers (dealers buy/sell for themselves at their own risk)
Where short-term debt securities are bought and sold primarily by dealers (dealers buy/sell for themselves at their own risk)
Money Markets
Capital Markets
Where long-term debt and shares of stock are sold primarily by brokers and agents (brokers match buyers and sellers but do not take ownership of security themselves)
Investors are best off if the company’s investment decisions are separate from the investors’ preferences
Separation Theory
Factors that determine the value of a firm
PV of its expected free cash flows, discounted at the weighted average cost of capital
Where long-term debt and shares of stock are sold primarily by brokers and agents (brokers match buyers and sellers but do not take ownership of security themselves)
Capital Markets
Money Markets Vs. Capital Markets
Money Markets - Where short-term debt securities are bought and sold primarily by dealers (dealers buy/sell for themselves at their own risk)
Capital Markets - Where long-term debt and shares of stock are sold primarily by brokers and agents (brokers match buyers and sellers but do not take ownership of security themselves)
Money Markets - Where short-term debt securities are bought and sold primarily by dealers (dealers buy/sell for themselves at their own risk)
Capital Markets - Where long-term debt and shares of stock are sold primarily by brokers and agents (brokers match buyers and sellers but do not take ownership of security themselves)
Money Markets Vs. Capital Markets
Primary Market
Where the original sale of the security occurs. The corporation or government that issues the security receives the proceeds from the sale
Where the original sale of the security occurs. The corporation or government that issues the security receives the proceeds from the sale
Primary Market
Secondary Market
Where securities are bought or sold after the original sale. The entity that originally issued the security is not involved in a secondary market transaction
Where securities are bought or sold after the original sale. The entity that originally issued the security is not involved in a secondary market transaction
Secondary Market
Primary Vs. Secondary Markets
**Primary Market **- Where the original sale of the security occurs. The corporation or government that issues the security receives the proceeds from the sale.
Secondary Market - Where securities are bought or sold after the original sale. The entity that originally issued the security is not involved in a secondary market transaction.
Private Markets
Trades are worked out directly between two parties; lack liquidity
Trades are worked out directly between two parties; lack liquidity
Private Markets
Public Markets
Standardized contracts are traded on an organized market; more liquid and transparent
Standardized contracts are traded on an organized market; more liquid and transparent
Public Markets
Private Vs. Public Markets
Private Markets - Trades are worked out directly between two parties;** lack liquidity**
Public Markets - Standardized contracts are traded on an organized market; more liquid and transparent
Main Problem With Balance Sheet
- Assets are shown at historic cost and do not reflect current market value
- Book value is usually not market value
Net Cash Flow (NCF)
An alternative measure of profitability that adjusts net income for the fact that some expenses (depreciation and amortization) do not involve the use of cash
