Introduction to FinMa

Question 1

Basic Areas Of Finance

Answer 1

Corporate finance = Business Finance

Investments

Financial institutions

International finance

Question 2

An area of specialization within each of the areas discussed so far

May allow you to work in other countries or at least travel on a regular basis

Need to be familiar with exchange rates and political risk
Need to understand the customs of other countries; speaking a foreign language fluently is also helpful

Answer 2

International Finance

Question 3

Work with financial assets such as stocks and bonds

Value of financial assets, risk versus return, and asset allocation

Job opportunities:
Stockbroker or financial advisor
Portfolio manager
Security analyst

Answer 3

Investments

Question 4

Companies that specialize in financial matters

Banks – commercial and investment, credit unions, savings and loans
Insurance companies
Brokerage firms

Answer 4

Financial Institutions

Question 5

Why Study Finance?

Answer 5

Marketing
Accounting
Management
Personal Finance

Question 6

Some important questions that are answered using finance

Answer 6

What long-term investments should the firm take on?

Where will we get the long-term financing to pay for the investments?

How will we manage the everyday financial activities of the firm?

Question 7

Financial managers try to answer some, or all, of these questions

The top financial manager within a firm is usually the Chief Financial Officer (CFO)

Treasurer – oversees cash management, credit management, capital expenditures, and financial planning

Controller – oversees taxes, cost accounting, financial accounting, and data processing

Answer 7

Financial Manager

Question 8

Financial Management Decisions

Answer 8

Capital budgeting
What long-term investments or projects should the business take on?

Capital structure
How should we pay for our assets?
Should we use debt or equity?

Working capital management
How do we manage the day-to-day finances of the firm?

Question 9

Forms of Business Organization

Answer 9

Sole proprietorship

Partnership
General
Limited

Corporation
S-Corp
Limited liability company

Question 10

Business owned by one person

Answer 10

Sole Proprietorship

Question 11

Business owned by two or more persons

Answer 11

Partnership

Question 12

A legal “person” distinct from owners and a resident of a state

Answer 12

Corporation

Question 13

International Corporate Forms

Answer 13

Joint stock companies
Public limited companies
Limited liability companies

All share:
Public ownership
Limited liability

Question 14

What should be the goal of a corporation?

Answer 14

Maximize profit?
Minimize costs?
Maximize market share?
Maximize the current value per share of the company’s existing stock
Maximize the market value of the existing owners’ equity

Question 15

Agency relationship

Principal hires an agent to represent its interests
Stockholders (principals) hire managers (agents) to run the company

Agency problem
Conflict of interest between principal and agent

Management goals and agency costs

Answer 15

The Agency Problem

Question 16

Do Managers Act in the Shareholders’ Interests?

Answer 16

Managerial compensation
Incentives can be used to align management and stockholder interests
Incentives need to be carefully structured to insure that they achieve their goal

Corporate control
Threat of a takeover may result in better management

Other stakeholders

Question 17

Cash flows to the firm

Primary vs. secondary markets
Dealer vs. auction markets
Listed vs. over-the-counter securities
NYSE
NASDAQ

Answer 17

Financial Markets

Question 18

means planning, organizing, directing and controlling the financial activities of the organization.

It refers the efficient and effective management of
money (funds) in such a manner as to achieve the
goals of the organization.

Answer 18

Financial Management

Question 19

It is necessary to understand
these principles in order to
understand finance.

Answer 19

Ten Principles of
Financial Management