Module 2 Flashcards
is the system that includes the circulation of money, the granting of credit, the
making of investments, and the provision of banking facilities.
Finance
Three areas of finance
Financial management
Capital Markets
Investment
also called corporate finance, focuses on decisions relating
to how much and what types of assets to buy, how to raise capital needed to buy
assets, and how to run the firm so as to maximize its value.
Financial Management
relate to the markets where interest rates, along with stock and
bond prices are determined. Also studied are the financial institutions that supply
capital to businesses
Capital Markets
relate to decisions concerning stocks and bonds and include a
number of activities: (1) security analysis; (2) portfolio theory; (3) market analysis
Investment
Managers are naturally inclined to act in their own best interests, which are not always
the same as the interest of stockholders. They might be more interested in maximizing
their own wealth than their stockholders’ wealth; therefore, managers might pay
themselves excessive salaries.
Stockholder-manager conflict
compensation packages should be
sufficient to attract and retain able managers, but they should not go beyond what
is needed; must also be structured so that managers are rewarded on the basis
of the stock’s performance over the long run, not the stock’s price on an option
exercise date.
Reasonable compensation packages
happens when a company is acquired by
outside parties against the will of its management.
The threat of hostile takeovers
More likely to prefer riskier projects because they
receive more of the upside if the project succeeds
STOCKHOLDERS
Receive fixed payments and are more
interested in limiting risk
DEBTHOLDERS
Particularly concerned about the firm’s use
of additional debt
Debtholder
Attempt to protect themselves by including
covenants in bond agreements that limit the
use of additional debt and constrain
managers’ actions
Debtholder
can be thought of as a company’s attitude and conduct toward its employees,
customers, community, and stockholders. It is important to observe and follow ethical behaviour
in business so that frauds, misleading accounting practices, etc. can be avoided and punished
appropriately.
Business ethics
can be thought of as a company’s attitude and conduct toward its employees,
customers, community, and stockholders. It is important to observe and follow ethical behaviour
in business so that frauds, misleading accounting practices, etc. can be avoided and punished
appropriately.
Business ethics
